In the 1940s, the government imposed a price and wage freeze. The logic was that the shortage of employees (the men who left as soldiers) would cause businesses to raise wages to entice workers and consequently prices would go up to cover the new, increased cost of production. The government tried to stop this normal market-correcting mechanism by forcing employers to fix their wages, forcing distributors to fix their prices and ignore reality.
The reality was that businesses still needed workers. One of the consequences was that employers figured out other ways to entice workers: they provided benefits such as medical benefits that did not show up as increased wages.
In 1942, the Internal Revenue Service (IRS) decided these benefits were a substitute for wages and wanted to tax them. This caused an uproar, particularly by unions who had been most successful at getting these benefits included. Congress complied by establishing that employer-based medical care would not be taxable as income.
This health policy decision was fundamentally flawed on principle. It actually says that if you are personally responsible for paying your healthcare, you are penalized with taxes. And if you can get your employer to be responsible for paying it, you get it at a better deal–tax-free.
Consequently, personal responsibility is being penalized in favor of group responsibility. If the group–the employer–selects and pays for medical care, it is cheaper. If an individual opts for free choice and selects his own care and makes his own decisions and chooses his own insurance and pays for it himself, he is paying twice as much because after-tax dollars must be used.
The idea that the responsible unit is the group or the collective and not the individual is a distinctly un-American idea and it will raise its ugly head again and again.
Has the Market Responded to This Bad Idea?
Over the last fifty years this incentive has been so powerful that employers own over 85% of health insurance policies. There is at least $100 billion of tax incentive for employer-based coverage. Less than 15% of the market is personally responsible for paying their medical care.
Insurance is usually something people don’t want to use–it is purchased to protect against costly, catastrophic, unexpected events.
The fact that people want to use their medical insurance in contrast to other types of insurance is the consequence of the bad idea of collective responsibility for paying health insurance.
Soon after 1942, it became obvious to individuals and unions that dollars spent through the employer on medical care were tax-free. Therefore, the incentive was to create 100% coverage for all medical care, whether routine or not, whether expensive or not. Health care insurance became a vehicle through which to bill employers for all medical services.
The concept of the consumer was split in two. The payer was the employer, and the recipient of care was the individual employee. As long as the payer did not balk and did not have a say in the purchasing decisions, the individual gets all the care they want or need without any worry over the price.
Normal consumer pressures did not restrain the doctor charges at the time of the service. Advanced technology focused on improving quality without the need to focus on reducing costs.
The shift of personal responsibility to group responsibility resulted in undermining another principle of our American heritage: free market exchange. Market exchange can not exist when the recipient of the service is not also the payer most of the time.
Medical Care as a “Right”
By the mid-1960s most people began to think of medical care as something they should get for free. It was “given” to them by employers. It began to be perceived by them as a right, something the group must take care of.
Edited from a speech delivered by AFCM President, Dr. Art Astorino
Red Lion Hotel, Costa Mesa CA on December 11, 1993
