It is easy to spot bubbles looking backward. It is more difficult to see bubbles yet unpopped. I contend our healthcare system is in a huge bubble. Here is why:
People generally prefer their salary in the form of dollars, not goods or services. They want to be paid in cash, not in toilet paper, oil changes or Hamburger Helper. Given this, why do employees receive healthcare benefits from their employers?
Our federal tax code allows for employer-provided healthcare benefits to be tax-exempt. In other words, you don’t have to pay taxes on healthcare if your job provides it, but you do if you buy healthcare on your own. This tax policy alters the natural preference to be paid in salary, to instead be paid in healthcare.
What we get from our employers is called health ‘insurance,’ but it is anything but. Insurance is defined as “the equitable transfer of the risk of a loss from one entity to another, in exchange for a premium.” Common examples that fit this definition are homeowner’s insurance, which pays out in the event of fire, and car insurance, which pays out in the event of an accident. Yet health insurance pays for everything from routine doctors visits to Viagra. This is not a transfer of risk in exchange for paying a premium; it is a third party buying your healthcare so you don’t have to pay taxes on it.
While this allows healthcare consumers to purchase their healthcare tax free, it has the unintended consequence of stripping price signals from the patient’s decision-making process. This turns health insurance into the equivalent of an all-you-can-eat buffet where consumers gorge themselves with no consideration of cost. When was the last time you selected a doctor based on price? What about a prescription drug? Do you even know what the real prices of these things are?
How does this translate into a bubble? Let’s put all the pieces together.
The bubble is blown like this: Our tax structure creates the incentive for people to get as much of their healthcare through employer-provided benefits; with people getting as much of their healthcare through employer-provided benefits, consumers do not price shop their healthcare services; with consumers not price shopping their healthcare services, there is no sensitivity to rising prices; with no sensitivity to rising prices, prices spiral out of control; with prices spiraling out of control, a system is created that is completely artificial, exorbitantly expensive, and not built on market forces. This is a bubble.
All bubbles burst. It is not a matter of if, but when.
The bubble will burst like this: As healthcare continues to become more and more expensive, employers will no longer be able to afford to provide their employees benefits; with employers no longer able to provide their employees benefits, less people will have their healthcare paid for by a third party; with less people having their healthcare paid for by a third party, there will be more consumers responding to price signals in the healthcare market; with more consumers responding to price signals in the healthcare market, the existing system will begin to crack due to the infiltration of market forces; with the infiltration of market forces, America's healthcare system will be shown to be wholly uneconomic and will collapse on itself.
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