Patients Should Pay Their Own Bills

Big Spenders: Increases in health care costs rival the rising of the sun for inevitably. Should we blame greedy doctors and drugmakers? No, blame should be placed on the system the government has promoted.

The tax code encourages employers to buy health care insurance plans with pretax dollars. Because these plans are exempt from federal income and payroll taxes, employers salaries. Nearly 60% of American adults are covered by an employer-based plan.

For most, these plans work well. But the arrangement that so many have become accustomed to has driven health care spending ever higher. The cost of medicine increased 98% between 1992 and 2008, a period when the consumer price index rose 53%. Health care spending now makes up 17% of the economy, a far bigger slice than it did before the 1965 creation of Medicare and Medicaid, when it never went beyond 6%.

Why has this happened? Devon Herrick from the National Center for Policy Analysis has the simple answer: We have become big spenders on health care because our motivation to be thrifty has been legislated away.

"A primary reason why health care costs are soaring is that most of the time when people enter the medical marketplace, they are spending someone else's money," Herrick wrote in "Why Health Costs Are Still Rising," an NCPA report released last week.

Because Americans who have employer-based coverage see little money coming out of their pockets when they visit a doctor or go to the hospital, they have little incentive to keep costs down.

"When patients pay their own medical bills, they are conservative consumers," Herrick writes. "Economic studies and common sense confirm that people are less likely to be prudent, careful shoppers if someone else is picking up the tab."

According to Herrick, for every dollar of hospital care that is consumed, a patient pays only 3 cents. The rest is paid by a third party, the insurance company. When a patient visits a doctor, less than 10 cents of every dollar of care consumed is paid by the patient. Again, a third party pays the balance.

And "for the health care system as a whole, every time patients consume $1 in services, they pay only 12 cents out of pocket."

Medicare and Medicaid have also had an impact on spending, as they too are third-party payers that, similar to insurance plans, hide from patients the true cost of medicine.

To show what a health care sector without similar incentives looks like, Herrick turns to cosmetic surgery, the demand for which has exploded in recent years.

Citing American Society of Plastic Surgeons data, he says 1.7 million cosmetic surgical procedures were performed in 2008, "more than 40 times the number performed two decades ago." Yet cosmetic surgeons' fees, he says, have remained relatively stable, rising only 21% from 1992 to 2008.

The rather flat line of growth in spending on cosmetic surgery is due to the nature of the market. Almost all payments are made out of pocket by patients, which forces them to be wise consumers. It also requires doctors to compete on price.

The third-party payer problem that has forced costs higher was not addressed by ObamaCare. In fact, the Democrats' plan to bring down costs will only make the problem worse. Their chief goal is to increase the role of the third-party payer, that third party being the government, or, in the interim, the government and an insurance market under the central-planning thumb of Washington. Costs won't be going down.

The appropriate policy solution would be one that puts patients in control of their health care. It's obvious that the country needs more spending discipline, the kind that lets consumers, not the government, make their own choices on health care purchases. Let the market — consumers trading freely without coercion — solve the problem.

If Washington were to give health savings accounts the same tax treatment afforded employer-based insurance, exempting them from federal income and payroll taxes, the incentive for consumers to ration their own care would slow the rise in health care spending. This is something Republicans need to consider as the new Congress starts to dismantle ObamaCare.

IBD editorial