Health Care

I’ve seen the “public option” compared to the Post Office (by the President), and I just saw it compared to public colleges by Sen. Schumer (D-NY).

The explanation of the public option that I keep hearing is: The government will set it up, and then it must compete on its own, and the government will be “hands off” after that. To that I say: maybe. Suppose the public option plan begins to have trouble, and starts to fail. Won’t we bail it out? It has to compete with other insurers. Believe it or not, these have patents on business processes. Will the public option be given the royalty-free right to use these processes? If so, it isn’t a level playing field.

Does the government even have the authority to create such an entity? The Post Office is, after all, explicitly an enumerated power in the constitution. Clearly they do… but really, should they?

If Schumer’s analogy (like public colleges) is apt, then I would point out that the government subsidizes public colleges. But I am repeatedly told that the public option will not be subsidized.

The Post Office is a pseudo-independent corporation and receives no tax funds. But it has only been this way since 1971 (thank you Mr. Nixon); before that the Postmaster General was a Cabinet position, and was, in fact, in line to succeed the President.

Maybe Fannie Mae and Freddie Mac are the models to follow. But Fannie and Freddie are protected monopolies. Then again, so is the Post Office. It is illegal for anyone else to deliver letters.* Even better, all three are exempt from state and federal taxes and free from most government regulations.** We could expect much the same from the public option, I suspect.

(* The USPO has a monopoly over the delivery of certain kinds of mail, and also over access to your mailbox: http://en.wikipedia.org/wiki/United_States_Postal_Service)

(** Fannie Mae pays property taxes: http://www.fanniemae.com/aboutfm/charter.jhtml. But not state or local taxes! http://en.wikipedia.org/wiki/Fannie_mae)

It is starting to look like the public option is dying. Maybe that’s sad, but there’s no way to know. So far as I can tell, it was never adequately explained.

Health Care

In order for the market to reduce the cost to you, you need two things.

• You need to have a choice.
• You need to be the one paying the bill.

If you lack either of these, you will be, in essence, ignored by the market, almost as if you were a non-participant.

So… what about health care?

First, we have little or no choice in most cases. Most of us have health insurance provided by our employers, and they typically have just one or maybe two options. This leads to a lack of choice that Obama and others decry, and hope to fix by introducing a public option. Further, I am not the one paying the majority of the bill; my employer is.

The insurance company negotiates a contract with my employer, and seeks to satisfy them. I have no other options, since I cannot afford to go off the employer-provided insurance, and so I’ve lost choice and I’m not the party paying. That’s not a good situation when you are the consumer of a good.

To find out why we ended up with this system we have to go back to World War II. During the war labor is scarce, for obvious reasons. Companies would typically compete for labor by offering better wages, but there are price and wage controls in place. Companies are, however, allowed to compete by offering employee insurance plans, including health benefits.

I found a pretty good discussion of this here:

Offering insurance policies to employee groups not only benefited insurers, but also benefited employers. During World War II, wage and price controls prevented employers from using wages to compete for scarce labor. Under the 1942 Stabilization Act, Congress limited the wage increases that could be offered by firms, but permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of securing workers. In the 1940s, two major rulings also reinforced the foundation of the employer-provided health insurance system. First, in 1945 the War Labor Board ruled that employers could not modify or cancel group insurance plans during the contract period. Then, in 1949, the National Labor Relations Board ruled in a dispute between the Inland Steel Co. and the United Steelworkers Union that the term “wages” included pension and insurance benefits. Therefore, when negotiating for wages, the union was allowed to negotiate benefit packages on behalf of workers as well. This ruling, affirmed later by the U.S. Supreme Court, further reinforced the employment-based system.

Perhaps the most influential aspect of government intervention that shaped the employer-based system of health insurance was the tax treatment of employer-provided contributions to employee health insurance plans. First, employers did not have to pay payroll tax on their contributions to employee health plans. Further, under certain circumstances, employees did not have to pay income tax on their employer’s contributions to their health insurance plans. The first such exclusion occurred under an administrative ruling handed down in 1943 which stated that payments made by the employer directly to commercial insurance companies for group medical and hospitalization premiums of employees were not taxable as employee income (Yale Law Journal, 1954, pp. 222-247). While this particular ruling was highly restrictive and limited in its applicability, it was codified and extended in 1954. Under the 1954 Internal Revenue Code (IRC), employer contributions to employee health plans were exempt from employee taxable income. As a result of this tax-advantaged form of compensation, the demand for health insurance further increased throughout the 1950s (Thomasson 2003).

I leave it to the historians out there to check that, but it jives pretty well with what I’ve read elsewhere.

So let’s summarize. Our gov’t created a system that reinforced employer-provided health insurance. This resulted in lack of competition, and now they are going to fix the lack of competition by adding a public option. What have I missed?