• Every time we spend a dollar in a hospital, we pay less than 5 cents out-of-pocket and 95 cents is paid by a third party (employer, insurance company or the government).
• Every time we spend a dollar on physicians' fees, we pay about 17 cents out-of-pocket.
• For the health care system as a whole, we pay only 21 cents out-of-pocket every time we consume a dollar's worth of services.

"Too much health insurance results in wasteful spending."

Moreover, the explosion in health care spending over the past three decades parallels the rapid expansion of third-party payment of medical bills. The patient's share of the bill has declined from 48 percent in 1960 to 21 percent today. There is substantial evidence that a great deal of waste in our health care system is caused by people who have too much insurance. For example, Rand Corporation studies imply that if every family in America had a $2,500 deductible, personal health care spending would drop by 30 percent with no adverse effects on health. Market prices for health insurance also provide powerful evidence of the wastefulness of low deductibles:

• If a family in a city with average health care costs increases its deductible from $250 to $1,000, its premium savings will be $1,775 - more than twice the amount of the increase in the deductible.
• If the family increases its deductible from $250 to $2,500, it will save $2,396 on premiums - roughly the amount of coverage the family would forgo, considering the effects of the deductibles and copayment.

Most individuals and families would be much better off if they had the opportunity to choose high deductibles and to place the premium savings in an account they could use for small medical bills. Yet while the federal government generously subsidizes third-party insurance, it discourages self-insurance by heavily taxing funds that individuals put aside for medical expenses:

• Under current law, every dollar of health insurance premiums paid by an employer escapes, say, a 28 percent income tax, a 15.3 percent Social Security (FICA) tax and a 4, 5 or 6 percent state and local income tax, depending on where the employee lives.
• On the other hand, these taxes are imposed on every dollar employers put in a Medical Savings Accounts to allow employees to pay their own small medical bills.
• Thus government is effectively paying up to half of the premiums for third-party health insurance and taxing up to half of the funds used to self-insure.

The federal government could eliminate this distortion by giving just as much tax incentive to individual self-insurance as it now gives to third-party insurance. Without this change, there is little reason to think health care costs can be controlled without government-imposed health care rationing. Although 15 state governments have passed Medical Savings Accounts laws and others are considering them, the effect of federal tax law is so large that state efforts alone are likely to accomplish little.

"The federal government should give just as much encouragement to individual self-insurance as it give to third-party insurance."