Our Descent into Madness

In One Flew over the Cuckoo's Nest , Ken Kesey tells the story of a man anything but mad, but who suffers the consequences of being labeled mad because of his rebellion against the petty tyranny of those who run the asylum. Think about that as you think about the course of health-care legislation, which is now perilously close to passing.

Because of an accident of World War II, many Americans get their health care through their employers, as tax-free compensation. Because of wartime wage controls, companies looked for ways to solicit workers, and offering fringe benefits like health insurance was one way. The authorities long ago declared that such benefits are not taxable income. If employers bought us houses in lieu of paying higher wages, our houses would be really big. And because they buy us health-insurance in lieu of paying higher wages, our health insurance tends to be gold-plated. Like any subsidy, a tax subsidy of health insurance has led to higher demand for health insurance, and therefore people relying on others to pay for their own routine, perfectly predictable health expenses.

In response to those higher costs, which plague all third-party payer systems, but seem to affect ours more than most, we are now apparently resolved to control costs by taxing the pretax plans that have premiums that are too high. In other words, we don't tax the insurance to begin with, as we would for any other form of compensation, but then decide to compound the sin when people then choose to demand a lot of healthcare, which then claims a lot of resources at high social cost.

The Wall Street Journal indicates the current state of play:

Under the Senate bill, health insurers would have paid a 40% tax on premiums that exceed $8,500 annually for individuals or $23,000 for family plans. That would have affected 19% of existing policies. The new agreement raises those thresholds slightly, to $8,900 for individuals and $24,000 for families, so fewer workers would be affected.

Of course no one knows the "right” amount to spend on health care. Anyone who says we spend too much is obligated to give a number of what healthcare should cost -- 16.378% of GDP, an appendectomy should cost $2130.62, something along those lines. But of course no one knows that answer. Like any other good, those numbers are the result of interplay between millions of competing buyers and millions of competing sellers, with the sellers themselves buyers of the resources needed to sell their services, and everyone possessing information invisible to the planner. There is no imposing a bureaucratic solution on that. The result of cost controls will inevitably be some combination of rationing, people lobbying to get their special health-care needs or role in society declared exempt from cost controls, black markets, increasing the attractiveness of health-care services by ways other than improving the quality of the care but billable to the user (e.g., more luxurious hospital rooms), and other ways that we can never predict but which the planner is always expertly quick to find someone to blame for.

Cost targets are the weapon of the slave master. That we have gotten to this point -- we are prepared to give bureaucrats and politicians control over costs that are created because of the decisions of past bureaucrats and politicians -- is essentially planning in a nutshell. The proper solution to this problem is simply to tax health-insurance compensation like any other.

But we have long since left the moment when good sense was an option. During the early years of the Great Depression President Hoover consented to legislation authorizing farm subsidies, because he wanted farmers to make more money. Alas, subsidies encourage overproduction, and farm prices fell at an even faster rate than they otherwise would have. Thus, Hoover supported the Smoot-Hawley tariff’’s ability to raise farm prices, with catastrophic consequences. This is where our health care is headed, if this isn't stopped.