What Broke American Health Care?

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0:00:07.4 Trevor Burrus: Welcome to Free Thoughts. I’m Trevor Burrus. Joining me today is Michael F. Cannon, Director of Health Policy studies at the Cato Institute. His new Cato study published this week is in the tax exclusion for employer-​sponsored health insurance. Welcome back to the show, Michael.

0:00:22.5 Michael Cannon: Great to be here, Trevor.

0:00:25.7 Trevor Burrus: So we probably… Most of us know what employer-​sponsored health insurance is, but just so we’re all on the same page, can you explain how the system of getting insurance through your job works?

0:00:39.0 Michael Cannon: Sure. Consumers purchase lots of kinds of health insurance, there’s homeowner’s insurance, renters insurance, life insurance, car insurance, health insurance, with the exception of life insurance, we don’t really get any of these other types of insurance through our employer, and there’s no obvious reason why we should get health insurance through our employer either. There may be reasons to do it, but there are also reasons not to do it. If you change jobs, for example, you lose your health insurance, and what if you had a severe and expensive illness before you changed jobs or lost a job or retired, or your spouse divorces you or dies, and she was your connection to that insurance, then you have an expensive medical condition and no insurance and now that’s a pre-​existing condition, so there are serious downsides to employer-​sponsored insurance that don’t exist if you buy insurance directly from an insurance company, so how did we end up with this system where the vast majority of privately-​insured people, and even a majority of US residents have insurance through an employer? A lot of people think it’s because of World War II wage and price controls, which the federal government imposed on salaries but did not impose on… Did not use to limit employer health benefits.

0:02:11.5 Michael Cannon: So employers began offering more health benefits as a result of that, that’s part of the story, but the story actually goes all the way back to 1913 and the creation, the imposition and the implementation of the federal government’s second individual income tax. The reason we have such widespread employer-​sponsored health insurance is because when Congress created the income tax, they didn’t give any thought to whether to count something like health benefits as part of your income that the income tax would tax, because well health benefits weren’t that prevalent, and back then, we didn’t even have modern health insurance, there was just no need for it at that time. So the Treasury bureaucrats, there were some employers that offered some health benefits, the Treasury bureaucrats decided, Wow, this is actually really, a really complicated issue, we don’t know whether and how to tax health benefits, so we’re just gonna throw up our hands and say they don’t apply under the income tax. Well, that creates an interesting tax differential between compensation you get from your employer in a form of cash versus health benefits. If the government is taxing the cash but not taxing the health benefits that you receive, then in effect what the government is doing is it’s penalizing you for every dollar you take as cash income instead of health benefits.

0:03:42.2 Michael Cannon: And so if you wanna take your compensation all as cash and buy health insurance yourself, there’s an implicit penalty there, and it’s that implicit penalty that has shaped the market for health insurance in the United States, it has shaped the market for healthcare in the United States, it has also shaped the course of health policy for more than 100 years right now, because that historical accident has caused so many problems in the health insurance and healthcare markets that Congress and state governments have had to intervene in markets over and over again, trying to fix the problems that the… That the Federal Government accidentally created when it began taxing incomes.

0:04:25.3 Trevor Burrus: But there are some benefits to this, at least in terms of getting… Well, a lot of people maybe don’t want to shop for health insurance, so that one possible benefit, but there are also benefits in the sense that your employer maybe can be better at purchasing health insurance than you are because your employer with a bunch of employees has more market power than an individual person, and so maybe that’s created a more robust health insurance system than it would be if people were left to just shop on their own.

0:04:56.2 Michael Cannon: Well, people don’t wanna shop for lots of things. I hate shopping for houses, people hate shopping for spouses, we don’t let our employers make these decisions for us though, we don’t do it for a car insurance, is a closer analogue. And yet, you’re right, that there are some benefits to that, but these consumers are not making these decisions on a level playing field, the federal tax code dramatically increases by about 33%, the after tax price of insurance that you shop for yourself, so that’s gotta be having a really big impact. And as for purchasing power of employers, you’d think that because if employers are buying medical care on behalf of a large number of people, then they should be able to negotiate better discounts, but… Let me answer that first with theory then with evidence. If the employers can rely on their enrollees to go along with the tough negotiating strategies, if they can rely on their employees to say, Yeah, that’s fine, if you exclude that hospital from our network because they’re charging too much, then, yeah, employers could do that, but they can’t rely on their employees to do that because the savings are not… From those strategies are not salient to employees. If you were buying your own health insurance, paying the premiums yourself and thought, Well, I’ll get $50…

0:06:38.6 Michael Cannon: I’ll pay $50 less per month if I sign up for this health insurance plan that is really a tough negotiator with the hospitals, then you’ll go for that ’cause you’ll get to keep that $600 a year yourself, but if your employer is paying the premiums, even though the employer makes those payments with money that they are withholding from your salary, not really withholding, it never enters your salary, it comes out of your total compensation. Even though that’s part of your compensation, it’s not salient to you in the same way. And so what happens, when employers try to do this is, when they try to negotiate with healthcare providers or insurance companies on their behalf, and they end up excluding that expensive hospital that some of your workers really want to be able to use, the workers rebel because they’re not seeing any of the savings themselves, and employers it turns out are not very good price negotiators.

0:07:27.2 Michael Cannon: We saw some of this in the 1990s, when employers used some of these tools to try… Managed care tools to try to reduce prices in utilization, there was a huge backlash and employers had to undo those steps, but there’s also been a series of experiments that insurers in California used as well as employers like Safeway and some others, that made their enrollees cost conscious when consuming certain covered services in a way they just weren’t before. Basically, for say, a hip or knee replacement, the insurance company said, “We’ll only pay $30,000, you can go wherever you want, but you’re paying the balance if it’s above that.” ‘Cause some of the hospitals in California have been charging $60,000. The insurance companies and the employer on whose behalf they were negotiating could not get those prices down at those $60,000 hospitals. But when they made the consumers cost conscious, the consumers started asking for price information, getting price information and changing their behavior in a way they didn’t when it was their employer’s money, and that forced those high price hospitals to reduce their prices by 16% over a two-​year period, and in some cases up to 32%. So, employers are just not very good price negotiators, at least not the way we pay for employer-​sponsored insurance right now.

0:08:55.6 Trevor Burrus: Let’s take a step back to the question of health insurance, in general. If you read some critiques of the current American healthcare system, and I don’t necessarily mean from the Bernie Sanders crowd, but even from libertarians, that state health insurance is a strange way of paying for healthcare in general. We shouldn’t be insuring against predictable costs in the way that we don’t insure our oil changes for our automobile insurance, that automobile insurance covers unexpected things. Is it the case that this employer-​sponsored health insurance, sort of created this kind of weird hybrid of paying for health insurance, or at least highly directed the American healthcare system toward this method of paying for health insurance… For healthcare, via health insurance, and that we could say health insurance maybe wouldn’t even exist without this 100-​year-​old tax break?

0:09:54.7 Michael Cannon: I don’t think that’s the case, but let me answer that question this way. A nation of 330 million people got a wide distribution of risk preferences when it comes to wanting to be… Wanting something to protect you from the cost of an expensive illness. Some people would want very little or no risk protection, they are risk-​neutral, risk-​seeking, so they’re not going to buy health insurance. Others are very risk-​averse, and not only do they want health insurance, they want the most comprehensive health insurance. They want insurance against routine low-​cost, out-​of-​pocket expenses because… And I think this is one way that healthcare is a special sector of the economy. Oftentimes decisions about your health, or the health of family members is… Those are so emotionally charged that you don’t even want considerations like money to enter your decision-​making process when you’re making decisions about the care you’re gonna consume. So, for some people, it makes sense to buy first dollar coverage that where you’re not paying for anything out-​of-​pocket, and as long as those folks are willing and able to pay those premiums, I think it’s fine.

0:11:15.0 Michael Cannon: And I think a market would cater to those risk preferences. What the tax treatment of employer-​sponsored insurance does, or really the implicit penalty on cash income, and therefore your right to make your own healthcare and health insurance decisions, what that does is it encourages people to buy more insurance than they would have otherwise. So the people who are kind of risk-​neutral might not buy health insurance, they end up buying… Enrolling in an employer-​sponsored plan because there’s this huge tax differential, and if you are naturally risk averse, you end up buying more health insurance than before and a lot more people end up in that camp where they are demanding first dollar coverage, and it’s not just because of the tax differential, that’s certainly a big part of it, but it’s also because at first…

0:12:15.7 Michael Cannon: And I think this would still be the case today, even if it didn’t start out this way, at first, the tax preference for employer-​sponsored insurance only applied to premium payments that your employer was making. And so, when your employer is paying for the premiums, even though as I mentioned, it’s your money because they’re reducing your compensation to pay for it, it doesn’t feel like your money, it feels like someone else is paying for that rather than you, and so that I think gives an additional boost to demand for low deductible low cost sharing and even first dollar coverage. I think that would exist even in a free market, I would want it to exist because that would make a lot of people… Improve welfare for a lot of people, but it would not exist to the extent we have it now, and there would probably be more… What we call managed care or utilization controls by insurance companies, particularly the ones that offer first dollar coverage in the absence of the tax exclusion, and there are costs, but also many benefits that would come with that.

0:13:21.6 Trevor Burrus: So let’s get into some numbers. I’m a single man who is relatively healthy or pretty healthy, and Cato, we’re both employers of Cato…

0:13:31.2 Michael Cannon: And who has done a great job of losing weight.

0:13:33.1 Trevor Burrus: Thank you. And we’re both employees of Cato, so Cato pays us wages and then we also get healthcare through Cato. If we both declined… And you have kids and I don’t, but if we declined this, how much more money would be put in our pocket just… If we declined what we were offered in the… Where is that money coming from?

0:13:56.8 Michael Cannon: So the Cato Institute is a very progressive employer, because Cato does offer cash in lieu of health benefits for those who turn down Cato health benefits. Now, it’s not a full amount that they would have paid toward your health benefits, but it’s more than a lot of employers offer. This is something that I get into in the paper is, one of the reasons we know that the money that employers pay toward health benefits comes out of workers compensation, is that when employers don’t offer health benefits, our competitive labor market forces them to offer a higher cash compensation. And you would think that that would mean that the Cato Institute therefore, if they’re spending $16,000 on my health benefits for me and my family, that if you decline them, they would pay you $16,000, that’s what another firm might pay… Let’s say, for the sake of argument that there were a thick and competitive market for Libertarian policy wonks, if you were then to leave Cato, you would be able to command a salary that included that $16,000 from another libertarian thing. And therefore, Cato should be offering you that $16,000 as cash if you turn down health benefits, but it doesn’t… That’s the one place within firms is the one place where that compensating wage differential does not appear or does not appear fully, and the reason for that is, again, the tax code.

0:15:37.5 Michael Cannon: The IRS says that if an employer offers Trevor that $16,000 as cash, then the fact that they’re offering all employees that $16,000 means that Michael Cannon is in constructive receipt of that $16,000 in cash, so they’ll tax me as if I’m receiving that $16,000 as cash. I’m not, I’m getting it in tax-​free health benefits, and so offering… But what that means is that offering you that $16,000 as cash would completely negate the benefit of the tax preference for employer-​sponsored insurance for me and everyone else who does enroll in Cato’s plan. So that’s the one place where that tax differential does not show up and I think it’s just one of the many really interesting puzzles I explore in the paper.

0:16:26.4 Trevor Burrus: One of the interesting things about these benefits in the way that people don’t often understand which you get into in the paper, a lot of people don’t understand who is paying for these benefits, their health insurance through their employer. But they also don’t understand how their compensation package is affected by, say, rising health care costs, because if Cato, and under employer mandate from the Affordable Care Act has to supply health insurance to more than 50 employees, so if the price of healthcare doubles for some reason, of health insurance doubles because of the underlying price of healthcare, then we essentially get a raise, but we don’t even know it. Correct?

0:17:09.7 Michael Cannon: That is correct. The way economists look at it is like this, in a competitive labour market, what determines your total compensation is what we call your marginal productivity, that’s the added value that you bring to your employer’s production process, so if your marginal productivity is $50,000 per year, then that’s how much the market… That’s the direction in which the market is going to push employers to pay you, total compensation of $50,000 per year, and if your employer offers you health benefits… Since that’s what determines your total compensation, if your employer offers you health benefits, that has to come out of that $50,000, because if they offered you $50,000 plus health benefits, well, then they’re paying maybe $66,000 per year, the market is going to… Is gonna punish them for that, ’cause you’re not adding that much value to the production process, the market is gonna push your employers generally than to push your cash compensation down to the point where your cash compensation plus your health benefits spending equals your marginal productivity.

0:18:36.0 Michael Cannon: And so when… This gets very confusing because the way policy wonks, and even employers talk about this, when they talk about that $16,000 that your employer pays toward your health insurance, they call that the employer contribution, I think that is a completely misleading and even a harmful term because that’s like saying that when your employer withholds money from your paycheck to send to the IRS for income tax withholding, it’s like calling that an employer contribution, it’s not your employer contributing, that’s your money, and the same is true when it comes to your health benefits. The employer doesn’t contribute anything to your health benefits, your employer might make the payment, but they’re making that payment with your money, as surely as the income tax withholding they’re sending to the IRS is your money. So if we want to fix the problems that the exclusion… Tax preference we call it the tax exclusion for employer-​sponsored insurance creates, one thing we gotta do is we gotta change the way we talk about how employers pay for this, and we’ve got to make clear that this is the workers money that they’re spending.

0:19:47.8 Trevor Burrus: One term that you use in the paper that is interesting and you have interesting data in there about compulsory health spending, and how much of the… The amount of health care that is being spent in any given country is so called compulsory. Where does America sit on that compared to other countries and we talk about Scandinavian countries and we gotta think, well, they pay a ton in taxes, that’s pretty compulsory, and they get healthcare in return, and so that they have some amount of compulsion to that, and it seems that we don’t have that much compulsion ’cause we’re not paying for an NHS, such as they have in the UK, and we have more freedom with our dollars, but it’s not as good as we would hope it to be.

0:20:29.7 Michael Cannon: So one of the charts that I have in the paper is of tax burdens in advanced nations. And United States is at about 25% of GDP. Government soaks up that much in taxes. Because government runs deficits, spending is a little higher, but we’re almost at the bottom. That makes us look like a very economically free country, and we are relatively. And you might think that we have a relatively free health sector as well, but the OECD puts out other data on health spending that show that the United States not only is not a free market when it comes to healthcare, but it shows that we are ninth highest among 30-​some OECD nations in terms of how much health spending is compulsory. We are at about 83% of health spending in this country is compulsory. There’s only about eight countries that have a higher share and that’s well above the OECD average which is about 74% to 75%.

0:21:40.1 Michael Cannon: The reason compulsory health spending in the United States is so high, is first, half of health spending comes from the government. So that’s where the government takes your money, taxes it from you, taxes are definitely compulsory, and then spends the money itself. That’s half of total health spending in the United States. But about another quarter or more of health spending is health spending by employers and workers through employer-​sponsored insurance arrangements, and that spending is also compulsory. When you think about it, either you take it that dollar of income as health benefits, or if you wanna take it as cash, you end up having to pay 33 cents in tax on it, on average. What that means is that the tax code has created either a situation that is functionally equivalent to an individual mandate to purchase health insurance.

0:22:46.1 Michael Cannon: The government is saying to you either you enroll in this particular type of insurance that the government favors, which is employer-​sponsored insurance, or take the money as cash, you have to pay more money to the government. That’s indistinguishable, functionally speaking, indistinguishable from an individual mandate, and that means that spending on employer-​sponsored health insurance is… Everybody’s compulsory is spending on insurance under an individual mandate.

0:23:14.6 Michael Cannon: And therefore a lot of or most of what we refer to as “private” health spending in the United States is actually compulsory health spending, and that is why we rank number nine among OECD nations in terms of the share of health spending that is compulsory. And when you look at other measures of compulsory health spending, the OECD puts out data on this as well. The United States ranks first in per capita compulsory health spending. Which is not really much of a surprise to me, we’re a high income nation, we have higher health spending per capita, so, of course, per capita compulsory health spending is gonna be highest here, but if you look at compulsory health spending as a share of GDP, so you normalize it to the size of the economy, The United States is still… It’s still number one, we have the highest rate of…

0:24:10.1 Michael Cannon: Or the highest share of GDP going to compulsory health spending at about 14%, which is more than twice the OECD average of 6.6%, and we’re even pretty far ahead of number two, Germany, which is less than 10% of GDP is compulsory health spending. So when people complain that health spending in the United States is so high and they ask why, why, why do we spend so much more than any other nation? Well, the reason is partly because we’re a wealthy nation, but mostly because the government requires us to spend that much.

0:24:50.4 Trevor Burrus: What are the effects of all this? Because we understand that there’s high compulsion in other countries and quite high compulsory spending here, but the satisfaction can be pretty high with health care systems when you’re being forced to spend on something or you’re being forced to spend on health insurance, but at the same time, everyone knows the saying, “He who pays the piper, calls the tune.” So at the outset, one of the first things you said in the first five minutes or so, is that this sort of radically changed the way our healthcare system is run, and how health insurers, for example, have to be cost conscience and concerned about a bunch of things because they’re paying, and the same is true of the United States. So over the course of a century of this, what has it done, aside from just the system of insurance that we have set up and how we’re paying for healthcare, what has it done in terms of the type of healthcare we’re receiving and the experience of the person consuming healthcare?

0:25:48.2 Michael Cannon: It has had a serious, profound, negative impact on the consumer experience. We can say simplistically that, and intuitively that, when the consumer isn’t the one controlling the money, the system is not going to serve the consumer.

0:26:03.2 Michael Cannon: In more concrete terms, when you make the consumer not care about the cost of medical care, or the volume of services that they receive as much as they would if they were the ones controlling the money, when you make them cost unconscious, when it comes to health insurance, that tilts the playing field toward particular types of health insurance and particular ways of delivering healthcare. That have some benefits but also have tremendous costs, and you tilt the playing field away from financing and delivery systems that would correct some of the problems that we see… That we see in the first type of system and that are ubiquitous throughout the US health sector right now. What cost unconsciousness favors is more comprehensive coverage with fewer managed care controls, broader choice of doctors and paying healthcare providers on what we call a fee-​for-​service basis, so that for every additional fee the doctor provides… Every additional service the doctor provides, they get an additional separate fee.

0:27:23.4 Michael Cannon: That encourages doctors to do more, it encourages doctors to do more because there’s a lot of uncertainty in medicine, they don’t really know if writing that prescription is gonna help, but they’ll go ahead and do it because it might help, on average, medicine is beneficial, the consumer is okay with it because they’re paying for less of it themselves, and they’re being less… They’re scrutinising the doctor’s recommendations less than they would if they were paying themselves, and so we end up getting more prescriptions, we get more physician visits, more specialist visits, more hospitalisations, more tests, more procedures, and when that happens, you get more wasteful care, more stuff that doesn’t make the patient better off, and you actually create a really perverse incentives against improving quality, because under a fee-​for-​service payment system, if you get injured by a doctor, a hospital, say there’s a medication error, you get an infection, an avoidable infection at the hospital, they get paid first…

0:28:32.0 Michael Cannon: Or let’s say they discharge you from the hospital before you’re ready and you have to come back, the healthcare providers get paid first for providing the low quality care that resulted in you needing more services, and then they get paid again for the additional services that you require.

0:28:49.9 Michael Cannon: And if they try to fix that situation by putting processes in place to avoid that low quality care, well they’re out, the cost of those systems, which could be electronic medical records or the research necessary to find out if a particular process works, they’re out that cost and they’re out those additional payments. The entire US Health sector, and it’s not just the exclusion, the tax exclusion for employer-​sponsored insurance that does this. It’s also the Medicare program, but the Medicare program is kind of a creature of the exclusion, but the entire US Health Sector tilts in the direction of this type of fee-​for-​service payment that promotes a lot of low quality care.

0:29:29.1 Michael Cannon: I actually have another paper out on how this happens in Medicare, and that low quality care is ubiquitous, it is… And we’re having a hard time combating it because all the incentives are lined up to encourage it and discourage any quality improvements. If we had a level playing field where consumers were the ones paying for the premiums, if there were no tax distortions of their health insurance decisions, then we get a lot more of that other type of financing and delivery system, the other sorts of health plans that actually do the research into how to avoid these medical errors, and that would force the fee-​for-​service providers to compete and improve the quality of care. We don’t get that kind of competition, and so as much as the tax code has increased the cost of healthcare and made access to health care less secure because you can lose your insurance when you lose your job, maybe the worst thing that it’s done is erode the quality of care that patients receive.

0:30:34.9 Trevor Burrus: Seems like a good argument for a single-​payer or a much more centralised payment structure system, and maybe you can get into some of the Medicare stuff you were talking about because I presume, although I don’t exactly know, but I presume that in the NHS, for example, or in the Canadian health care system, if you’re a doctor in that system, you don’t get fee-​for-​service pay, ’cause otherwise you’d be able to extract money from the tax payer at will seemingly, or if you just got a solid salary like $150,000 a year and provide these people with care, and therefore you’re not gonna have them going overboard with care and you’ll be able to have sort of an official oversight of what type of care works and what type of care doesn’t work.

0:31:16.4 Michael Cannon: So different countries come with this problem in different ways. In some cases, they will do the polar opposite of fee-​for-​service. They will give hospitals or other providers a fixed sum of money each year and say, this is all the money you get to treat all the patients that are gonna come in your door, manage it wisely. In other places, they do fee-​for-​service, and sometimes they do a hybrid of these two things where they’ll do fee-​for-​service up to a cap, and there is no perfect way of paying healthcare providers. If we could measure health care quality precisely, well, then it’d be very easy to pay healthcare providers because we know exactly whom to pay and even how much, but because there’s so much variation in medicine, there’s so much uncertainty about whether what the doctor did led to a good outcome or didn’t lead to a bad outcome that we have to use proxies for quality, and every proxy for quality is going to commit type 1 or type 2 errors, it’s going to…

0:32:26.0 Michael Cannon: Is going to reward some forms of low quality care. The thrust of that Medicare paper that I mentioned is that the way a market addresses this problem is, it allows all sorts of different ways of paying for medical care, including innovations in payments and the virtues of each system. And that means you’ll have payment systems out there that will reward all dimensions of quality. And competition between those systems forces each of them to improve on the dimensions of quality where they’re weak. We’re not getting that right now, and I don’t think any advanced nation allows enough competition between payment systems to promote all dimensions of quality. And that’s why in the paper that we released yesterday on the tax exclusion as well as the Medicare paper that I mentioned, I talked about the importance of eliminating these distortions that encourage some forms of payment and some means of healthcare delivery over others so that we can get all of that quality improvement and force existing providers to deliver much higher quality care than they are now.

0:33:52.3 Trevor Burrus: To talk about those other payment systems, ’cause maybe it’s just a problem with the relatively few options that seem available in the OECD Western world that we kind of seem to have insurance or government-​provided healthcare of some sort. What other methods are out there of paying for healthcare that could be tried, if we fixed some of these distortions?

0:34:19.2 Michael Cannon: Well, a lot of them are already out there, they just can’t catch on because the government has stacked the deck against them. If you have ever lived on the West Coast, you might have… Or in the DC area, you might have enrolled in Kaiser Permanente. Kaiser Permanente is sort of the last man standing among the integrated and what we call integrated and pre-​paid delivery systems that cropped up in various parts of the country, but under lobbying pressure from doctors who didn’t want… Didn’t wanna lose their autonomy and their incomes, the government killed these, almost everywhere.

0:35:03.4 Michael Cannon: I mentioned that at one extreme, you got a payment system called fee-​for-​service, where provider gets more money the more services they deliver. Health systems like Kaiser Permanente operate on the basis of what we call, “pre-​payments or capitation or global budgets.” In Kaiser’s case, the insurance company and the health care providers are basically the same corporate entity. So all the money they soak up in premiums is all the money they have to provide healthcare to all of their members over the course of a year.

0:35:36.0 Michael Cannon: And so that creates a situation where if they provide you with healthcare, they don’t get more money, they actually end up with less, now, that creates perverse incentives. Obvious perverse incentives, they might deny you care, and a lot of people complain about Kaiser for that reason. But Kaiser also leads the industry on a lot of quality… Dimensions of quality, like convenience. My sister-​in-​law belongs to Kaiser in the DC area. She recently had brain surgery. She talks about, of course, that was very harrowing, but she talks about how much easier it was that she could go from this doctor, to this specialist, to that specialist, to the Pharmacy, all within the same building. I’ve never had an experience like that. Kaiser makes that possible.

0:36:26.4 Michael Cannon: Kaiser is also an innovator when it comes to electronic medical records, because they save a lot more money than other health care providers do when they avoid wasted duplication and medical errors using electronic medical records. One of the reasons Kaiser doesn’t exist in more states, and there’s been research on this, is that when they try to enter new states, their customers, the enrollees are not cost-​conscious enough for Kaiser’s low premiums to give them the advantage that it should. And so in states like North Carolina where they’ve tried to enter the market, they had to… They ultimately folded because they could not… Because the tax exclusion for employer-​sponsored insurance makes consumers of health insurance cost unconscious, so that these sorts of plans can’t… Often can’t even get their foot in the door. There are other obstacles to these sorts of plans that have to do with state licensing of clinicians and state licensing of health insurance, but probably the biggest one is the tax exclusion.

0:37:37.0 Trevor Burrus: Let’s go to Michael Cannon’s Libertopia then. We are obviously just removing the employer-​sponsored health insurance, tax exclusion isn’t everything that needs to be done. But give me your thousand flowers blooming idea here of… I’m not gonna ask you to design a health care system from scratch, but what happens if we give this money to consumers? Sure, more places like Kaiser will receive more things like medical care in a Walmart. I’m not really a entrepreneur, so I can’t really think of other ways of doing this but it seems like there’s a bunch of possibilities here.

0:38:15.6 Michael Cannon: Remember I said, “This is a story of the income tax.” In Michael Cannon’s Libertopia, not only would we get rid of the exclusion for employer-​sponsored insurance, we would get rid of the income tax and then payroll taxes as well. And some people would say, “Oh, you can’t do that, you’d have to get rid of most of the federal government.” To which I would say, “Hey, don’t threaten me with a good time.” But assuming all we did was get rid of the preferential tax treatment for employer-​sponsored insurance, you would see a lot of really remarkable things happening and wonderfully beneficial things. The first one is about a trillion dollars of workers earnings that employers currently control would go to workers. In the paper, I talk about how to make sure that happens immediately by expanding health savings accounts, but right now, this supposed tax break, is letting employers control $1 trillion of their workers earnings and use it to make their health care decisions for them. If we reformed the exclusion to give workers that $1 trillion, that would constitute a larger effective tax cut than any of us have seen in our lifetimes. The Reagan Tax Cut returned only about 2.6% of GDP to workers.

0:39:37.6 Michael Cannon: If you reform the exclusion, you can return about 4% of GDP to workers. So that is a huge effective tax cut, $1 trillion per year. And then once the workers are controlling that money, they are going to spend it very differently than their employers do. A lot of people would wanna remain in their employer plans, and I don’t have any objection to that, as long as people who don’t want to do that are free to do it. They don’t face any penalties, if they make a different choice. So the next thing you would see is you would see a lot more health insurance choices. I think that it would take time for additional plans like Kaiser to be able to enter new markets. Eventually you would see that though. You would see healthcare becoming much simpler, as I suggested, because people wouldn’t be driving all across town and trying to shop for specialists on their own. They would make one decision about the health system that’s going to serve them. If they don’t like it, then they would switch to another health system. But all of that, the process of selecting providers and assimilating all of the information the multiple providers give you and billing would all be much, much simpler.

0:40:54.2 Michael Cannon: We would also see a lot of cost-​conscious behavior on the part of patients. When they’re buying health insurance, they’d probably buy less of it, because they would see the premium savings rather than that seeming like it’s going to their employer and being very opaque to them. That means they would be paying for more medical care out of pocket, because when you buy less coverage, you’re paying for more out of pocket. And what research shows us is that when consumers do that, they scrutinize prices more, and prices would come down more. I mentioned earlier about how prices for a lot of services came down by up to 32% over a two-​year period, just because insurance companies made patients more cost-​conscious. That is the most important thing we can do to bring healthcare within the reach of people who can’t afford it today is falling prices.

0:41:52.0 Michael Cannon: Both because more people can afford healthcare themselves, and those who can’t, it’s gonna be easier for the rest of us to help them because prices are lower. And beyond that, I can talk about a lot of other things, but one piece that really excites me is when consumers are paying for more of their medical care themselves, and when more consumers are purchasing their health insurance themselves, so they’re paying the premiums, it’s going to be easier to get rid of unnecessary and unwanted regulatory costs. Right now, when I talk to people about the costs that clinician licensing is imposing on them and preventing them from being able to see a nurse practitioner who practices independently or that clinician licensing completely bars dental therapists from their state. So they have to pay a lot more for tooth extractions, and cleanings, and so forth. It kind of falls on deaf ears if they’re heavily insured and their employer is paying… Or their cost of those regulations is not salient to them, but when they’re paying for more of their medical care themselves, and their health insurance, dental insurance premiums themselves, then it’s gonna be easier to roll back those unnecessary and really harmful regulations.

0:43:07.2 Trevor Burrus: Thinking about your paper and I was looking around and researching some other Western OECD healthcare systems. And the thing that struck me is we can sit around and talk about, “Oh, this is how much we’d unleash if we gave consumers control over their dollars, and all this innovation and cost cutting that can happen.” But the overall trend in the western world is clearly to not let patients control their money. It’s almost a defining rule. They’re either gonna have it wrapped up in government or it’s gonna be wrapped up in the way we’ve discussed today. So maybe it’s a big philosophical question about why, note this idea that this would empower so many things and we just need to try it. Well, why is no one trying it? Why is this the preference for how we spend money on healthcare?

0:44:00.8 Michael Cannon: That’s a really good question, and I think the answer has to do with… It has to do with… I think there’s a signalling story, there’s a fear story, and there’s a public choice story. The signalling story is a lot of people want to send the signal that every human matters, every human being matters, and so we’re not gonna let anyone go without life-​saving medical care. Sending that signal means a lot to them. And so when entrepreneurial politicians stand up and say, “Now, that we’ve won the peace, we’re gonna have the government nationalize the entire health sector and make healthcare free at the point of service.” A lot of people will say, “Yes, I want that.” There’s also a fear story, people are afraid that they might fall on hard times and be unable to afford the medical care that they need, or one of their loved ones might. And that, I think needs to support for these sorts of programs. There’s also a public choice story, the public choice story is that given…

0:45:12.7 Michael Cannon: What other support might exist for government subsidies for health care, the people who would benefit from those subsidies before government creates them, and the people who benefit from them after government creates them, work very hard to make sure that those subsidies are as big as possible and make… They work very hard to make sure that they don’t go away because their livelihoods depend on them, and I think you can see that in every advanced nation. You can see it here in the United States, the biggest supporters of Medicare, Medicaid, Obamacare are not the people enrolled in those programs, although certainly they do support it, they at least just don’t want you to take something away from them, but the biggest supporters are the folks in the healthcare industry who receive those government subsidies, it’s the hospitals, it’s the drug companies, it’s the insurance companies in many cases, because in the Medicare and Medicaid programs, often times instead of writing cheques to healthcare providers, the government is writing cheques to insurance companies, and those are the people with all of the lie of being might in Washington DC, but you can also see this in other countries, where unions of doctors and unions of nurses have a tremendous sway over how those health systems operate.

0:46:46.3 Michael Cannon: Public choice economics tells us why that is, it’s because those groups have the most at stake on an individual level, they have the most at stake… Their livelihoods depend on this in a way that my livelihood does not, yours does not. Our health may depend on it, but not usually, and they are much easier to organise than patients are… So even if a government program, be it partial or universal, even if that government program is not serving its enrollees particularly well, it’s still very hard to get rid of it because it is serving the health sector, the healthcare providers and others very well, by transferring vast resources to them, and so it’s very difficult to get rid of for that reason.

0:47:35.1 Michael Cannon: Every time someone brings this up, I think about The Sugar Program or the Sugar Beet Program, or the Northeast Dairy Compact, these are all agriculture policies that have a very small number of beneficiaries, who make a lot of money off of them, we’re talking farmers and others, and they increase the price of food for millions of people who vastly outnumber the beneficiaries of this program, low income people, whose food bills we should not be increasing, but we can’t get rid of the programs, even though in a democracy, the majority is supposed to win, we can’t get rid of these programs because we can’t organise enough people to overcome the lobbying bite of this very small group of people that will spend tons of resources to protect these programs, and there’s a very similar story at play when it comes to government-​run healthcare in the United States and abroad.

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0:48:39.2 Speaker 3: Thanks for listening. If you enjoy Free Thoughts, make sure to rate and review us in Apple podcasts or in your favorite podcast app. Free Thoughts is produced by Landry Ayres. If you’d like to learn more about libertarianism, visit us on the web at lib​er​tar​i​an​ism​.org.