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Commentary

How We Pay for Health Care / Let’s Pare Down the Paperwork


     
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Doctors at UCSF’s Institute of Health Policy Studies confirmed this month that California’s health-care system suffers from an acute case of clogged arteries. In a study of spending by physicians and hospitals, lead author James G. Kahn revealed that 21 percent of their costs go to billing and insurance-related expenses.

What a waste—a fifth of our state’s health spending dedicated to sending bits of paper flying around to ensure that everyone gets paid what they should. These findings are in line with other research arguing that administrative costs in U.S. health care are way out of line when compared with, for example, Canada. Often, such findings result in calls to get rid of the private health insurers altogether, and bring in a Canadian-style “single-payer” system. Although the UCSF research team did not go this far, some Californian policymakers have. This summer, the state Senate approved a bill that would impose a single-payer system statewide.

When we look at the confusion around the new Medicare prescription-drug plans, our exasperation with private insurers rises. The federal government wants to get out of the business of providing coverage directly, and the new entitlement reflects its resolve to have as many private insurers as possible compete to offer the benefit. As they struggle with enrollment decisions, many seniors surely wish that Medicare would just provide one simple, easy-to-understand program.

That would be a mistake. There are two ways to cut administrative costs in health care: more government (which doesn’t work) and less government (which does). A government-monopoly single-payer system can reduce administrative costs, but at a heavy price to patient care. In Canada, the independent Fraser Institute has, since 1990, measured the median waiting time for all surgeries. This year, the wait is more than four months, measured from the date a patient first consults his family doctor until he finally gets his surgery. Surgeons report that it takes them more than a month longer to perform procedures than is clinically reasonable. This is because they cannot get operating time at the hospitals.

Waiting times to even get a diagnosis are also long. It takes the average Canadian patient more than five weeks to get a CT scan, and almost three months for an MRI. Patients enrolled in government-run drug programs in Canada have less choice of prescription medicines than privately insured Americans do.

Let’s focus on the major reason paperwork is so pervasive in U.S. health care: Americans are heavy consumers of state-of-the-art medicine, but don’t pay for it directly. Our employers do. This is a result of the tax code: If a firm provides health care to its workers, it is tax-free, but not if the worker buys his own health care. Traditionally, we have enjoyed this care with low co-payments, leading us to use health services inappropriately. Put it this way: If our employers gave us tax-free clothing for $10 co-payments, we’d do a lot of shopping. Costs would explode, leading our employer-provided “clothing maintenance organizations” to demand lots of paperwork justifying why we needed such huge wardrobes. Macy’s and Nordstrom would go crazy dealing with the bureaucracy, just as physicians and hospitals do now.

The government can solve this problem by changing the tax code. In January 2004, the federal government took a small but significant step by authorizing tax-free health savings accounts, private investment accounts to which American families (or their employers) with high-deductible health-insurance plans can contribute about $5,000 annually. Out of this, you pay most routine medical costs in full, saving the rest for retirement. Even better, your HSA belongs to you, not your employer. This offers a powerful incentive for patients to manage ordinary health costs effectively, reducing the need for insurance paperwork.

Unfortunately, California has not joined the federal government in making HSAs tax-free, reducing our incentive to switch from traditional health insurance. Our state needs to make HSAs free of state income tax, and encourage us to take the first step in eliminating unnecessary insurance bureaucracy.


John R. Graham is Senior Fellow at The Independent Institute.






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