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Real Healthcare Reform

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Many politicians have talked of repealing the Patient Protection and Affordable Care Act (“Obamacare”).  Mitt Romney has said nullifying the healthcare law would be one of his first actions if he was elected president.  However, rather than just repealing the law and going back to the status-quo, with minor changes, the American people should demand true reform.

In 2001, Milton Friedman, the famed, Nobel-prize winning economist, published an article titled “How to Cure Health Care.” (Although worthy of serious consideration, Friedman’s analysis does not contain any explicit moral message, and is simply a policy analysis on healthcare.  For a more in-depth look at the moral dimension of healthcare reform, visit Acton’s special section on healthcare)

In his essay, Friedman stated that, “The United States spends a mind-boggling percentage of its GDP on a health care system that virtually everyone agrees is a disaster,” and that was in 2001.  Spending has only increased over the past decade.  In fact, according to the Department of Health and Human Services Center for Medicare and Medicaid Services, the United States spent 17.6 percent of its GDP on healthcare in 2009, and this figure is expected to grow over time.

In addition to out of control spending, studies in the United States and Europe at the time were showing “…public dissatisfaction with the increasingly impersonal character of medical care.”  Recently, a 2010 Gallup poll showed a majority of Americans are satisfied with the quality of healthcare they receive (62 percent rated quality as excellent or good), but only 39 percent rated the availability of coverage as excellent or good.

How did this happen? How has massively increased spending led to unsatisfactory coverage?

In four words: the government got over-involved.

Friedman explained, “In other technological revolutions, the initiative, financing, production, and distribution were primarily private, though government sometimes played a supporting or regulatory role.”  However, in healthcare, the government decided to intervene and regulate extensively.

It all started at the onset of World War II when, due to wage and price controls enacted during the war, “firms competing to acquire labor at government-controlled wages started to offer medical care as a fringe benefit,” which was not recorded as part of their salary due to the wage-controls.  As a result, employees came to expect healthcare from employers as part of their compensation.

The IRS eventually wised up to this and, wanting more revenue, started to tax the contribution.  Workers raised an uproar so Congress passed a law, The Revenue Act of 1942 (Section 127 specifically), allowing, in Friedman’s words, “… medical care expenditures to be exempt from the income tax, if, and only if, medical care is provided by the employer.”  This system, according to Dr. Donald P. Condit in his Acton Institute commentary “Should Business Be Responsible for Employee Health Care?”, “effectively punishes taxpaying citizens who are paying for health care benefits with after-tax dollars.”

Thus, if an employee paid directly for healthcare, this was added to their taxable income, but, if they went through their employer, it was not, setting up a large incentive to get insurance coverage from one’s employer.  Condit states “medical spending has increased with this ‘tragedy of the commons’ scenario, wherein resources [health care dollars] are overconsumed with the perception that someone else [the company, the government] is paying.”

Friedman similarly demonstrated the result of this and other policies dealing with healthcare with a simple example: “In 1946, seven times as much was spent on food, beverages, and tobacco as on medical care; in 1996, more was spent on medical care than on food, beverages, and tobacco.”  In 50 years, healthcare went from a minor expenditure to the major expenditure of most people, and, during this period, spending by individuals and government on healthcare approximately quadrupled.

Friedman explained, “On the evidence to date, it is hard to see that we have gotten much for quadrupling the share of the nation’s income spent on medical care other than bureaucratization and widespread dissatisfaction with the economic organization of medical care.”

What can be done?

For starters, Friedman said: “If the tax exemption were removed, employees could bargain with their employers for higher take-home pay in lieu of medical care and provide for their own medical care either by dealing directly with medical care providers or by purchasing medical insurance.”  This would make families more responsible for their own healthcare and they could adjust accordingly, either spending less/more on healthcare or taking more/less in wages.  (It seems that most would probably spend less on healthcare and take more income in light of this National Journal article).

This kind of reform would help by “reprivatizing medical care by eliminating most third-party payment, and restoring the role of insurance to providing protection against major medical catastrophes,” rather than using insurance to pay “for regular medical examinations and prescriptions.”

This sounds great, in theory, but how would such a drastic change actually be accomplished?

Friedman advocated for medical savings accounts. He stated: “A medical savings account enables individuals to deposit tax-free funds in an account usable only for medical expense, provided they have a high-deductible insurance policy that limits the maximum out-of-pocket expense.”  This way, employees, not employers, would be responsible for their own healthcare spending, hopefully eliminating the third-party problem, while allowing the wages contributed to still be tax free.

Several companies, including Forbes, Quaker Oats, and the Golden Rule Insurance Company, tried out medical savings accounts instead of employer provided insurance and found that healthcare costs were lower and both management and employees were more satisfied than under the old employer provided system.

Friedman stated, “Families would once again have an incentive to monitor the providers of medical care and to establish the kind of personal relations with them that were once customary.”

This puts responsibility back on the individual to care for his or her family and brings to mind the words of 2 Thessalonians 3:10: “If a man will not work, he shall not eat.”  Modern healthcare is obviously not comparable to biblical food, but the concept of individual responsibility has largely been lost with employer provided healthcare. This reminds all that a family is better served caring for itself rather than relying on someone else to make choices, including healthcare, for them.  Condit, in his essay, says as much: “Employer, or any third party, involvement in providing health care can interfere with an employee’s ability to make his or her own decisions and distort individual responsibility.”

Also, allowing families to manage their own healthcare costs would allow for greater efficiency by means of more efficient spending.  For instance, instead of using insurance to pay for a doctor visit due to a cold or a small prescription, one could pay out of pocket.  If most people paid out-of-pocket, the cost would likely go down because what individual would pay $80 (like my insurance company does) for a 20 minute doctor visit?  By putting people in control and not insurance or government bureaucracies, one could expect people to “shop around” for quality doctors.  Then, doctors’ offices would likely offer better care to compete for patients, instead of expecting an $80 to $100 payout from the insurance company or the government.

In addition, Friedman advocated for the abolishment of Medicare and Medicaid, which sounds rather radical.  However, he said the government should “…replace them by providing every family in the United States with catastrophic insurance (i.e. a major medical policy with a high deductible).”

That way “the family would be relieved of one of its major concerns – the possibility of being impoverished by a major medical catastrophe – and most could readily finance the remaining medical costs.”

This should satisfy the concern that impoverished citizens would not get adequate coverage.  Even if a small portion of the population is chronically ill or unable to pay their medical bills, these people would be covered by a government catastrophic care policy.

It is a citizen’s duty to care for those individuals in their communities who simply cannot help themselves.  Condit states, “Christians, and others, are expected to fulfill a service obligation, with a preferential consideration for the poor and underserved.”  This corresponds to the principles of subsidiarity and sacrifice seen throughout Catholic and Christian teaching.

In Luke 3:11, John the Baptist states: “The man with two tunics should share with him who has none, and the one who has food should do the same.”  Jesus himself said, in Luke 14:13, “when you give a banquet, invite the poor, the crippled, the lame, and the blind.”  Again, in Jesus’ and John’s teaching, the focus is on “you”, the individual, caring for ones neighbor, rather than an entity such as the government (or a corporation).  The government, naturally being more impersonal and disconnected, could provide support in the severest cases, when communities and individuals could not support their own.

Rather than harming the less-fortunate and marginalized, this kind of health reform could free up time and hospital beds (many families would spend much less time and money on care) to help those chronically ill individuals who truly need the best care and doctors available. Friedman’s approach does not solve all the problems of healthcare (how do I know this doctor/hospital is reputable or provides good care since there is no rating service, what about those that refuse to or cannot pay out of pocket, etc.) and this is only a basic analysis, but it does offer a seldom discussed approach to improve care, allow for greater individual independence, and decrease costs.


John Meszaros John is from Hartville, Ohio. He is pursuing a bachelor's degree in economics from Wittenberg University in Springfield, Ohio and is scheduled to graduate in May 2012.


  • John Meszaros

    I see your point about the limited powers of Congress. However, there are many useful services (CDC, NASA, etc.) that are not specifically mentioned in the Constitution that I do not think anyone is in favor of getting rid of.  That being said, perhaps it would be useful to let each state determine its own system of healthcare provision.  It would be an interesting experiment to see if certain states produced more effective models than others and perhaps the other states would emulate these successful models.  Even so, I still think a basic safety net should be provided for catastrophic care, whether that be by each state or the federal government.

    In terms of the before tax/after tax distinction, I would not be worried about people saving too much in their MSAs.  I would be more worried that people would spend too much of their income and under-consume medical resources relative to other goods and flood and bankrupt the catastrophic care system mentioned in the article.  However, I think many people would probably do just fine managing their healthcare spending (again, this is all speculation).

    In terms of the lower tax rate and general tax-free fund for education, homes, etc., that is beyond the scope of this article; however, it is an interesting idea!

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  • John. 
    Your comments are good ones IF the truth about health care reform and governent involvement in health care were about “health care”.  The problem is that it is not at all about health care nor is it about ‘economics’ of care. 
     When I read the health care act I was shocked and horrified to see what it is really all about.  I do very much believe our healthcare system needs overhaul and your historical perspective provides good insite on how we got to where we are today.  I would add to your history the history of the development of the HMO and how exactly that helped change the concept of health care helping it evolve into what we have today. 
    As I said, the health care act is not at all about health CARE..  it is all about total and complete control of a person’s life from before birth (there is now a claim that the state needs to be responsible for a child prebirth.  The ramifications of such a claim are horrific at best.)  It is precisely the fact that the health care act as “health care” is a total and complete lie that it needs to be repealed and replaced as soon as possible.

    • John Meszaros

      I definitely agree with your opinion that reform is not totally (if at all) about actual “healthcare” or the economics of said care. 

      I think it would be interesting to investigate HMOs as well. Perhaps in the future I will try and write another blog about that topic.

      I think we are seeing just how many “vested interests” are at play, both in DC and in insurance companies, that are keeping real reform from happening. Plus, as you stated, anytime the government can dictate if or when you need care, that is always cause for concern. Thanks for the insightful comments!


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