Though most Americans would agree that our health care system needs to be changed, there are different schools of thought on how exactly that should be done. Before coming to any conclusions, however, it is important to know what is causing our health care problems in the first place.

Nobel Prize winning economist Milton Friedman explained that, “Before World War II, medical care was dispensed through a relatively free market … these arrangements were revolutionized by the unanticipated effect of wartime price and wage controls imposed to counter inflation … in response, employers offered inducements such as ‘free’ medical care … in time, that practice was legalized and medical care provided by the employer was made tax-exempt.”

Because of this tax exemption, it is cheaper for employers to pay their workers $20,000 worth of health benefits than it is to pay them $20,000 outright. That is why acquiring health insurance from employers has become so commonplace.

It is also cheaper for employers to give their workers $40,000 worth of health benefits than it is to give them $20,000 of health benefits and $20,000 outright. This is one of the main reasons (besides the fact that legislators often require it, as was discussed in my last column) why health insurance, unlike other types of insurance, covers so many everyday expenses rather than just the large, unexpected ones. Covering more things means a greater tax exemption.

Friedman commented that, “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 … yet in medicine, it has become common to rely on insurance to pay for regular medical examinations and often for prescriptions.”

Third-party-payer systems like this, however, cause a problem. Since the only thing that must be paid by consumers — even for everyday medical care — is a small deductible, consumers have little incentive to properly ration their medical care. That is, the quantity demanded by consumers is greater than that which they would demand if they had to pay the full price.  This increased consumption, however, is reflected in the ever-growing cost of insurance that is necessary to compensate for that increased consumption.

In his book “Applied Economics,” economist and Senior Fellow at the Hoover Institution Thomas Sowell said, “Third-party payments are at the heart of much confusion about the cost of medical treatment. In government-run medical systems, the public pays in taxes for its medical care, either wholly or in part, with a share being paid directly by the individual patient … but the fact that only part of the costs are reimbursed by direct out-of-pocket payments from individual patients to doctors, hospitals or pharmacies in no way indicates that the total cost of the particular medical treatment is any lower than before. When the public pays part of its medical costs in taxes that the government uses to subsidize medical treatment, or in premiums paid to health insurance companies, none of that lowers the total cost in the slightestv…

“To the extent that the direct payments by patients are lower than they would be if they had to cover the full costs, medical treatments tend to be sought more often – and that alone is enough to cause the total cost of medical care to rise, not fall … to the extent that third-party payments require a bureaucracy to administer these payments — whether a government bureaucracy or a private insurance company bureaucracy — the people in those bureaucracies have to be paid, adding still more to the cost of medical care.”

But because of the tax-exempt status of employer-sponsored medical care, the problem continues. Americans consume an excessive amount of medical care, and therefore pay an excessive amount of money for that care. But they keep on buying because someone else is footing the bill. Unfortunately, that someone else is the employer, and that bill considerably reduces take home pay.

Sowell continued, “Despite a tendency to regard medical care as a more or less fixed ‘need,’ the amount that is demanded can vary greatly according to who is paying.  For example, the use of tax-free medical savings accounts in the United States has tended to increase sharply in December, since unexpended money in those accounts is not carried over to the next year.”

One of the best ways to combat this effect would be to simply end the tax exemption for employer-provided medical care. John Sheils and Randall Haught of the Lewin Group Center for Comparative Effectiveness Research estimated the cost of this exemption to be almost $200 billion in 2004. Of course, with that much money on the line, it is likely that a new tax cut of some sort would be necessary to compensate businesses for the loss, or it would be political suicide for any politician who was dumb enough to suggest it.

Friedman concluded that, “The best reform would be to eliminate the tax deduction of any medical care expenses. There is no more reason for medical care expenses to be tax deductible than for food, clothing and housing expenses to be tax deductible.”

So, rather than increasing the scope of government intervention into health care by creating a national, government-run health care plan, it would be wiser to begin reducing government intervention in the health care market.

Blake Hasenmiller is a senior in industrial engineering and economics from DeWitt.