Wednesday, March 4, 2009

Fairness in the US Health Care System

In an earlier entry, I suggested that there might be a need for higher income individuals to pay more for certain aspects of their health care or health insurance. If those with higher incomes are paying more, then those with lower incomes would be paying less. In that case, we could apply the typical label and call health insurance and health care a "means tested" program. Some people may not like this because it implies that not everyone is facing the same price and in a free market the price is set at the market level and everyone faces the same price. I don't deny that is a legitimate concern. And, certainly, it could aruably limit the efficient operation of the market.

However, I offer something else for us all to consider. In the United States, the amount that I pay for health insurance depends on whether I get it through my employer and the rest of my income. An individual who gets health insurance through his employer pays for it with dollars that have not been taxed by the federal or state government. Those who purchase health insurance on their own still pay for it largely with dollars after taxes. So, suppose I get my plan though my employer and pay $100 per month. If I could get the same plan outside my employer (and aside from COBRA laws even that is questionable because groups almost always get a better buy than individuals), I'd have to earn more like $125 dollars, pay 20% in taxes (i.e. $25), and then pay the $100. So, if we can agree that health insurance is just part of compensation and that my total compensation should be the similar wherever I work (a basic idea in a free market system), I'd only use $100 of my compensation (perhaps $2000/month total) when I get insurance through my employer and $125 of my compensation if I have to get it on my own. So, is that fair?

Even among those who are employed, different people pay different tax rates. Higher income individuals pay higher tax rates. So, if one person is paying only 20% of the last dollar earned in taxes and another person is paying 40%, the person paying 40% gets a bigger break. In other words, if those two individuals had to obtain insurance outside their employers but had the same income, both would pay the same amount but the person with the higher tax rate would have had to earn more dollars before taxes to get the $100 after taxes.

In addition, the logic just applied to health insurance premiums can be applied to health care flexible spending accounts. Those with higher tax rates get a bigger break by putting money in these rather than using after tax income to pay health care expenses.

So, fairness is a good thing. In some senses, this is encouraged by the free market--although some would argue that the results of a free market are not fair, this is not the question here. The issue here is that if we think the free market promotes fairness (at least in pricing) then the US health care system right now has a lot of unfairness in it. Making pricing fairer in the US system will result in the advantages in the price of health insurance that are enjoyed both by individuals getting insurance through their employer (relative to individuals who have to purchase health insurance individually) and by higher income individuals (relative to lower income individuals) being taken away.

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