Healthy Reforms

The Bush Administration’s proposals for reforming healthcare actually sound pretty good to me, although I have abundant confidence in the ability of this president and Congress to screw them up somehow. So I was mildly surprised to see Tyler Cowen’s skepticism, and more surprised to see Arnold Kling’s.

I won’t try to address their main criticisms (my intention to do so is what delayed me from blogging on this subject earlier), but I’ll make a couple of points. First, the clear goal of the Bush proposals is to eliminate the current system’s bias toward health insurance over direct healthcare expenditures. There are only two ways to do that: (1) eliminate the tax exemption for employer-provided health insurance, or (2) expand the exemption to include any form of health expenditure, not just health insurance. Now, the former would be the better policy, because it wouldn’t privilege healthcare over all other goods and services. But it’s just not politically feasible, while expanding the exemption is. So I’m giving the administration credit for working within political reality here.

Second, neither Tyler nor Arnold recognizes one of the primary benefits of eliminating the bias toward insurance over direct payment: creating a competitive bargaining process. When consumers have their bills paid by a third party (like an insurance company or Medicaid), they have no incentive to haggle over the price. They don’t even have an incentive to ask the price. Hence the complete absence of clear prices for services in doctor’s offices. But when consumers pay for services out of their own pockets, they have every reason to know the prices and to request discounts. The overall effect should be lower prices (though I won’t try to predict the magnitude of the effect).

Here’s my post from a couple of years ago, in which I tangled with Tyler on the tax treatment of health insurance. Warning: it’s a little dated on the subject of HSA rules.