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Americans have killed managed care

As I See It

Managed care has failed. It was with us briefly and is now destined to fade away into the elephant graveyard of failed endeavors. The American public has decreed that the cure was worse than the disease.

Republicans and Democrats have reached a bipartisan consensus ( a rare happening!) that all parties want to return to the old way of dispensing health care. Whether we end up with the milder Republican version of the “patient bill of rights” or the stronger Democrat version, managed care is on the ropes and the referee is counting.

Health care is provided in a unique environment wherein there is no consumer. Customers yes, but consumers, no. Health care providers traditionally have no incentive to keep costs low since insurance pays the largely unquestioned tab. The insurance companies likewise have no incentive to economize since they merely add a 15% administration fee to the cost and bill the employer. The circle is unbroken since the employer typically passes along the increased health insurance cost to the general public through increased prices. Managed care was an attempt to interject a consumer into the health care cycle.

Interestingly enough, the whole problem goes back to the “socialization” of the income tax code. Sixty years ago, Congress decided not to tax fringe benefits. The employer claims a tax deduction for the health care premium and the employee does not report the benefit as income.

The non-taxability of fringe benefits is of increasing value as one’s income and tax bracket increases. The higher the tax bracket, the greater the tax savings for the employee. One calculation finds the annual tax subsidy worth $2,357 to a $100,000-household versus $71 to a $15,000-household. As higher income employees feast upon tax-subsidized, medically unnecessary procedures, lower income employees are forced out of the fringe benefit arena. This is certainly not the outcome the tax writers in Congress had in mind.

Options for improving the situation are available. I think the “medical savings account” currently being tested by Congress would be a huge step forward. Without delving into the technicalities, a medical savings account works like this. The employer pays a fixed amount into the participating employees’ account each year – say $4,000. Health insurance premiums, deductibles and non-covered medical services are paid out of the account. Whatever is left at the end of the year belongs to the employee. This creates a consumer since a fair amount of good old selfish greed has been interjected into the formula. The unexpended funds are accumulated year after year and are ultimately available at the employee’s retirement.

A less realistic, but more effective, option would be to change the tax law to make fringe benefits taxable to the employee. In addition to eliminating the tax subsidy for upper income employees, this change would make health care customers more aware of the cost of their care. Of course, in my judgment, scrapping the Internal Revenue Code and replacing it with a flat tax with no deductions would be even more preferable.

The object of the game should be to encourage consumerism in the health care arena. The failure of managed care proves that there is no easy out. We must free health care providers of the paperwork nightmare that they now contend with and let them get back to doing what they do so well – providing us with top notch health care.


Do not judge, and you will not be judged. Do not condemn, and you will not be condemned. Forgive, and you will be forgiven. Give, and it will be given to you.

– LUKE 6:37

Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. His e-mail address is cpajones@msbusiness.com.


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