On his Agoraphilia site, Glen Whitman succinctly explains our health-care system’s flaws and how they came to be:
The basic flaw in our current system can be traced back to WW2, when firms laboring under government-imposed wage and price controls were casting about for ways to attract employees without raising wages. They hit upon the idea of providing workers with health insurance and other benefits, and the War Labor Board gave them the thumbs-up. Eventually, the Board’s policy was written into the tax code.Ever since then, employers have been able to provide health insurance to their employees tax-free. If your employer buys your health insurance, you’re not taxed on it, because it’s treated as a cost of business; but if you buy health insurance for yourself, you have to buy it using after-tax dollars. Now, tax breaks are generally a good thing, but not when they create perverse incentives. This particular tax break creates two. First, it encourages people to buy their health insurance through their employers, instead of individually or through other organizations like churches, schools, fraternal societies, etc. The result is that your health insurance is tied to your job, so that you may lose it if you lose your job. (Subsequent COBRA legislation mitigated this problem marginally.)
Second, and more importantly, the fact that the tax break is for health insurance only — not for other healthcare expenditures — encourages people to get the most expansive health insurance policies possible. Why pay for any healthcare with after-tax dollars if you can use pre-tax dollars instead? Routine and elective expenditures are now regularly included in health insurance plans, which is much like including gasoline and car washes in auto insurance plans. Consequently, health insurance has increasingly been transformed into a pre-payment system. You send checks to bureaucrats who send checks to doctors, even though it would be simpler and cheaper to pay your doctor directly for most services. The unsurprising result is rising healthcare prices.