(Second of two parts.)
PRICES ARE ADVERTISED EVERYWHERE. From newspapers to billboards to websites, we are forever being told how much things cost. Want to buy contact lenses? A cruise to Alaska? A pedicure? The price of almost any product or service is readily available, and vendors vie for business by keeping their prices competitive.
But not when it comes to health care.
How much does your local hospital charge to deliver a baby? Which blood pressure drugs are the most affordable? What is the going rate for a pediatric checkup?
Most of us couldn't begin to answer such questions. Hospitals and physicians rarely advertise their rates because patients rarely care to learn them. For the majority of Americans under age 65, medical bills are something insurance companies take care of. Few patients have any incentive to focus on price, so few health care providers have any incentive to compete on price. Result: ever-higher health care costs, leading to ever-higher insurance costs.
It may seem natural to rely on insurance to pay for ordinary health needs, but it isn't. After all, we don't use auto insurance for tuneups or tires. Homeowners insurance doesn't cover paint jobs or new applicances. Those kinds of costs we pay out of pocket, which is why we do things like get written estimates or check Consumer Reports. When we're footing the bill, price and value matter.
So why are medical expenses different? The answer has nothing to do with health care -- and everything to do with the tax code.
For more than 60 years, federal law has excluded the value of employer-provided health insurance from the employee's taxable income. Buy your own health insurance, and you pay for it with after-tax dollars. Get health insurance through your employer, and it's tax-free.
This policy dates from World War II, when a labor shortage caused by wage controls led employers to offer health insurance in lieu of cash as a way to recruit and retain employees. When the IRS agreed to go along with the legal fiction that this employer-paid benefit wasn't really income, it triggered a radical -- but unintended -- change in the way Americans paid for health care. Within 10 years, the number of people with health insurance had soared from fewer than 3 million to nearly 80 million. And instead of the limited coverage that used to be the norm -- typically, only hospitalization was insured against -- health insurance gradually expanded to cover day-to-day medical costs.
Economics and human nature don't change when it comes to health care: Insulate consumers from the cost of the choices they make, and those choices tend to become more extravagant and oblivious to price. Give them a reason to care about the bottom line, and their spending becomes more cost-conscious and careful.
Which is why real health care reform starts with tax reform.
After 60 years, it's too late to repeal the tax shelter for employer-provided health insurance. But why not extend that favorable treatment to individuals' own health expenditures? The goal should be to alter the way people buy health care by giving them a financial stake in its cost. That would be the result of leveling the playing field between medical benefits provided by an employer and those that taxpayers provide for themselves.
As John Cogan and Daniel Kessler of Stanford's Hoover Institution and R. Glenn Hubbard of Columbia have proposed, all medical expenses should be made tax-deductible for everyone, so long as they are covered for catastrophic health care. Medical expenses would include an employee's contribution to employer-provided insurance or the cost of insurance purchased individually, as well as out-of-pocket spending. Taxpayers would be free to stick with their employer's expensive health plan if they wished, but now there would be no tax incentive to do so. Most employees would choose to switch to a cheaper health plan with higher deductibles and co-pays. Employers' health care costs would fall sharply, and market pressures would ensure that those savings returned to employees in the form of higher wages.
Higher co-pays will make consumers "more cost-conscious and more willing to take greater control of health care decisions," write Cogan, Kessler, and Hubbard. "Ultimately, consumers will make better health care choices, achieving improved . . . outcomes and considerable savings." Based on RAND Corporation research, they estimate that making medical expenses deductible would reduce health care spending by $40 billion -- all without forcing a single benefit cut on anyone.
With health care no longer a function of employment, concerns about portability would vanish -- your benefits would go wherever you went. Because insurance would be more affordable, fewer Americans would remain uninsured. Above all, consumers would be in charge of their own health care. As a result, providers would compete for their business and prices would come out of the shadows. Would it be the last word in health care reform? Far from it. But it would make a terrific first step.
(Jeff Jacoby is a columnist for The Boston Globe.)