LOOKING TO FRIEDMAN'S WISDOM ON HEALTH CARE

February 8, 2007

With health care dominating the political agenda, it seems appropriate to revisit the foundational economic principles of Milton Friedman, says Raymond J. Keating, chief economist at the Small Business and Entrepreneurship Council.

Some of Friedman's most critical analysis is reserved for employer-provided medical care, since it leads employees to:

  • Rely on their employer, rather than themselves, to make arrangements for medical care; yet employees are likely to do a better job of monitoring medical care providers-because it is in their own interest-than is the employer or the insurance company or companies designated by the employer.
  • Take a larger fraction of their total remuneration in the form of medical care than they would if spending on medical care had the same tax status as other expenditures.

Additionally, says Friedman, employer financing of medical care has caused the term insurance to acquire a rather different meaning than in most other contexts.  Insurance generally protects us against events that are highly unlikely to occur but that involve large losses if they do occur -- major catastrophes, not minor, regularly recurring expenses.

What's politically possible that takes us in the right direction? According to Friedman: health savings accounts (formerly referred to as medical savings accounts):

  • They eliminate third-party payment except for major medical expenses, and is thus a movement very much in the right direction; by extending tax exemption to all medical expenses whether paid by the employer or not, it eliminates the present bias in favor of employer-provided medical care.
  • They help resolve the growing financial and administrative problems of Medicare and Medicaid; it seems clear from private experience that a program along these lines would be less expensive and bureaucratic than the current system and more satisfying for participants.

Source: Raymond J. Keating, "Looking to Friedman's Wisdom on Health Care," Small Business and Entrepreneurship Council, February 1, 2007.

 

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