Thoughts on Health Care

In the recent presidential debates, Obama mentioned that, according to the Chamber of Commerce, McCain's plan will lead to the unraveling of the current employer provided health insurance system. While searching for the source of this information, I came across an interesting view point on health insurance published in the Boston Globe. First, for those searching for the origin of Obama's comments, it seems to be this New York Times article which quotes R. Bruce Josten, executive vice president for government affairs at the Chamber of Commerce. Both articles are interesting, and I'd encourage any one interested in the issue to read both.

However, the Boston Globe one, being an op-ed, provides much more opinion and is therefore more interesting to discuss. The author argues that health insurance ought not be tied to employment. His primary reasons are to improve health insurance portability (something I think is an important issue) and to reduce over consumption of medical services. Its this latter point that I find both intriguing, but ultimately unconvincing.

First a bit of history from the article. The origins of employer based health care according to the article stem back to WWII, when certain laws prevented worker salaries from increasing. The law however did not ban perks, such as medical insurance. It turned out, that not only was this a way to sneak in additional pay, but employees and employers alike did not have to pay taxes on this form of compensation. While initially contentious, this was ultimately codified by Congress.

This creates a bit of a problem in the health care system. If I don't get health insurance from my employer and go purchase it on my own, its paid for with post-tax, not pre-tax dollars. I'm not an expert on the tax code, but even if health insurance is deductible, its not the same as the employer version since it competes with other pieces of the tax code (e.g., the standard deduction) and ultimately may not cause my taxes to be any lower. In my mind, this dichotomy gives unfair advantage to those people fortunate enough to receive insurance from their employer.

McCain's approach to the problem is to tax the employer health provided health insurance and then provide a $2,500 ($5,000 for families) tax credit to allow people to shop for their own insurance. This seems silly to me when a more obvious solution (or at least a less radical one to level the playing field) would be to simply not tax health insurance purchased by individuals.

The other effect, however, of making health insurance tax free is that it encourages health insurance to pay for things not insurance-y. What do I mean by that? Well, many health insurance plans (mine for sure) pays for (or at least subsidizes) preventative care. For example, I can go get an annual checkup, semi-annual teeth cleaning, etc. No doubt the cost of this is transferred to me (or my employer) in the premiums. However, those premiums are paid pre-tax. If only I could convince my insurance company that my rent was a medical expense...

This situation is interesting because these expenses are routine and completely predictable. So it seems silly to involve a middle man in the transaction. Why pay my insurance company to pay my dentist, when I could pay the dentist myself? Normally insurance is used to hedge against uncertainty. Taking automobile insurance as an example, my auto insurance doesn't pay for an oil change (as the Boston Globe op-ed points out), in part because this is routine predictable service. It does however pay for repairing my vehicle if I get into an accident. This is an unexpected event, and the sum total of my premiums up to the accident may not be enough to pay for the repairs. In other words, stashing the premiums in a bank account is not an acceptable replacement for the auto insurance. The insurance company does not operate at a loss (of course, only if it is well managed) because on average the premiums they collect do cover the costs of the repairs they pay for. In summary, while one person may receive a net cash flow from the insurance company (at least for a fleeting instant in time) on average money flows into the insurance company. As customers of the insurance company, we're willing to pay the difference between the premiums we pay and our lifetime accident repair costs for the peace of mind that if we were to require a very expensive repair (a repair that exceeds our premiums thus far and what we could presently afford), the insurance company will pay. This simply does not apply to the regular visit to the dentist for a cleaning (but does for things such as root canals or wisdom tooth extraction, etc.).

The author of the Boston Globe op-ed suggests this is responsible for an over consumption of medical services. In essence, since medical insurance distances the patients from the true cost of medical care, patients get more treatment than they need. I think this is a tenuous argument for several reasons, some pointed (albeit sarcastically) article's comments. Who in a life or death situation is going to question the doctor's advice? However, one does have to wonder if doctor's would be more sensitive to cost when making suggestions if they knew that costs were going to come from the patient and not their insurance company. This may have the effect of reducing unnecessary procedures. Its far easier to take from a faceless insurance company than the patient sitting right in front of you. It may also avoid the insane situation where the list price for medical service is outrageous on the assumption that the insurance company will negotiate it down. This leaves those without insurance in a lurch since they have to pay full price or close to it.

However, the flip side of the story is that the medical insurance companies have a vested interest in their customers receiving preventative care. Returning to the auto example, my insurance company, in addition to not paying for oil changes, doesn't pay for an engine overhaul either. This is a consistent position. If they paid for the latter (because its expensive and often unexpected), but not the former, I as a customer am given an incentive not to protect my engine with regular oil changes. After all, the price of the oil changes come out my pocket, whereas the price of the engine overhaul comes out of the insurance companies pocket. Economists call this moral hazard. A similar moral hazard exists for medical insurance. Its often significantly cheaper to prevent a disease or treat it in its early phases than to deal with it as an emergency. Consequently, if the medical insurance companies are going to pay to deal with the emergencies, they ought to give their customers incentives not to create emergencies. This means paying for preventative care. While no one deliberately wants to get sick or have an emergency, if customers are left to their own devices, when faced with challenges in meeting the family budget, preventative medical care may be cut. That's the last thing the insurance company wants.

What this means to me is that even more things need to be tax deductible. If my routine medical care is being paid by insurance, which is tax deductible, then if I can't afford insurance, or choose not to have it, it's only fair that my routine medical costs are tax deductible. Once again, just being deductible is not enough, it should be deductible before considering things like the standard deduction, etc. If I understand correctly, this is what medical savings accounts are for, but its not at all clear to me why I have to predict at the beginning of the year what my medical expenses are going to be. Why can't I just save the receipts and deduct the costs when filling out my return.

In summary, it seems to me that our current tax code is inconsistent on dealing with medical care and medical insurance. While I'm not sure that the McCain plan is fiscally sound (i.e., does it make health care less affordable for some who are already covered and not go far enough for others who are not, all the while spending more government money with no new sources of government income?), I do think the doing something about the current inequality in the taxation of medical expenses makes sense. On the other hand, I'm also pretty skeptical of Obama's plan (once again, is it fiscally sound?) of having a government run insurance plan. Ultimately, I'm not convinced the government is good at running large programs of any form, nor does it have the incentive to be efficient. Unfortunately, on the corporate side of the world, companies have incentives to be efficient, but they don't have incentives to be sympathetic and caring. That's what makes health care such a tricky issue.

Presidential Debates

This past week, I watched the most recent presidential debate and the one that occurred before that (the one from 10/7). I've realized there are two things that really anger me about the way presidential campaigns and debates work. One, a common gripe, is that the candidates never answer the question. In the past, I've felt like they've cleverly avoided the question. I don't know if its me becoming more cynical or if the candidates have just degenerated, but I feel like the ignore the question altogether and continue talking about what they were talking about during the last question. It's like they're giving a speech that occasionally gets interrupted by the other candidate and the moderator. That's not a debate!

The second thing I hate is when the candidates invoke their own or their opponent's voting record in a legislature (state or federal). Quite frankly, I think its dirty. Every bill is a complex beast. Just because you vote for something doesn't mean you support every aspect of the bill, just that on the net it is good. Similarly, just because you vote against a bill doesn't mean its bad. Once again, you feel on the net its bad. The situation is more tricky for bills that will definitely succeed or fail. In these cases, you may vote for or against just to make a point! The fact of the matter is that both candidates realize this, but selectively choose to ignore it. For example, McCain is big fan of talking about pork and how it gets introduced into legislation at the last second. Couldn't this be a good reason for voting against an otherwise good bill? Sure it can be. So just because someone voted against something doesn't make them evil. Similarly, maybe its worth letting the pork through so that other critical measures get enacted. Does that mean you're pro pork. Obviously not. This case in particular was supposed to be eliminated by the line-item veto. However, that was judged (probably correctly so) to be unconstitutional by putting legislative ability into the hands of the executive (in particular the president).

While I'm talking about the election, one more thing I'd like to mention. Why when talking about the economy do we vilify Wall Street and mourn Main Street? There is no doubt in my mind that excess, greed, and poor judgment on Wall Street are largely to blame for the current economic mess. However, on every bad loan that was given, there were (at least) two parties involved. Those giving the loans and those taking it. If an individual or family accepted an obligation they knew they couldn't meet, they're part of the problem! And, the last I checked, we, as a nation, do not accept ignorance as an excuse. If someone making a large investment (as buying a house is) does not do their due diligence to understand not only how much their mortgage will cost next month, but how much it'll cost 60 months from now, well shame on them. If they understood it, and took a risk (for example on home values or interest rates) and those things did not work out in their favor, we shouldn't feel sorry for them. They rolled the dice and lost. That's what risk is about. We don't feel sorry for the person who loses money on the blackjack table, so why should we feel bad for those that lost it in real estate gambling (unless of course, they can convince us that they're addicted to the real estate market and need help).

I do feel bad for any home owner that is in trouble now because an unscrupulous loan agent lied to them in the past. These lies can come in many forms, whether explicit or lies of omission. However, there is certainly a fine line here. If the consumer doesn't ask the right questions, they're never going to hear the right answers. You can't walk into a bank trying to get a mortgage and worry only about your monthly costs in the short term. There is some responsibility on you to ask the tough questions about the future.

One last point on this subject. Where is the mourning for the person who acted responsibly. You'll find this person in fairly sound financial shape, renting an apartment, wishing he or she could buy a home. Unfortunately, because these people could do math, understood how the interest rates and the various loans worked, and were fiscally responsible, they rejected mortgages they couldn't afford and decided not to buy a home, or settle for something smaller than they really wanted. At the same time, the irresponsible people (both lenders and borrowers) kept making more money available so that home prices were driven up, making it even harder for the responsible folks to buy a home. And now that the market has begun to correct itself, we hear the politicians talking about stabilizing home prices. And how are we going to do that? Well, we'll tax the responsible people a little bit more and force banks and other organizations to renegotiate mortgages to more reasonable values. All this does is let people who shouldn't have been able to buy a home in the first place keep their homes, while responsible people still can't afford a home because the prices are, once again, artificially high. Why not, in these re negotiations, give first dibs to people who acted prudently through the growth of the real estate bubble. Reward them for acting responsibly, instead of using them to support the excess not only of Wall Street, but of Main Street too.