Monday, January 29, 2007

Why is Health Care Expensive? WWII Wage Controls

Health care costs are out-of-control because consumers pay only 14% of health care costs out-of-pocket. Why do consumers pay so little? Because price and wage controls during WWII led to employer-paid health care as a way to circumvent the wage ceilings, and we've been paying a huge price for the last 60 years because of the significant distortions in health care market resulting directly from the price/wage controls.

Jeff Jacoby summarizes the situation extremely well in today's Boston Globe, here are some exerpts from his column "The Tax-code Quirk and the Health Care Mess:"

"Why is it that in every other field where enormous technological strides have been made, total costs have fallen over time, but in health care they have increased?

The answer is simple: Health care costs so much because most of us pay so little for it. And we pay so little -- out-of-pocket expenses amount to just 14 cents of every health dollar spent in this country -- because a third party nearly always picks up the tab. For most working Americans, that third party is an insurance company paid by their employers.

All of this is due to a quirk in tax policy dating to World War II, when employers looking for a way to enhance workers' salaries without running afoul of federal wage controls hit on the idea of providing medical benefits. When the IRS agreed not to treat such benefits as taxable income, it triggered a far-reaching change in the way Americans paid for health care.

What had been a relatively free market in medical services, with patients transacting directly with doctors and hospitals, gave way to a third-party system, in which employers paid the insurance companies, and insurance companies paid the bills. Americans increasingly used insurance to cover routine medical expenses, not just major unexpected costs like hospitalization or surgery. Imagine what automobile insurance would cost if people insisted on plans that had low deductibles . . . or policies that included not just major body work, but also oil changes and gas."

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