I’ve frequently argued that “third-party payer” is the main problem with the healthcare system. In simpler terms, this is the notion that a market won’t function very well if consumers think they’re spending someone else’s money.
Why be a careful consumer, after all, if someone else is picking up the tab?
But our supposedly private insurance system also contributes to the problem. Under our convoluted internal revenue code, there’s no tax on worker compensation in the form of employer-provided fringe benefits such as health insurance. This allows workers to avoid a significant amount of both income tax and payroll tax by getting more and more of their compensation in the form of fringe benefits.
And since the average employer-provided family policy now costs about $15,000, the tax savings are significant. I like it when the government is deprived of revenue, of course, but this policy also contributes to the third-party payer problem by encouraging over-insurance.
Indeed, we’ve reached the point where only 12 percent of healthcare costs are paid for directly by the consumer. No wonder the healthcare market doesn’t function very well!
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