In 1900, most people walked to work, school, shopping and socializing. The percentage of the average household’s budget devoted to transportation was so low that the Census bureau didn’t even bother to collect data on it. Today, the average household spends 21% of its budget on transportation. It’s the second biggest single cost after housing yet people take such spending for granted and easily factor it in to their personal budgets. We do so because transportation costs rose slowly over the course of the last half century while other costs, such as food, decreased. Decade after decade we gradually became used to spending more and more for transportation till now the average middle-class family easily accepts spending several thousand dollars a year in transportation costs.
As a thought experiment, imagine that for some reason people never had to individually pay the cost of their own transportation.
Imagine that as technology changed and people began to travel further and further on a daily basis, institutions such as businesses and the government began to pay for transportation costs. Imagine that private employers provided people with cars as an employment benefit and that the government provided cars or an alternative for the poor and elderly. Imagine that most people never had to sit down and write a check for the cost of cars, fuel, insurance, train tickets or anything else associated with transportation. Imagine that most people didn’t even have a vague idea how much their transportation actually cost. Imagine that most people never experienced the gradual rise in transportation costs from too-insignificant-to-measure into the second-biggest chunk of their budgets.
In such a case, people wouldn’t have developed their total budgets with a huge chunk devoted to transportation. Instead, they would spend that money on housing, food, entertainment, consumer goods, etc. Moreover, such spending would become structural not only for individuals but for society. Everyone would have intuitive expectations that a certain income would buy a certain level of housing and other consumption without taking into account the cost of transportation.
Now imagine that an individual lost their transportation benefits. Suddenly, they have to figure how to pay for thousands of dollars a year in transportation costs. Most people don’t have that kind of slack in their budgets. They couldn’t pay that much without significantly reducing their standard of living in every other part of their lives. Most people would interpret this condition as being unable to afford transportation.
No doubt, in this scenario, politicians would swarm out of the woodwork claiming that only the government could possible pay for transportation for everyone except the wealthy. They would claim that it was completely impossible for a middle-class family to pay a shocking 20% of their income for transportation.
This is pretty much an analogy for why we believe that no one but the rich can afford to pay for their own health care.
In 1900, health care consumed only a couple of percentage points of the average family’s budget because medical science couldn’t actually do much. Gradually, over the course of the last century as medical science improved, the cost of paying for treatments that actually worked rose gradually as well. However, unlike with transportation, most people never had to individually budget for health care.
Starting in the ’30s and ’40s, right at the time that medicine really became effective, government and business began taking money out of people’s paychecks for medical care and spending it for them. Most people who worked did earn enough money to pay for their health care. Further, through payroll taxes, they paid for the health care of the poor and elderly as well. We always earned the money to pay for our health care but we never held it in our hands or had to write the check. We never had to sit down and balance our health care spending against our other spending needs. Our own health care spending just happened automatically without most of us having to think about it.
Indeed, most people don’t even think of the part of their wages that covers their benefits and payroll taxes as even being their money in the first place. When people talk about benefits, they say that their employer pays in the same way they say that the employer pays for the building they work in. Only people who’ve had to make a payroll understand that each individual employee earns and pays in full for each individual benefit.
As a result, few of us have a mental slot in our psychological budget for health care the way we do for transportation. We don’t bat an eye at shoveling out thousands a dollars a year for transportation because over the decades we slowly adapted our psychological perception of what was a normal cost for transportation and what percentage of our total budget we should expect to pay for transportation. We never had that long period of adaptation for health care cost. In the last 15 to 20 years the cost for health care seemed to arrive suddenly, out of the blue, in one unmanageably huge chunk. This makes it easy for politicians to convince us we can’t possibly budget for our own health care needs even though most of us are already earning the money that pays for our own health care.
How to we dispel this psychological budgetary illusion? We could begin a process of adaptation to educate ourselves about our real individual health-care budgets. We should establish compulsory a medical savings account for everyone who works. People should be required to deposit a fixed percentage of their paychecks into those accounts. It would start out at 1% a year and then increase a percentage point each year until we reached a basic level of 10%-15% of income devoted to medical care. This is what people already pay through the administration of their employers. Such a slow rise would give time for people to adapt their overall spending to include the real cost of their health care. As people budgeted for their own health care as a matter of course, market forces would drive employers to shift employee wages from benefits to the money that ends up in the employee’s hands.
After the process was complete, people would no longer think it odd, unreasonable or impossible for the average working household to pay for its own health care along with the health care of the poor and elderly. Just as we do with transportation, we would plunk down several hundred dollars a month for health care without batting an eye.
Better, just like transportation, we would all have the power and freedom to chose our own health care ride.
True, and if you consider the point that medicine became a net benefit (that is, subtracting out deaths caused by infection, overenthusiastic use of procedures, etc.) we get an even narrower compression of costs.
The analogy applies. But your perfectly sensible idea of a mandatory HSA probably deserves its own post.
Other possibilities:
– a “government match” on HSA contributions. Weighted at the low end so pretty much everyone winds up with some significant amount of money each year.
– a “minimum standard contribution” that is made by the government if a person is unable to contribute that amount themselvs. Enough to cover some basic care each year.
– Provide everyone with a very basic, high-deductable policy. The policy would be something very simple (say, 20K in medical expenses after the first 10K). The intent would not be to cover everything; the idea would be to lessen the blow when someone has a major unexpected medical event.
– private insurance can cover everything else for before and after what the high deductable plan covers.
– since everyone will have an HSA, private insurance plans could factor a person’s HSA account when rating.
– allow HSA balances to be passed on to heirs.
– allow a portion of HSA balances to be transferred to other individuals.
Wait… everyone doesn’t think of this? Oh. That’s why my conversations with other people about health care make no sense.
I’m not a huge fan of requiring people to tie up large chunks of capital in any kind of account. My idea is to forbid third-party payment of health insurance (with one exeption) and require people to carry a minimum level of coverage (like most states do with car insurance). That way we can allow acturarial effeciency to lower costs for most people and allow people the freedom to choose what level of payment and deductable they can afford. One other requirement: any deductable that’s a significant portion of the required coverage would require a bond; essentially one of your HSA’s.
Government assistance would be the exception to third party payment: If you find you cannot afford any offering you would apply for government assitance, they would look at your income to determine how much you can afford to pay and then cover the difference between that and the cheapest suitable plan.
DirtyBlueShirt,
<i<I’m not a huge fan of requiring people to tie up large chunks of capital in any kind of account.
Me neither but health care is rather a unique case. A person can be as responsible as they wish but when they fall ill, the rest of us have to take care of them whether they put aside money to pay for their care or not. Our cultural inability to let people die just because they were short sided or stupid creates an enormous moral hazard that we can’t work around. It is even worse in the case of children.
Compulsory savings counteracts this moral hazard. I envision requiring people to save money up to the point they can afford private health care and from then on they can just provide proof of insurance just as we do with auto liability.
I’ve made the argument with friends and family for years that employers don’t actually pay insurance, we do in the form of decreased wages. I’m usually just met with blank stares. Like other commenters, I’m not sure I agree about mandating that everyone buy coverage, but I certainly understand the logic.
we have some experience with states going the obama way. i wish we had some experience with states going in a free market direction vis a vis tort reform, insurance deregulation, hsa etc.
Great article, well written. Mark Levin gave you a shout out tonight.. Good site, I will be back.
I really don’t think health care costs would be anywhere as high as transportation costs if we had tort reform and got rid of the FDA and other government red tape. The people who are too poor and/or stupid to pay for their own doctors can be taken care of by churches and other charities. I think thats how things worked for most of America’s history so it’s not a very new idea. Government is the problem not the solution.
I find this post both deliberative and profound. I heard Mark Levin read it on the radio tonight, as I was starting to drift off to sleep, and got up to find the link. Excellent.
Lane in Illinois
http://www.marginalrevolution.com/marginalrevolution/2009/08/consumer-drive-health-care-plans.html
Here is a bit of evidence that HSAs work well. Obviously, we need more study of what they are achieving, but I do believe you are on the right path with the ideas and narrative explored in this post.
Are we getting what we pay for, collectively? I think health care has a pretty darn good record. Not perfect or 100% efficient but surprisingly effective. We could slap down the lawyers but there are legitimate malpractice suits that hold doctors’ feet to the fire.
Likewise, transport. It would take me all day to walk to work and walk back. Locating next to the office within walking distance would be great but all the employees just couldn’t do that, especially with working spouses and good schools for the kids and decent shopping.
Maybe we do live in the best of all POSSIBLE worlds.
What this post boils down to is that, in a sense, we are all collectively living beyond our means and trying to get “someone” else to pay for healthcare so we don’t have to reduce our life-styles.
“Everybody wants to go to Heaven, but nobody wants to die.”
ANOTHER thought experiment along the same lines. Is it not often said ad naseum that the purchase of a home is the largest “investment” the average citizen will ever make? And is it not also generally agreed that the purchase of an auto is the 2nd largest “investment” the average person will ever make? Well, following that lgic should not all realtors and car salesmen be required to be also
licensed as “Registered Investment Advisors?” And if so, would not that mean that prior to the purchase of either a financial planning sheet be filled out in which it is pointed out to the perspective purchaser that, although he might have enough income/cash flow to “afford” that $800,000 home or 600 series BMW,
the revealed (by the planning process) requirements of medical, life and disability ins and a college fund for the children dictate that the client walk across the street and consider a Buick instead, and a house of, say, half that amount?
Don’t you just have a real mental picture of the car salesman sending his paycheck to the opposition, or the realtor cutting her commission thereby in half following such a process? Or better still, the prospective buyer and wife meekly submitting to lower their dreams even though they have the ready cash to “pay” for the original car and house shopped for”? Yeah, I’ve got a real mental picture of that.
Pogo was right: “We have met the enemy and he is us.”
Virgil Xenophon,
What this post boils down to is that, in a sense, we are all collectively living beyond our means and trying to get “someone” else to pay for healthcare so we don’t have to reduce our life-styles.
No, that really wasn’t my point. My point is that we just don’t have a mental slot for health care in our budgets so it seems like an incredible expense that no one could possibly pay for.
In fact, that working people (51% of total) in America (1) pays for their own health care which they earn through their employers, (2) pays the flat medicare tax that provides about half the health care for seniors and (3) pays the same tax for medicaid for the poor. So, we are in fact living well within our means, we just don’t know it.
People are in a panic over health care in large part because they believe they don’t and can’t earn the money to pay for it. They believe this because todate most of our health care spending has been automatically administered by others.
Shannon Love/
Oh, I realized the point you were making alright, I was just trying to add yet another perspective–didn’t mean to attempt to thereby invalidate yours, which is very much a needed conceptual lens which all too few consider. MY point is that were we to monetize FICA, etc., and include that in the worker’s paycheck, my experience in the financial services industry in both the brokerage AND the insurance end of it, is that the psychological imperative mitigates against the “rational actor” model insofar as this nation’s long-ingrained habits about money and spending are concerned. Very few people buy a pup-tent to live in and invest the difference—or paddle a canoe instead of a yacht and invest the difference. People–at least a great many people–buy what pleases them if they have the purchasing power and worry about the “necessities” later. The events of 9/11 demonstrated that even highly compensated bond traders were vastly under-insured as to life insurance even though they could have afforded it, and thus put their wives and children at the mercy of the appointed special-master and the American tax-payer as to final compensation–as opposed to being covered by a death benefit payout of their own choosing deemed fitting by them as to their own needs and circumstances. Instead they were left to depend on the “kindness of strangers” because they chose to maximize current, immediate gratification in the form of country estates and pricey cars–as opposed to the deferred kind. Leaving the individual (as opposed to the employer) to select and pay for his own health ins w.o. some kind of govt mandate is a heavy slog for many–even if not for me and thee.
Slightly off topic, consider as companion to self-funded health care the fact that 12% of pay is taken by the Fed Gov for Social Security. With no guarantee of any sort of payback, totally at the whim of Congress.
Can you imagine what people could do investment-wise if they took that 12% of their income and invested it starting with their first job?
We would have millionaires tripping over each other just walking down the sidewalk.
Could we not do that today? And let older geezers like myself, a number that will be reducing over time [after a while], be paid out of the general fund. It seems as if people only look to 2038 when SocSec goes negative, and never look beyond to the lower recipient numbers. The boomers will all die someday, and the next gens will take their place. It should be simple math to an actuarial, I would think.
tom
This is the best discussion I have come across on the subject. I see zero partisanship here, and I have strong feelings. Kudos to all of the intelligent comments that move the discussion forward in a civil manner.
I EXACTLY understand Shannon’s point. I’d be scared to death to drop my family’s health insurance. Yet, my husband pays $1500/month for our HSA high deductible insurance ($5000 ded.) We never rack up bills that amount to so much $$$. Yet, one hospital stay for a serious accident (like a near drowning or cancer) and we’d be indigents.
Also, will high deductible plans and HSAs be allowed under Obama’s plan.
Thank you for this discussion.