S8 Ep546: ### HEADLINE: THE TAX CODE ORIGINS OF HIGH AMERICAN HEALTHCARE COSTS SUMMARY: Veronique de Rugy traces modern healthcare expenses to a 1920s tax error and advocates for health savings accounts to restore consumer control and transparency. GUEST: Veronique

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I'm John Batsler, and welcome to the Makeda Center, George Mason University,

writing most recently a creator's syndicate about this question.

Why is healthcare so expensive in America?

Bernie, the answer, of course, is somebody else pays, but therein lies the tale.

Who pays? How is it constructed? And then we'll come to how it could be improved. Good

evening to you. Good evening, John. So who pays? Well, mostly the government and

and insurers, right? So lots of bad incentives. So only roughly 10% out of our spending is done

from out of pocket, where we actually have an incentive to look at what we demand and assess,

shop around, but also assess whether we really need to actually spend money on a given

healthcare service. So that's a big one, right? But one of the things when looking at the cost

of healthcare of government, one of the things that people often don't realize that there's a

tax break that is called the exclusion of employer-sponsored health insurance, which is an exclusion

from taxable income, that is actually the third largest government spending on healthcare.

And it is probably responsible for the most distortion and the most perverse incentive that

exists in our healthcare system that explains the mess we are in today. This is the tax code,

you're talking about? Yeah, I'm talking about the tax code. So in the 1920s, a few employers were

offering insurance to their employees. And when bureaucrats at Treasurery had to kind of decide

how to treat that benefits, whether to tax it or not, they decided to not tax it. And then

you, but at first it really didn't matter. It didn't matter for a long time, actually,

it didn't matter until 1954, when Congress, you know, basically enshrined into legislation,

that exclusion, but it didn't really quite matter because very few employers extended healthcare

benefits to their employees. But after that, it actually became the driver of a lot of the decision

about how to pay people, some that people weren't paid with wages, but actually,

they were, this was a supplement, and it was one that employers were happy to do in part because

they could exclude them from the tax base. The reason this matters is because it would give us

an ability to do shop. I'm trying to understand what the original thinking was. Did they not know

that it would go badly or did they mean it to go badly? No, they didn't know. I mean, I think

originally it was just a kind of a policy decision that was made about how to take a particular

thing. And I think Michael Cannon at Kato is actually convinced me that this was absolutely

really not only about decision, but it's a bad decision that has the most negative consequences

in our healthcare system now. What it did is that first, it's skewed the market towards having

most of healthcare insurance provided through government, right, as opposed to actually be an

individual market. It means that people who are not getting their insurance through the government

through employers actually are faced making choice for insurance in a market that is also really small

with all the problems that it causes. But it goes above and beyond this, which is, and I really

recommend Michael Cannon on this. It also means that effectively, it kind of get people or

first, when people have to go with the insurance provided by their work, because the

it's kind of amended, because if you don't do it effectively, your tax on that income that is not

paid in the form of benefits. So you're paid your taxed more if you don't take the benefits.

That's one thing. The other thing is effectively, it means that a lot of the healthcare decisions

that are made in the market are decided by the employer. It's the plan that the employer chooses

and because it had become like a really big part of how much of our total compensation is basically

paid for in the form of benefits, it means that basically it's just an enormous amount of

our compensation that is that we don't actually decide like we do with the rest of our income,

how to reasonably spend that money when we utilize it. So it creates all sorts of distortions

that are just really negative for the whole system. And it reverberates through the entire system.

So it is a really, it's kind of a small tax mistake that was made in the 1920s that has now

enormous task. Can it be reversed? Can it be changed? Can it be moderated?

Well, I mean, yeah, I mean, no, I mean, yeah, it changed would be to just get rid of it. Yeah,

you just say no more, no more exclusion for this. So the benefits that you're going to be getting,

the healthcare benefits that you're going to be getting through, through, through worker is going

to be tax-like, like waiting. And then we would see, we would seek the best opportunity. We

wouldn't just take that work given. Exactly. So you would, you would, you would do that, but there's

so that is very politically difficult. So the thing that I talk about in the in the column is

if the first best solution is just not is out of reach, but there are ways to actually move more,

to shelter more of our money in a system that actually makes us in control of our healthcare

decision. And that's a universal universal sitting account, a health sitting accounts. We're

basically in a, in a good tax system, every money we save shouldn't be taxed. It should only,

only be taxed at the point of consumption. And so health settings account are a way to actually

shelter or the money we are going to save. And an ultimately going to spend on healthcare. And

that in a way is not just good tax policy, but it actually restores a way to give control

of Americans to Americans to their health, spending dollars. And, and with all of this,

it will facilitate price transparency, it will facilitate competition, it will facilitate all sorts

of things that we that we badly need in this system. Who's against it?

I think a lot of, I think like all of the Democrats who would like to go to a Medicare for all

system, they don't, they probably don't want, they probably don't want a universal health

saving accounts because they, you know, they just think that it's better if the government provides

everything. Are the health insurers against a universal account or are they for it? Would it help

them? We have 30 seconds. Well, I think, I think they're not, but right now, I don't think they

care about because they're not at risk of being as long as the exclusion survives, they're not at

risk of not providing, I'm not providing health insurance and not being basically have all these

employers buying health insurance. So I think as long as the exclusion survives, these guys

they're probably, they don't really care. So we have a hundred years of a bad tax code that was

inadvertent, but here we are paying more and more for health care, terrific. What? Very unique

to receive the Mercatus Center. What happens in the 1920s doesn't stay in the 1920s, I'm John

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