Moral Health Care vs. "Universal Health Care"

Contrary to claims that government-imposed "universal health care" would solve America's health care problems, it would in fact destroy American medicine and countless lives along with it. The goal of "universal health care" (a euphemism for socialized medicine) is both immoral and impractical; it violates the rights of businessmen, doctors, and patients to act on their own judgment-which, in turn, throttles their ability to produce, administer, or purchase the goods and services in question. To show this, we will first examine the nature and history of government involvement in health insurance and medicine. Then we will consider attempts in other countries and various U.S. states to solve these problems through further government programs. Finally, we will show that the only viable long-term solution to the problems in question is to convert to a fully free market in health care and health insurance.

Although health care and health insurance are often conflated, there is a crucial difference between the two. Whereas health care consists of the actual goods and services necessary for medical care, health insurance is one means of affording such care. The two are closely related but distinct, as are the services of an auto-body repair shop and an automobile insurance company.

Unlike those in more openly socialist countries who obtain health insurance directly from the government, Americans typically purchase health insurance from increasingly government-controlled insurance corporations, giving health insurance in America the veneer of a free-market industry. Behind the veneer, however, the industry is subject to countless state and federal laws, regulations, and taxes-which do not apply to all insurance companies equally.

In addition to taxing insurance companies on the premiums they collect, states typically require them to set aside monetary "reserves" to cover future claims. But some companies have been exempted from these taxes and requirements. During the Great Depression, hospitals and doctors organized their own insurance companies, known respectively as Blue Cross and Blue Shield (or "the Blues"). The Blues lobbied and convinced the states to treat them as nonprofit charity corporations rather than "for-profit" insurance companies, on the grounds that they were organized by doctors and hospitals. The Blues also requested and received tax-exempt status from the federal government. In return for their nonprofit status, the Blues agreed to offer health insurance on the basis of "community rating," which meant that every customer would pay the same premium, regardless of age, sex, health history, lifestyle choices, or regional demographics.11 (This was occasionally modified to reflect different premiums for age and location and was then called "modified community rating.")

Commercial insurers-who were still required to pay taxes, establish reserves, and adhere to other state insurance regulations-had difficulty competing with the Blues, which, by the 1950s, together were the largest provider of health insurance in America.12

The primary goal of the Blues was to obtain steady income for their member doctors and hospitals by guaranteeing that they received payment for all the services they provided. Their strategy was to provide coverage for all expenses-even routine, ordinary, easily affordable medical services. In contrast to the original purpose of health insurance-which was to protect against rare, unforeseen, catastrophic expenses that could bankrupt a family-the Blues turned health insurance into a form of pre-paid medical care in which the insurance company (rather than patients) would pay doctors and hospitals for all medical services-catastrophic, routine, and everything in between-on a cost-plus basis. In an effort to compete with the Blues, more and more for-profit insurance companies offered similar plans, and the model of third-party insurance plans paying the providers directly with little or no input from the patient-and paying for routine care through insurance-became entrenched. This new model was a disaster in the making. In addition to minimizing incentives for insured customers to comparison shop for medical services, it also minimized incentives for doctors and hospitals to compete on price.13

The model created by the Blues and followed by commercial insurers was not the result of free-market thinking and competition. It was a direct result of government meddling and intervention, giving preferential treatment and economic advantages to one insurer (and its health plans) over others. This initial distortion of the health insurance market was exacerbated by the 1942 Stabilization Act, passed during World War II. This act froze wages nationwide but allowed employers to provide or increase employee benefits such as health insurance, since benefits were not considered wages under the Act. In 1943, in response to the Act, the IRS decreed that health insurance premiums paid by employers are not taxable income to employees and are therefore exempt from federal income tax. The IRS further decreed that health insurance premiums are a legitimate cost of doing business and can be deducted from the employer's taxable income.14 These decrees were later codified into the Internal Revenue Code of 1954.

These income tax laws are largely responsible for the explosive growth in employer-purchased health insurance. In 1939, only 6 percent of the population had health insurance of any kind, and only a small fraction of those insured had employer-sponsored health insurance.15 By 1960, 18 percent of the population was insured under an employer group plan, and that percentage grew to almost 70 percent of the insured by 1980.16 The percentage has since declined, but even today about 60 percent of insured Americans obtain health insurance through their employer.17

This preferential government treatment of Blue Cross and Blue Shield over other insurance plans, combined with the tax breaks to recipients of employer-sponsored health insurance plans, has wreaked havoc in the American health insurance industry in myriad ways.

When employers pay for health insurance, employees tend to remain largely unaware of the costs involved. And even if they are aware of the costs, because the insurance is paid for with pretax dollars, employees cannot as easily compare its value to that of other benefits such as vacation time, personal days, or retirement savings. Further, because employer-paid health insurance premiums are not taxed as income, many employees come to think of them as a normal condition or an entitlement of employment and feel shortchanged when the employer tries to shift part of the cost to them.

Because employees do not own their plans, and because the employer is insuring a group without regard to any one individual's condition, individuals with employer-purchased policies have little or no say about the policy under which they will be insured. As the Joint Economic Committee of the U.S. Senate reports, nearly four out of ten workers with employer coverage have no choice of health plans, and less than half have a choice of more than two plans.18

Having not been in charge of evaluating, comparing, or selecting their health insurance plans-having paid little or no attention to the various costs involved or the types of benefits offered-many employees, when given a choice, opt for "smaller" out-of-pocket costs and "greater" benefits, and grumble when the former increase or the latter decrease.

Whereas people generally keep the same auto or homeowners insurance for many years, employees rarely have the same health insurance for more than two or three years, even while remaining with the same employer, because the employer chooses and changes the plans at his discretion, usually with an eye toward minimizing premium costs. Unlike auto insurance policies, under which the insurers often give significant discounts to safe owner-drivers in order to retain them as long-term customers, under employer-sponsored health insurance, the employers, not the employees, are the customers, and there is little, if any, financial incentive for insurers to build long-term relationships with the employees.

Another drawback to employer-paid insurance policies is that they make it difficult for employees to keep sensitive health issues from employers. Many large employers are self-insured, which means that the employer sets aside money it would have paid as insurance premiums, and, instead, directly pays the claims of its employees (and their families). Generally, the employer buys a catastrophic policy or a reinsurance policy for losses in excess of a huge deductible. In those cases, the employer/insurer is very much aware of every dollar that is spent for any claims, and, because it is paying the bills, may even have access to all of an employee's (or his family's) medical information.

Additionally, the tax waiver for employer-paid health insurance has tied workers to their employers in a damaging way. Many workers with preexisting conditions or serious chronic illnesses-or who have spouses or children with such conditions and illnesses-stay in less than desirable jobs solely to avoid the risk of changing or losing their health insurance. Currently, one out of seven Americans says he needs to remain in his current job rather than take a new job in order to keep his health insurance benefits.19

Employer-paid insurance has also been hard on employers. As health insurance costs have risen faster than other costs, premium increases amount to an increase in wage costs disproportionate to revenue increases and independent of employee productivity. This is the reason that many employers are cutting back the amount of money they spend on health insurance, trimming benefit packages, increasing employee co-pays, and requiring employees to pay a larger portion of the actual insurance cost.

Further, as indicated earlier, employer-sponsored insurance treats a large minority of the population unfairly through unequal tax laws. Whereas employees with an employer-paid health plan get their benefits tax-free, individuals who purchase health insurance on their own do so with after-tax dollars. Consequently, a person buying an individual policy may pay up to 30 percent more (depending on his tax bracket) for the same policy benefits.

Given the existing tax burden on Americans and their justified efforts to legally shield their money from tax collectors, the tax-exempt nature of employee-paid health insurance further raises the costs of health insurance. To understand this, consider that homeowners generally pay for their own house maintenance such as lawn work, painting, and remodeling. Routine maintenance is not covered by homeowners insurance; only damages resulting from a tornado, fire, vandals, or some other catastrophic event are covered. But suppose the government suddenly decreed that it would exempt from income taxes any money spent on homeowners insurance. This would reduce taxes for insurance-paid repairs. Accordingly, people would seek insurance policies that cover routine home maintenance, such as painting, carpet replacement, and fence and deck maintenance-and insurers would provide them. Although these new policies would cost more, they would seem on the surface to be a bargain because homeowners would be spending untaxed dollars. Demand for home repairs would skyrocket. More money would be spent on home maintenance, and the cost of home insurance would quickly outpace that of other goods and services. To remain in business, home insurers would limit coverage for more expensive repairs. Simultaneously, to curry favor with their constituents, politicians would seek mandates to expand coverage, and, of course, they would demand further regulations to make sure that poor homeowners had "access" to homeowners insurance. This is precisely what has happened with health insurance.

Just as spending money in that way would make economic sense under that tax law, so using employer-sponsored health insurance to pay for small claims makes sense under the current tax laws. David Henderson, who served on President Reagan's Council of Economic Advisers as a senior economist for health care policy, observes:

The employee is better off to charge a $50 doctor bill to the insurance company-even if the [insurance] company spends $20 to process it-and have the employer pay the extra $70 in a higher premium to cover the bill and the processing cost. The alternative-having the employer pay [the employee] an extra $70 in cash-yields the employee only about $42 [because of federal income, social security, and Medicare taxes] and costs the employer $75.36 ($70 + $5.36, the employer's portion of the social security and Medicare tax on $70).20

The current system of employer-sponsored health insurance is a catastrophe, and it is a result of government intervention in the free market. Such intervention violates the rights of insurance companies, employers, and consumers by granting special government favors to certain insurance companies or plans, by forcibly eliminating options that would exist in a free market, and by forcibly seizing money from insurers and the insured. It artificially places employers and insurers between doctors and patients and leads to innumerable economic distortions. Employers and insurers dictate everything from which doctors and specialists employees will be permitted to visit under the plan, to the kinds of benefits that will and will not be provided, to the co-payments and deductibles that will be paid. Because third parties are paying for both insurance and health care, the employee-patient-customer has little choice in what kind of insurance or who provides the health care he receives-and plenty of incentive to visit a doctor anytime he has a runny nose. The fact that third parties pay for all health care increases the administrative costs for doctors as well as insurers, and those costs are passed on to consumers.

These problems were further exacerbated in the mid-1960s with the creation of two federal insurance programs: Medicare (for the aged) and Medicaid (for the poor). Both had major effects on the private insurance market. When Medicare was proposed, advocates claimed that it would not interfere with the doctor-patient relationship or patient choice-it would merely pay the bills. In fact, however, it has drastically changed the doctor-patient relationship and sharply limited patient choice. Medicare determines what procedures and treatments are "appropriate" and "medically necessary." It also determines the monetary "value" of a diagnosis, treatment, or procedure. Both patient and doctor must abide by Medicare's decision; and, despite low Medicare reimbursements, doctors cannot accept any money from a patient beyond what Medicare pays, even if the patient so desires.21

Doctors are paid so poorly by Medicare and burdened by so much paperwork that about 28 percent are turning away some or all new Medicare patients.22 Hence, newer Medicare patients often cannot find a doctor in their area who will treat them at all. Such "insurance" does these patients no good. Nor do they have any private insurance alternative. With the insignificant exception of Medigap policies, Medicare has eliminated the private insurance market for the elderly, and many elderly patients are left with no way to seek medical treatment except through hospital emergency rooms or charity. (A person who purchases a private policy prior to turning sixty-five may be able to retain it after turning sixty-five, but such a policy will then only supplement Medicare.)

Medicaid is a bigger problem. Medicaid reimbursement rates for doctors and other providers are generally even lower than they are for Medicare, and many doctors opt out of treating Medicaid patients. Only about 52 percent of doctors accept new Medicaid patients, whereas 99 percent will accept new private insurance patients.23 Moreover, many doctors who do take Medicaid patients limit the number of Medicaid patients they see each week so that they can control their income loss. It is not unusual for a Medicaid patient to have no family doctor because he cannot find a nearby doctor who will treat him, a problem that is especially severe in rural areas. As a result, for years Medicaid patients have used emergency rooms as their regular source of treatment: Emergency rooms charge no co-pay or deductible; they perform tests right away; they generally provide high-quality health care; and they cannot refuse patients. (We will elaborate on this last point later.)

In financial terms, Medicare and Medicaid are bankrupting our state and federal governments. These two federal insurance programs compose nearly 20 percent of the federal budget, and the percentage keeps rising. In addition, for most states Medicaid is the largest single budget item, averaging 22 percent of states' spending. Medicaid is generally administered by the state, with matching federal tax dollars. As a result, states seek to expand Medicaid coverage and other medical programs such as SCHIP (State Children's Health Insurance Program) in order to reap more of the matching federal dollars. Eligibility for these programs continues to expand, and, in some states, families with incomes as high as $55,000 are now eligible for Medicaid benefits. Federal, state, and local governments now pay 50 percent of every dollar spent on health care, even though government health insurance covers only 27 percent of the population.24

By tying health insurance to employment through the income tax law-by providing preferential legal status and tax treatment to nonprofit companies and their payment plans for routine services-and by establishing government health insurance for the aged and the poor in the form of Medicare and Medicaid, the government has created a system that violates individual rights and fosters an entitlement mentality.

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