Throughout the 1950s, 60s, and 70s, Americans received health care with hardly a thought about cost. Because employer-provided health insurance is exempt from taxes, health insurance became a very popular fringe benefit. Health care costs were irrelevant to doctor and patient; the bill was footed by an insurance company whose premiums were paid by the employer. But by the late 1970s, health insurance premiums were soaring and those who had to pay them were crying for help.
Enter HMOs. Health Maintenance Organizations, loosely termed “managed care” plans, are prepaid health plans made possible by the HMO Act of 1974. The act granted them competitive advantages over other forms of health insurance, in return for accepting all applicants to their plans. This let them take root and eventually dominate the health insurance market. HMOs were designed to stress preventive care and prudent, top-down management of health care dollars, at the expense of patient choice and the old-fashioned patient-doctor relationship. The goal: quality health care at affordable prices with no frills.
By the early 1990s, more than 90 percent of Americans got health insurance through their employer. Employers saved money when they purchased managed care plans, so the vast majority of Americans were enrolled in an HMO or its variant. Eventually, managed care’s managers squeezed as much waste as possible out of health care dollars. They saw diminishing returns from these efforts. In addition, doctors and patients, still spending other peoples’ money, found ways to “game” the system to get the services they wanted. This pushed costs back up.
Then politicians got into the act. Eager to please constituents unhappy with health care’s depersonalization and loss of choice, they passed state and federal laws mandating additional services and coverage by managed care. This “one-size-fits-all” approach to health care reform greatly increased the cost of health insurance. A National Center for Policy Analysis study in 1993 found 25 percent of the uninsured priced out of the market by mandated benefit laws.
So now spiraling health insurance premiums are again hitting crisis level only this time patients have neither the choices nor relationships with physicians they had in the last crisis. Some in Congress recognize the root cause patients and doctors spending other peoples’ money and promote medical savings accounts (MSAs). These are tax-exempt savings accounts coupled with high-deductible insurance that create incentives for smart health care spending. Any money left in the IRA-like account at year-end gets to accumulate, tax free, along with the next year’s contribution. This idea is opposed by the HMO lobby, which fears the competition. Consequently, Congress placed so many limitations on these accounts that they have little chance of success. MSAs are a good idea. But even if they take off, they will still only treat the symptoms and not cure what ails America’s health care. MSAs may squeeze out some more waste, but they still amount to tinkering with a fundamentally flawed system. That system is the federal income tax.
As long as the income tax code rewards employer-provided health insurance (which, incidentally, most benefits those in higher tax brackets), the underlying forces that push up health care costs will prevail. Health care is the only good or service where the consumer and the provider are cut off from each other. A third party pays and makes the ultimate spending decisions.
A group called “Americans for Fair Taxation” spent three years and $15 million researching a way to completely scrap our corrupt and confusing income tax system, and replace it with a simple and fair one. They commissioned distinguished economists, and polled people from all walks of life. What they came up with, the FairTax, was recently introduced in Congress by a bipartisan group of representatives.
The FairTax completely eliminates the personal and corporate income tax, all Social Security and Medicare payroll taxes, self-employment taxes, the death tax, the capital gains tax, and the Internal Revenue Service. To raise the same amount of revenue the government now gets for all of its programs, the economists calculate a retail sales tax of 23 percent on all new goods and services purchased by consumers. Raw or used materials, wholesale purchases, tuition and other business costs are not taxed. Every American, on the first of each month, gets a rebate check from the U.S. Treasury for 23 percent of the essential monthly costs of living (calculated each year by the U.S. Department of Health and Human Services), so sales tax is only paid on “discretionary” spending beyond basic human needs. Those living below the poverty level, in effect, pay no sales tax. The FairTax puts 100 percent of the paycheck into a worker’s pocket.
The FairTax ends the tax incentives that put the employer in charge of buying health insurance. Employees, empowered by bigger paychecks, can thus purchase health insurance more suited to their individual needs and desires. Employers can still offer health insurance as a benefit. But employees can waive the benefit and purchase it personally if they wish. The FairTax puts the health care consumer back in direct control of health care; no more spending other peoples’ money.