HEALTH CARE SPENDING IS OUT OF CONTROL.

• Author: Suderman, Peter
• Position: POLITICS

HEALTH CARE IN America costs too much because we pay for it the wrong way. And it's all but certain that we're going to continue doing so for a very long time.

The crux of the problem is third-party payment, or, as most people think of it, insurance. Health insurance doesn't just protect people from financial ruin. It insulates them from individual decisions about price and service quality. Those decisions become invisible, outsourced to a middleman--either a private insurer or a federal program--while the patient whose health is at stake is removed from the equation. The result is a system where prices are inscrutable, if they can even be called prices at all.

The dominance of third-party payment is almost entirely a result of two policy decisions that have warped the nation's health care system for decades.

The first was the decision, in the wake of World War II wage and price controls, to allow employers to brovide fringe benefits, including health coverage, tax-free.

This created an incentive for employers to provide more expansive and more expensive coverage. It made an extra dollar in salary, which would be subject to taxes, worth less than an extra dollar in benefits, which did not incur taxes.

The result is that most private insurance is provided through employers, and it tends to be reasonably comprehensive, covering everything from ordinary doctor visits to foreseeable surgeries to truly catastrophic events. Because employers and insurers manage the costs for everything, patients have little incentive to shop based on prices or quality, which can be difficult to determine anyway. In addition, employers typically pay a large share of the monthly premium, meaning that tens of millions of people are kept ignorant about not only the cost of medical services but the true price of the insurance itself.

The second policy decision was the introduction of Medicare (and, to a lesser extent, Medicaid) in the 1960s. Medicare expanded a system of government-run third-party payment to seniors, who, for understandable reasons, consume an out-sized share of health care services.

Initially, that system was designed to ensure profitability for America's hospitals and health care providers, paying them based on self-reported costs plus a guaranteed-percentage markup. Later, the system imposed price controls, but not caps on total spending or volume.

The result was a huge new revenue stream for the health care industry, which rapidly reorganized...