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Policy Diagnosis: Today’s Health Insurance Crisis Stems from Federal Interference in 1943

January 12, 2017

Hillsdale College Professor Dr. Gary Wolfram traces Obamacare's seeds to the 1940s, 50s, and 60s with alumnus and Michael T. Hamilton.

Editor’s Note: The Affordable Care Act (ACA) is the Obama administration’s contribution to a cycle of government intervention and unintended consequences in the labor, health insurance, and health care markets, according to Gary Wolfram, director of the economics program and professor of political economy at Hillsdale College. Health Care News Managing Editor Michael Hamilton asked Wolfram to help readers trace Obamacare back to its roots.

Hamilton: Can you explain the link between government interference in the market and unintended consequences?

Wolfram: In 1927, Ludwig von Mises wrote a book called Liberalism, putting forth an idea of how markets work, how limited government is important to that, and how markets alone create wealth for the masses. He pointed out that when government intervenes in the market, it creates unintended consequences. This leads to more government intervention and then more unintended consequences, until interventionism leads to central planning. We’ve seen that exactly in the health care industry.

Hamilton: In an online lecture hosted at Hillsdale College’s website, which is offered to the public at no cost, you trace the federal government’s intervention in the health insurance market to World War II. How so?

Wolfram: During World War II, the government imposed wage and price controls. One of the problems with this was you had a high demand for labor in the manufacturing sector but couldn’t raise wages, and the supply of labor was shrinking because we had sent people off to the Army and Navy. So, as a manufacturer, how would I deal with that? I’ve got to build planes, tanks, and everything else.

Markets being what they are, people became clever and said, “How about if we provide health insurance for our employees? That won’t count against the wages.” Indeed, in 1943 the War Labor Board ruled that the wage freeze didn’t apply to fringe benefits. So, lots of people in the manufacturing sector now had insurance provided through their jobs.

Hamilton: The wage and price controls subsided once the war ended, but Congress tied health insurance even more tightly to employment in the 1950s, correct?

Wolfram: In 1954, Congress decided to exclude the employer’s contribution to health insurance plans from the individual income tax. Let’s suppose your marginal tax rate was 30 percent. If your employer gave you a dollar in income and you bought health insurance with it, you’d only have 70 cents to buy the health insurance. If your employer bought the health insurance, however, you got a full dollar of health insurance. Naturally, that became the dominant way of providing health insurance.

Hamilton: How did this tax exclusion for employer contributions to health insurance trigger a cycle of government intervention and unintended consequences?

Wolfram: Once you have insurance, you don’t say, “How much does that cost?” You say, “Does insurance pay for it?” As long as insurance pays for it, you’re going to demand it. As demand for health care services went up, prices rose.

What happens? In the 1960s, two major groups did not have access to health insurance through their employer. For those over 65, the government instituted an insurance policy called Medicare. For people who are unemployed or low-income, the government invented Medicaid, another government insurance policy. That put more people into the system where they don’t care how much it costs; they just want to know whether the government pays for it, which is driving up the cost of health care.

Hamilton: How has government intervention in the labor and health insurance markets affected innovation in the health care industry?

Wolfram: It causes all sorts of distortions, because innovation takes the form of selling something Medicare or Medicaid will pay for instead of something that will be inexpensive and cure you. For example, you’ve probably seen ads for a certain scooter. Well, I went on their website, and it doesn’t say anything about the scooter’s price. It just tells you that 90 percent of the people who get the scooters get them for free, and the seller will fill out customers’ Medicare forms for them.

Hamilton: How is ACA an attempt to address unintended consequences of government policies implemented in the 1940s, 1950s, and 1960s?

Wolfram: Once your insurance is tied to your job, what do you do when you lose your job? Before ACA, insurers would not insure you for illnesses you already had. Had they done so, people would have just waited until they got sick to buy insurance, and insurers would have gone out of business. Well, the Affordable Care Act says insurers can’t deny you insurance for a pre-existing condition. That’s why the law requires everybody to buy insurance: to prevent the insurance companies from going bankrupt.

Insurance companies are losing money like crazy anyway, and they’re raising premiums on the rest of us that are still buying the insurance. It’s a downward spiral.

Hamilton: How can lawmakers start correcting more than 70 years of government intervention in labor, health insurance, and health care markets?

Wolfram: First, do what the markets are doing: Employers give employees health savings accounts and a catastrophic care policy, the high deductibles of which are much less expensive because they only come into effect when you have some sort of dire consequence. Second, start getting people to ask, “What’s the price for this?” and the whole supply side of health care services will change.

Michael T. Hamilton (mhamilton@heartland.org) is a Heartland Institute research fellow and managing editor of Health Care News, author of the weekly Consumer Power Report, and host of the Health Care News Podcast. He is a graduate of Hillsdale College.

Author
Michael Hamilton writes and edits for the liberty-minded clients of Good Comma Editing, LLC, a freelance writing and editing company.
media@heartland.org @MikeFreeMarket
Author
Dr. Wolfram is the William E.
gwolfram@hillsdale.edu

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