TCS Daily

America Is Crazy

By Arnold Kling - June 6, 2003 12:00 AM

America's most expensive health care problem is mental illness. I'm not referring to depression, schizophrenia, or other commonly-diagnosed psychological disorders. I am talking about the neuroses that cause us to remain attached to a complex system of corporate and government involvement, rather than relying on individuals to make their own choices about health care and health insurance.

How Health Care Ought to Work

As Reason magazine's Ron Bailey recently put it:
"how much more could be accomplished if all the money and time now being wasted were put in the hands of individual patients, who could then make their own health care choices? The government and corporations would be eliminated as third-party payers, and would no longer face uncontrolled health care expenses; health care options would multiply to meet the preferences and needs of individual patients; and the insurance industry, once freed of mandates, could offer a wider variety of coverage to meet the budgets and circumstances of individual clients."

People should pay for their own health insurance. The typical policy would be "catastrophic coverage," meaning that you are covered for large medical expenses. However, catastrophic coverage means that deductibles are high, so that if you have only modest medical expenses in a given year you pay them yourself. Of course, people should be free to choose medical plans with low deductibles, but those plans will tend to be expensive and inefficient.

Poor people should receive vouchers that enable them to obtain catastrophic coverage. These vouchers will be financed by taxpayer money, of course. Because hospitals are not going to refuse to treat people, everyone should be required to obtain catastrophic coverage, just as every driver is required to obtain auto insurance.

Health care benefits paid by businesses should be taxable to individuals. This would eliminate the tax advantage to business-paid health care, which in turn would lead to companies dropping health care as a benefit. This would get ordinary companies out of the health care business. It would eliminate the situation in which a change of employer automatically means having to reconfigure your health coverage.

A health care system in which government involvement is limited to providing vouchers to the poor would be better for the poor as well as more efficient in many respects than what we have today. Unfortunately, mental illness blinds many people to the feasibility and wisdom of such an approach.

Fear of Losing Employer Coverage

After over half a century of employer-provided health care coverage, the American people have developed a phobia of paying for health insurance themselves. In 1994, when I left Freddie Mac to start my own business, I obtained catastrophic coverage for my family of five for less than $4000 a year (rates have gone up since). To me, this seemed like a trivial expense when compared to the salary that I was giving up, which had been close to $100,000 a year. Yet when my friends expressed concern about the risks I was taking, it was always over losing health benefits, never over giving up my salary.

Basic economic theory says that employers could make their employees better off by giving them cash income rather than the in-kind benefit of health care coverage. Employees could use the cash to purchase health care coverage directly from insurance companies, which would result in a more efficient system. What precludes this from happening today is the tax deduction that employers receive for providing health care benefits, which in turn are not treated as taxable income by employees. This tax subsidy distorts the market for health care, raising the cost of health care for everyone.

The Delusion of Collective Affordability

When in a previous essay, The Statism Trap, I alluded to the problem of socialized medicine, one reader provided aggressive feedback. He was adamant that health care is so expensive that the only way people can afford it is if the government pays the bill.

Anyone who believes that we can afford collectively what we cannot afford individually is delusional. Based on my experience with the reader's feedback, this delusion appears to be untreatable. However, I think it is important to point out this peculiar mental illness.

Suppose that a group of friends is getting ready to go out for dinner. At first, they consider a fancy restaurant, but then it is pointed out that the price of a meal there is higher than anyone in the group can afford. Somebody pipes up and says, "That's ok. We can just split the check." Does that make sense?

Paying for health care with taxpayer dollars means splitting the check for health care. Health care costs do not diminish. Quite the contrary. Just as splitting the check at a restaurant tends to lead people to order more expensive meals than what they would order on their own, insulating individuals from the cost of health care decisions tends to make them less cost-conscious in their health care choices.

Health care differs from a restaurant meal in that one family may end up with unusually large expenses, due to a severe illness. However, we can pool our risks of severe illness with catastrophic health insurance coverage. Thomas Sowell points out that this is how auto insurance works, "but our automobile insurance does not cover gasoline or oil changes." Health care policies that pay for routine doctor visits are the equivalent of auto insurance that covers gasoline and oil changes.

When the government pays, health care's lack of affordability becomes a self-fulfilling prophecy. In health care, as in other things, government is the high-cost producer.


Any attempt to inject market discipline in health care is denounced as an assault on the poor. Somehow, self-interest cannot be trusted when what is at stake is a "basic need." As my earlier adversary put it, "Is there something more valuable than keeping people alive and healthy that society should be paying for?"

This form of mental illness might be called paternalistic paranoia. It is the belief that the market is out to get people, so the government must step in and make choices for them.

Instead, we might want to consider how the choices that people make reveal their own beliefs about what is valuable. W. Michael Cox and Richard Alm, in Myths of Rich & Poor, pointed out that in 1994 over 90 percent of poor households owned a color television. The majority of the poor owned microwave ovens, VCR's, and cable television hookups. Almost three-fourths of such households owned one or more cars. From this sort of data, one must infer either that there is something more valuable than health care coverage or that poor people have obtained enough coverage and are moving on to meeting other needs.

We could provide for the health care needs of the poor at far less cost by using vouchers in a market setting rather than using pervasive government intervention. However, as Sowell writes, "here, as elsewhere, the poor are being used as excuses to fasten a whole system of controls on all of us. The left uses the poor as political human shields."

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