Tax Policy Distorts Healthcare Pricing

America's healthcare crisis is just another example of what happens when government control and regulation seeks to influence the outcomes of a private market. Obamacare is just the latest extension of government's pervasive reach into this arena.

Far and away the most egregious intrusion, however, relates to one very simple government policy--that employers are able to deduct the cost of the health insurance they provide to their employees from their taxes while those same employees, if they purchase insurance directly, would not be able to take a similar deduction. Coupling this with the fact that employees are not taxed on the value of the insurance they receive from their employers has contributed in substantial part to the rise of healthcare's cost in the United States.  This policy has encouraged employers to add more and more items to the coverage they provide their employees enabling employees to essentially arbitrage between the market price of the services the receive and the after-tax cost to their employers of those services. The problem is that if millions of employed people with healthcare insurance provided by their employers who may not have undertaken an activity because of its cost now see a significant artificial reduction in that cost, then the increased demand for that activity will drive up the cost for everyone that does not have employer provided insurance.  Furthermore, by increasing the demand for many services beyond that which would exist in a non-distorted market, this policy has also contributed to the upward price pressure on the insurance itself.

Tax policy has distorted the demand for healthcare services and when demand is distorted so are prices.