Paying for Health Care

By: Inoljt,

One of the most important health care reforms would be to get rid an inefficient, outdated tax exemption that is still a fundamental part of U.S. policy.

This is how it works. If a company provides health insurance to its employees, the federal government does not tax the health benefits that are being provided. Say you have an insurance policy worth $5,000. Said company deducts a part of the employee's salary - say, $1,000 - for "health insurance." But the majority of the cost - the other $4,000 - is hidden, because the company negotiates with health providers itself. This is an enormous tax exemption, amounting to the biggest the federal government gives.

On the surface, it sounds like a good idea. Who wouldn't want to encourage a companies to provide health insurance?

The problem lies in the unintended consequences of this tax exemption. An employee who gets his health insurance from a company has an incentive to get the most expensive, technologically new treatment possible - even if such treatments are not proven to be effective, as is far too often the case. After all, the company's paying for most of the cost. And who wouldn't want to get the costliest treatment possible if you're not paying for it?

Except the employee is paying for that other $4,000 - just not directly. He's paying in the form of lost wages that the company would have given him were it not for the health insurance it provides. For example, instead of paying Sam $50,000 in wages, Company A decides to offer everybody a $5,000 health insurance packet and pay Sam $45,000 (and put a $1,000 heath insurance deduction on his paycheck), due to the government tax exemption.

But Sam doesn't know how much more he could have made without the tax exemption. All he knows is that he's getting cheap health insurance, and that he'd better use it on the most expensive, new treatment possible.

In effect, Sam is spending $5,000 of his own coin in an inefficient, wasteful manner. But he doesn't know this - doesn't consider it his money - because of the way our health care system works. If said employee was given $5,000 in wages instead of a $5,000 health insurance plan that looks like it costs $1,000, he'd probably be less likely to seek that $100,000 prostate cancer detection test (which studies show doesn't work anyways). And we'd all be better off for it.

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