America’s Health Care System was Built for the 1950s

America’s Health Care System was Built for the 1950s

In his State of the Union address, President Obama responded to Republicans adamantly opposed to Obamacare by issuing a challenge, saying, “if you have specific plans to cut costs, cover more people, increase choice, tell America what you’d do differently.”

He makes a fair point. After all, our country faces a real problem concerning health care–one that long predates current law. In the decade between 1999 and 2008, “family premiums for employer-sponsored health insurance increased 119 percent between 1999 and 2008,” and were then set to nearly double again in another decade. So to fix this, Republicans must do more than vote another 47 times to repeal Obamacare.

What may surprise the president is that the “Republican” alternative has already been written, as in a CATO Institute handbook from 2009. Chief among the free market solutions to the broken health care system is removing tax code incentives against individual health insurance and ending government support for the employer-based insurance model.

To start, let us consider the oddity of the employer insurance model. For the most part, an employee is compensated with money for their work. We then take that money and buy what we want. We generally buy our own food, housing, clothes, car, car insurance, etc. However, we don’t usually buy our own health care – 91% of Americans with private insurance get it through their employer.

This anomaly stems from World War II, when wages were capped to combat inflation. Competing for scarce labor, businesses offered other perks, and they found free health insurance was particularly appealing. Yet after the war, when these wage caps were removed, employer health insurance didn’t go away. Employers persisted in offering this benefit because they found that it let them avoid taxes on part of their employees’ wages.

Let’s say a company pays an employee $100, and his total income tax is $30. His employer spends $100, and his employee gets $70. If, instead, the company spends $10 on providing health insurance, the taxes go down to $27. Between taxes and income, the employee gets $73, and the company still spends $100. As long as the insurance is fairly close to what the employee wanted, the company has now created a better rewards package without spending more money. Because employer health insurance isn’t taxed, the tax code encourages it.

The distortion goes beyond favoring employer-based health insurance, and in fact favors higher health care costs.  The more of an employee’s compensation is spent on health insurance, the smaller the employer’s tax burden. An employer is incentivized to provide a more expensive plan because it allows them to offer a total package to employees with a higher price tag, despite the employer paying less to offer that package. As a result, health insurance has grown further to cover routine matters.

The idea of insurance is to cover the unexpected, extraordinary expenses that we cannot normally deal with. It’s supposed to be a safety net. Yet this model has encouraged health insurance to creep into more and more segments of the health care market, creating our modern inefficient system. The total cost of this inefficiency amounts to $169 billion.[1]

The clear objection to this is that the solution requires raising taxes on huge numbers of Americans. If health insurance is now taxed, their tax burden will increase by $126 billion.[2] Doing so in such a weak economy as we have today would be disastrous, and it would be unfair to effectively punish people for a system they did not create.

To address this, the exemption’s removal would need to be offset by a tax cut. With the aforementioned $126 billion in extra revenue, it should be possible to cut the overall tax rates by the same sum. Granted, some of this will go to people who were already purchasing individual insurance, or who were outside the private insurance market, but it would still offset a great deal of the damage. Furthermore, the short-term harms of the tax increase on some would be outweighed by the increased inefficiency of the health care system.

It is imperative that we address the growing cost of health care. Repealing Obamacare is insufficient, and will fail to deal with the pre-existing problem. Many other industries are transforming themselves by empowering consumers with knowledge and buying power; yet health care is burdened by a set of archaic regulations better suited for the industrial age. If  we are serious about moving forward, then it’s important to start bringing policy solutions in line with reality.


Image credit: CC by postaletrice.

[1] Christopher Conover, “Health Care Regulation: A $169 Billion

Hidden Tax,” Cato Institute Policy Analysis no. 527, October 4,

2004, p. 20.

[2] Budget of the U.S. Government, FY2006, Analytical

Perspectives, p. 324.

  • Benjamin Kafferlin

    Great piece