Eureka!

The morning paper carries a letter from a doctor with the melancholy tale of the couple who came to see him because the husband was feeling tired and napping a good deal, and his reflexes on the mad were not quite so good. The couple were over eighty years old, had been married for 55 years, and didn’t the doctor think it might be a good idea for the husband to have a CAT scan, a magnetic resonance imaging, and then go on to a neurologist for a thorough check-up? Our doctor examined the gentleman and told him that, in fact, he suffered from nothing that someone his age shouldn’t expect to suffer from and that there really wasn’t any point in spending $5,000 to take all those tests, which were highly unlikely to reveal the need for any dramatic therapy. Uh-huh. He was thanked, and the couple went, at the urging of their daughter, to an out-of-town neurologist who, zap, gave him all those tests, from which no illness transpired. The bill was, of course, sent to Medicare.

In the endless pursuit of free-market applications to the problem of health care, we have had the good fortune to be in touch with Dr. Gerald Musgrave, who is associated with the National Center for Policy Analysis. From his collaboration with John Goodman of the National Center and Dr. Jesse Hixson, an idea has evolved that is worth celebrating: the Health Bank. This idea rests on Musgrave’s Iron Law of Public Policy, which says, “The economizers must benefit from the economizing.” “It means that if you want to control health-care costs, the ones who receive the pain from cutting cost must be rewarded with the pleasure.” Applied to the eighty-year-old couple above, if they had not spent the $5,000 it should have substantially gone into their own pockets.

But some background.

Dr. Musgrave reminds us of several things we tend to forget. The first of these is that health benefits are deductible to the employer, and non-taxable to the recipient. If it costs General Motors $3,000 per year to endow an employee with health benefits, then each worker is receiving $3,000 of untaxed income.

During the Second World War, wages were frozen. As always happens when wages are frozen, employers and employees look for ways to get around the prohibition, and the best way was to increase health benefits. This caused a rush for “first-dollar coverage,” which means that if you go to the doctor once a year and shell out $25, you get $25 back from your insurance company.

But this doesn’t make sense from any point of view. To begin with, “insurance” is philosophically and statistically designed to protect you from phenomenal collisions with nature. If you go walking down the street and slip on a banana peel and break your arm, that is an insurable event. If you go around to the doctor to get medicine for this winter’s cold, that isn’t an insurable event, because people visit their doctors as a matter of course, for routine health maintenance. The clerical work done to cover the costs of mending your collarbone is still $50, but this becomes a small fraction of, say, a $2,000 medical event.

But people being as people are, if they are fully insured, they will go to the doctor more frequently, and will put in for 100 per cent of the tax-free reimbursement.

How does one design a system that allows you to pay your employees in tax-free income, allows insurance companies to serve a useful function of insuring (rather than simply administering pre-paid health expenses, as is now the case), allows physicians and hospitals to provide health care without government and other bureaucrats monitoring their every move, provide the safety net that protects us from people who become a public charge? Answer: The Health Bank.

Suppose that General Motors paid $3,000 not to an insurance company, but to you: that that money went into your bank account, but reserved for the payment of medical bills. That much of it as is not used sits there earning interest, and, if you wish, you can play the market with it. Every penny you don’t use will one day be yours to do with as you like. Your only specified expense is: You have to take out an insurance policy against catastrophic illness, with a deductible of $1,000.

The beginning of the Health Bank plan, with more to come. But already, enough to celebrate.