Humorist and author P. J. O’Rourke, in his book Eat the Rich, summed up the four ways of spending money thus:
- Spend your money on yourself.
- Spend your money on other people.
- Spend other people’s money on yourself.
- Spend other people’s money on other people.
If you spend your money on yourself, you look for the best value at the best price — knockoff Pings on sale at Golf-Fore-Less. If you spend your money on other people, you still worry about price, but you may not know — or care — what the other people want. So your brother-in-law gets a Deepak Chopra book for Christmas. If you spend other people’s money on yourself, it’s hard to resist coming home with real Pings, a new leather bag, orange pants with little niblicks on them, and a pair of Foot-Joy spikes. And if you spend other people’s money on other people, any damn thing will do and the hell with what it costs.
Government spending falls into the last two types. This is why the Transportation Security Agency is in hot water for spending so much of other people’s money on themselves, stuff like art and silk flowers. But most of government’s spending is solidly in the last type, and this is why no government branch ever spends less than its yearly budget. It’s not like it’s their money, so they finish spending every bit of the yearly budget before the new fiscal year begins.
As bad as that is, government is guilty of exporting this most wasteful of spending practices to other areas of our lives. At the end of World War II, there were fewer able-bodied men between the ages of twenty and forty than before. In a normal situation, a shortage of a good will cause the price to rise, but the government had placed a cap on wages, so how could the manpower-starved businesses attract workers? As an added perk, companies started to offer medical benefits to their workers. The wages were fixed by law, but the medical benefits were a way around the law. Well, the smaller companies couldn’t compete with the big boys, so they yelled to the government.
The government realized that the wage controls were a problem, so they quickly dropped them. Hah! In your dreams! Instead, the government “fixed” the problem by giving tax breaks to companies who provided these medical benefits to their employees. You will get more of that which you subsidize, so very shortly most companies were offering medical benefits to their employees to compete in the marketplace and because of the tax breaks it provided.
But what is the nature of spending with these health care plans? This is a case of people spending other people’s money on other people. Who cares about the cost? Not the employees. By 1960 70% of the American people had health care coverage, up from about 20% in 1945. With the corresponding rise in people insured, so also rose the cost of health care. Stan Liebowitz wrote an interesting article for the Cato Institute in 1994. The most telling part of the article is represented in the following graph.
Medical costs have gone up in direct relationship to how little people pay out of pocket for them. This is the 4th method of spending money in action. By the mid-’60s, the rising cost of health care was an issue for retired people and the poor who didn’t have a company paying for health insurance. They petitioned the government to fix this problem. Rather than backing out of the mess they had created, the Federal Government decided that Medicaid and Medicare would do the trick. This effectively pulled more people away from paying their medical bills directly, and shifting nearly all medical spending into the 4th method. Looking at the graph above, can you predict what happened next? Let’s not see the same hands this time. Yes, you in the back, you’re exactly right — prices did go up.
Fast forward to today. We see the same problems in action. The elderly, who don’t have a company to pay their health care costs, are complaining about the rising cost of medicines. In a politically shrewd but truly dumb financial move, President Bush pushed for a prescription drug benefit for the heavily-registered and commonly-voting AARP crowd. With more spending on prescriptions shifting into the 4th method of spending money, expect the cost of medicines to rise, rise, rise.
Milton Friedman explained one reason why costs have risen in an article entitled How to Cure Health Care from 2001:
Employer financing of medical care has caused the term “insurance” to acquire a rather different meaning in medicine than in most other contexts. We generally rely on insurance to protect us against events that are highly unlikely to occur but involve large losses if they do occur – major catastrophes, not minor regularly recurring expenses. We insure our houses against loss from fire, not against the cost of having to cut the lawn. We insure our cars against liability to others or major damage, not against having to pay for gasoline. Yet in medicine, it has become common to rely on insurance to pay for regular medical examinations and often for prescriptions.
You will get more of that which you subsidize. By removing the majority of the out-of-pocket cost of a doctor visit or of a bottle of pills, there is little downward pressure on using that service. Friedman also covers this problem in his article:
Enactment of Medicare and Medicaid provided a direct subsidy for medical care. The cost grew much more rapidly than originally estimated – as the cost of all handouts invariably do. Legislation cannot repeal the non-legislated law of demand and supply. The lower the price, the greater the quantity demanded; at a zero price, the quantity demanded becomes infinite. Some method of rationing must be substituted for price and that invariably means administrative rationing.
Every time you hear someone badmouth an HMO for the way they deny coverage, you can thank the government’s involvement in the health care industry. Had then-First Lady Hillary Clinton been successful in nationalizing the health care industry, everyone would have health care insurance. Good thing, right? Wrong! Haven’t you been paying attention about how that would shift all health care spending into the 4th method? Did you realize that had Hillarycare been enacted, paying cash for your own medical bills would have been a crime?
Time to hammer home the point. There is one medical cost I can think of that has steadily decreased over time, while at the same time the technology has increased, and that is laser eye surgery. This procedure is not covered by medical insurance, so the money comes from the patient’s own pockets. This is the 1st method of spending, and this means people hunt for a bargan, driving prices down. And doctors compete with each other for the money by improving the technology while also driving down their costs and increasing overall care. If laser eye surgery were to be covered by health care, you could expect to see the cost of the procedure soar to new heights.
So how can we get out of our current situation? Well, it won’t be easy. The ultimate solution is to move from spending other people’s money on other people to spending your own money on yourself. There is a method in place for doing just that — Medical Savings Accounts. Again from Milton Friedman:
The high cost and inequitable character of our medical-care system is the direct result of our steady movement toward reliance on third-party payment. A cure requires reversing course, reprivatizing medical care by eliminating most third-party payment, and restoring the role of insurance to providing protection against major medical catastrophes. The ideal way to do that would be to reverse past actions: repeal the tax exemption of employer-provided medical care; terminate Medicare and Medicaid; deregulate most insurance; and restrict the role of the government, preferably state and local rather than federal, to financing care for the hard cases.
If large companies were to change to catastrophic health insurance, the cost of that insurance would be much less than it is now. They could take some of the savings and place that into their employees’ medical savings accounts, some to go into the employees’ paycheck, and pocket a bit of the leftover savings themselves. It would truly be a win-win situation all the way around: the company spends less money, the employee gets a medical savings account and more money in the paycheck, and there would be a strong incentive to shop around and lower medical costs.
You would benefit. The company would benefit. People on low or fixed incomes would benefit from the dropping medical costs. Heck, even doctors would benefit from reduced paperwork from giant HMOs. So just who would suffer?