Jeffery Singer writes in Reason Online, Health Care’s Third-Party Spending Trap:
Nobel-winning economist Milton Friedman, in his masterpiece “Free to Choose,” wrote of four ways to spend money:
Category I—You spend your money on something for yourself. Here you are very careful, because it is your money, and the good or service you are buying is for you.
Category II—You spend your money on something for someone else. Here you have the same incentive as in Category I to economize, but since you are buying something for someone else, you are not quite as meticulous when it comes to the purchase meeting the needs or values of the recipient.
Category III—You spend someone else’s money on something for yourself. Here you are not concerned about how much you spend, because it is not your money. But because you are spending on yourself, you make sure you are getting what you want.
Category IV—You spend someone else’s money on something for yet another person or persons. (This is what we ask our legislative representatives to do every day.) Here you are the least incentivized to economize, or to buy something that meets the needs or values of the recipient.
Like the government does, third party payers operate under the dynamic outlined in Friedman’s Category IV. This becomes most obvious when it comes to the government acting as third party payer, e.g., Medicare and Medicaid. And it doesn’t just pertain to health care (think of $800 toilet seats for the defense department). When the government buys goods or services for other people with other peoples’ money, special interest pleading, political concerns, and cronyism run the game. And “leakage” of money through “waste, fraud, and abuse” is a given.
This isn’t to say we don’t need health insurance. Health insurance that covers truly unforeseen, costly catastrophic occurrences makes sense for most people. As does life insurance, property and casualty insurance, and auto insurance. But health insurance that covers routine, predictable events isn’t really insurance. It’s prepaid health care. And it is driving up prices for everyone with everyone else’s money.
Policymakers need to understand that the key to “affordable health care” is not to increase the role of health insurance in peoples’ lives, but to diminish it. We need much less Category IV spending on health care, and much more of Category I.