Economic influence, Market principals, and Tax policy in the Health Care System.

How can law and economics create effective public policy in the health care arena? While it is clear that our current system is dysfunctional; using 80% of the resources to focus on the minority of users who have reached the stages of chronic illness, we have yet to find a solution to the problems. Many advocate the use of government regulatory action, tax proposals, or socialized health care. However, I submit that free market solutions combined with tax policy changes will be more effective at fixing the problems than a government run system.

Starting with the tax policy proposals, I suggest the use of a Pigovian tax (a tax levied on market activities to correct negative externalities that are inefficient) to change health and healthcare. These efforts take aim at altering personal choices and preferences with the goal of increasing the public’s general health while lessening the burden on the health care system. Within business contexts Pigovian style taxes are used primarily to control issues like pollution. A Pigovian tax can change negative externalities in personal health and lifestyle choices as well. These changes will have far reaching impacts in the health care market. For years the sin taxes, a Pigovian tax targeting individual conduct, focused on products people considered moral ills, such as alcohol. Current public policy is shifting towards using the sin tax to address the epidemics of obesity and diabetes that have swept through the healthcare system like a tsunami in recent years.

States are beginning to tax products believed to be at the root of this public health crisis. These include candy, sugar products, and sugar laden sodas and beverages. The Governors of New York and Massachusetts recently proposed a soda tax and Illinois already has a tax on candy bars and soda products. These taxes adjust personal choices which eventually result in reduced health care costs. Additionally, the taxes help fund the system. Studies have yet to show whether these methods will be effective or not, however, they are sure to be better solutions than socialized state run health care. Additionally, while the traditional Pigovian tax encourages people to abstain from certain negative behaviors; negative Pigovian taxes (giving subsidies to encourage positive behavior) are being proposed to encourage people to make healthy life choices like working out at a gym.

Traditional libertarian thinkers will likely think the traditional Pigovian tax limits personal freedom and choice. They may argue that these behaviors are strictly personal and the government should not moderate them; however, I contend that a negative Pigovian tax that would make gym memberships deductible and subsidize positive health choices can only be a benefit. Other critics of the sin/Pigovian taxes say that these taxes have historically led to black markets and organized crime smuggling. These taxes create large price differentials in markets and the tax is punitive in nature. These taxes tend to discriminate against lower socio-economic classes that are more likely to consume cheaper and less healthy foods and products. These methods of altering behavior also place a greater burden on those members of society who already have a difficult time acquiring or affording quality health care. While the critics make valid points, economic theory predicts that in an economy where the cost of making responsible choices is high, and where supply of unhealthy products is abundant, Pigovian taxes will be an efficient way to promote the public interest, and will lead to an improvement of the quality of life and health care.

Free market ideas have created the richest nation on earth and can provide the answers for our health care problems. One idea is the creation of personalized health insurance accounts that travel with the consumer from job to job and are not employer based. To bring health care costs down the free market needs to establish a private health insurance sector. Americans should be able to save with a Health Savings Account (“HSA”). Insurance premiums and HSA’s should be tax deductible. Furthermore, individuals should be able to roll over excess HSA dollars from one year to the next, instead of losing their unspent money at the end of each year. Another reason health insurance is so expensive is because many states require policies that provide benefits that many families do not want. These mandates increase costs for everyone. Allowing customized policy selection similar to auto insurance policies would lower costs for all users. Lastly, to improve health care quality, the free market system must emphasize cost reductions, incentives for preventive care, and chronic illness management.

Finally, government has created the bulk of the health care problems. Let's be honest, government rarely if ever does anything well or efficiently. Why should we think something as massive as healthcare should be any different or better with government control? With the most minimal of government assistance in structuring tax policy; free markets can be the solution.