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Temporary Fix, Permanent Cost: Why Health Insurance Is Expensive

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Published September 8, 2020

The government is quick to enact policies during a crisis, but policies that sound good in the short term can have bad long-term consequences. Government-mandated wage and price controls during World War II prompted employers to lobby for employer-paid health insurance that was not counted as taxable income. When wage and price controls were lifted, the tax-free status of employer-paid medical care remained in place, driving up medical costs and health care premiums for all.

Discussion Questions:

  1. What are other examples of federal policies with good intentions and negative consequences?
  2. How can we bring down the cost of health insurance?

Additional Resources:

  • Read “How to Cure Health Care,” by Milton Friedman. Available here.
  • Read “How to Cure Health Care,” an interview with Milton Friedman. Available here.
  • Read “Pricing Health Care: The Folly of Buying Health Care at the Company Store,” by Milton Friedman via the Wall Street Journal. Available here.
View Transcript

Whether it is a world war or a pandemic, authorities are quick to enact policies during a crisis to protect the public from harm. These policies are enacted with the best of intentions, but they often have long-term consequences that far outlast the crisis.

For example, during World War II, the government instituted wage and price controls to help with the war effort. But there was a problem. Businesses couldn’t recruit enough workers without offering higher wages. To sidestep these restrictions, employers started paying for their employees’ health insurance as a new benefit.

Businesses and workers then successfully lobbied Congress not to count health insurance as income, effectively making it tax free.

Wage and price controls were lifted after World War II, but the tax-free status of employer-paid medical care remained in place.

Today, the government is still subsidizing expensive employer-paid insurance. These plans give patients fewer reasons to consider the cost of their healthcare choices, encouraging them to use more care than they really need. Ultimately, this drives up medical costs and healthcare premiums for all.

If not for a temporary decision made in the midst of a world war, today’s health care system would offer Americans more options and lower prices.

When a crisis happens, we expect our policymakers to respond. But we should remember that policies that sound good in the short term can have bad long-term consequences.