Taxing Our Health

Michael W. Lynch from the May 1997 issue

(Page 2 of 2)

Herzlinger chooses the former, advocating either tax-deductibility for individual health purchases or a version of medical savings accounts, which combine high-deductible indemnity insurance with a medical IRA from which an individual could pay for routine health care with pre-tax dollars. In a world replete with high taxes and targeted tax breaks, either of these options is preferable to the existing system, and both would do much to develop a consumer-driven market in health care. But Herzlinger, like many technocratically inclined experts, isn't satisfied with letting consumers spend their own money on health care and decide which insurance policy to purchase. She wants the government to dictate to individuals how much insurance they must buy.

Advocates of medical savings accounts are sure to burst a blood vessel in their foreheads if they make it to Herzlinger's penultimate chapter, "A Consumer Controlled Health Care System."Basing her argument on an implicitly developed theory of adverse selection, Herzlinger argues that "a government mandate that requires the purchase of health insurance is essential to the existence of affordable health insurance policies."

Continuing along this line of reasoning, she states that otherwise "many young people may choose a policy that covers them only in the unlikely event that they are accidentally injured or contract an infectious disease such as hepatitis,"as if young people, or anyone else, would buy insurance for any other reason. (Imagine a Harvard Business School professor complaining that individuals would only buy fire insurance that covers them in the unlikely event that their house burns down!) In Herzlinger's world, if young people aren't forced to buy products they neither want nor need, then "other people will not be able to find affordable health insurance."To prevent such a catastrophe, she calls for the government to require individuals to buy a "specific kind of policy."

Herzlinger goes much further than requiring that individuals buy some insurance, so as not to be a burden to society in the event that they unexpectedly contract a disease or become incapacitated, which is a boilerplate public goods argument. She wants specific insurance policies. So much for her consumer-driven market.

It gets worse. Readers are informed that "the purpose of insurance is to protect people from financial ruin,"which means that the government should require individuals to buy certain health insurance policies based on their income. "People who earn $50,000 a year probably could afford to pay about $500 out of pocket for health care, while those who earn $200,000 realistically could pay a much higher amount."While this may be true, it should be a non-issue. Who is Herzlinger--or any other academic, politician, or bureaucrat for that matter--to tell individuals how much health care they can afford?

The effect of her scheme, although she never recognizes it, perhaps because she may be in the $200,000-a-year neighborhood, would be to further price people of modest means out of the health market. Since premiums are inversely related to deductibles, in Herzlinger's world, those of us toiling for less than six figures, many of whom are healthy and young, would be forced to pay more for health insurance so that individuals who are older and worse insurance risks--but who earn more money--could spend less.

Here Herzlinger also conflates current income with wealth or resources. Young adults often enjoy a financial safety net--provided not by the government but by their families. As many middle- and upper-middle-class college graduates know, parents will often buy high- deductible indemnity plans for their children who are too old for the family policy but not yet covered by their own employer-provided insurance. It may be the case that the young adult couldn't afford the $3,000 in health expenses before the policy kicks in, but many parents can.

In the end, the only rationale Herzlinger leaves herself for requiring young, healthy adults to buy more insurance than they otherwise choose is the cross-subsidy it provides older individuals in the insurance market. Readers can form their own opinion as to whether this justifies a federal mandate on individual insurance purchases. And who would enforce her minimum requirement? "The IRS would require taxpayers to demonstrate that they have purchased a health insurance policy that covers all the health care expenses that they could not afford to pay personally,"she writes.

From here, the arguments start to contradict themselves, and it becomes clear why Herzlinger left the most important, and substantive, chapter for last. On page 259, she tells us that "clearly the mandatory policy should cover costly long-term care expenses and even preventive health care, for those who cannot afford to pay for them directly"(as if they can then afford to pay for them indirectly through insurance premiums). But on the very next page, she tells us that her "consumer-controlled approach"(which by now is really an IRS- controlled approach) relies on the freedom of individuals to purchase the package of benefits that they want. "Limits that are placed on Americans' ability to shop for health care will seriously compromise their ability to make the health care system more efficient,"she says.

REASON readers will appreciate certain aspects of the book. Herzlinger makes the case, mostly by indirect example, that health care, like life's other necessities of housing, clothing, food, and a decent beer, should be provided for a profit. She usefully quantifies the opportunity cost of waiting for health care, which she places at $3.5 billion a year just for physician visits and $2.5 billion for undertreated depression. Many health analysts, especially those enamored with government-funded or -provided health care, tend to ignore these costs because they don't show up on the accounting ledger. Herzlinger also does a good job of compiling examples of entrepreneurial innovations in health care, such as a chain of cancer treatment centers, the eye care centers, and home health systems, all of which allow individuals to better manage their own health.

But in the end, these kernels of truth are simply not worth the effort. Serious health analysts and the casual consumer alike will be better served by reading Herzlinger's more precise 18-page Public Interest article. She simply didn't add enough muscle to the bones of this skeleton, to use a Herzlinger-like analogy, to stretch it into a 400-plus-page book.

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