By linking medical insurance to employee compensation, the tax code generates several major long-run problems for employees, employers, and the medical industry:
- Because medical insurance is tied to a particular job contract, employees with severe medical problems become, in effect, bound to a particular job. Thus tax policy undermines job mobility, deterring workers from moving to those employers and types of work that they find most congenial. The negative consequences, obviously, fall upon employees and employers alike.
- Because the normal purpose of medical insurance is to reduce risk rather than to defray all medical expenses (cf. p. 4.9:6), free-market medical policies could be expected to include a substantial deductible and correspondingly lower premiums. In order to maximize the advantages of tax avoidance, however, employers tend to offer medical policies with much lower deductibles than would be expected in the free market. Such highly expensive low-deductible policies, unfortunately, tend to discourage employees from economizing on medical costs as they would in the free market, whether by avoiding unnecessary office visits or tests, or by adopting healthier life styles. Undoubtedly, the current crisis in medical costs in the United States can be traced in part to the absence of such incentives to economize.
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