No free lunch

fedgazette Editorial

Preston J. Miller | Former Vice President and Monetary Adviser

Published October 1, 1991  | October 1991 issue

In an effort to illuminate the issues surrounding the current health care debate, the bank's Preston Miller has written a dramatic analogy that warns of the problems of government-required health plans.

Scene: Deep in the bowels of the U.S. Capitol

Act I
Senator Goodbody: Every person in this country has a right to be free of hunger.

Senator Aide Kandu: Agreed. Let's start a program to ensure that all people can eat to their hearts' content.

Senator: How could the government possibly pay for something like that?

Senator's Aide: Good point. We can't. But I got an idea. We can have businesses cough up the bucks for us. We'll have businesses hand out a Masterfood card to each employee. The employee presents the card at any grocery store or restaurant and the food is provided for free.

Senator: But who pays for the food?

Senator's Aide: The businesses do. The food providers, grocery stores, restaurants, etc., keep careful records of every customer purchase. Then at the end of the month they send bills to the customers' employers, who, in turn, pay the bills.

Senator: Why would a business want to give its employees food cards instead of just higher income to spend as they see fit?

Senator's Aide: We'll let the employers' payments on the cards be tax-free income to the employees; that is, the employees won't have to pay income or payroll taxes on the value of their cards. Each dollar the employer pays on the food cards will then cost the employees something like 70 cents in after-tax income. Therefore, the employees will demand the food cards, employers will be glad to pick up the tab, and the government is just out a little tax revenue.

Senator: I like it. The American people will like it. And Congress will like it. I guarantee you, your idea will become law.

Act II (5 years later)
Senator Goodbody: Well, I'm up for reelection again. Tell me how our food card system is working.

Senator's Aide Kandu: I can honestly report the United States has the best food distribution system in the world.

Senator: Then why do I hear all these complaints from my constituents?

Senator's Aide: Well, there are some minor glitches, but it's easy to patch things up.

Senator: So, what are the employers complaining about?

Senator's Aide: They say our system is too costly, that the United States is devoting about twice as much of its total income to food than is done in other countries. It seems that once people received their Masterfood cards they started buying steak instead of hamburger and eating at Chez Paree instead of McDonald's.

Senator: Hmmm. That seems like a problem to me.

Senator's Aide: But it has an easy solution. I've made up a daily menu and restaurant schedule. For each person the menu indicates how much vegetables—green, yellow, and red, fruits—with edible skins and without, meats—fish, fowl, red meats, and so on, that can be purchased in a week. Then once a week the person can eat out, but three times a month it must be fast food and only once a month a snazzy restaurant. This simple plan will hold down costs by preventing people from buying too much of the high-priced stuff.

Senator: O.K. Will your plan also answer the public's complaint?

Senator's Aide: Not entirely. People complain that the cards aren't available to everyone, like the self-employed or those not in the labor force. But that's easy to fix. We just require all firms to issue cards and for those individuals who fall through the cracks we make Uncle Sam the issuer of last resort. Voilá, we have universal nutrition insurance.

Senator: But won't that raise people's demand for food even more and drive up costs even more?

Senator's Aide: Not to worry. We'll set ceilings on food prices.

Senator: I see. But tell me one thing I don't understand. If our Masterfood card system has raised the demand for food and driven up food prices, why are the food providers complaining?

Senator's Aide: Well, for one thing, those greedy merchants are upset that the government pays them less than they bill it for government card carriers. Of course, once we set ceilings on costs, everyone will pay them less than what they want. The other thing they complain about is all the forms and records they have to keep. Seems like each customer's firm has different rules on what records are required and how bills are to be handled. But, we can easily fix that. We'll just have the government be the sole provider of cards and then we'll charge the firms. That way there'll just be one set of rules.

Senator: Sounds promising. Let me see. You want to set prices, tell people where they can buy food and what kinds they can buy, and have one administrator. Isn't that socialism?

Senator's Aide: Maybe. But the cause makes it worthwhile.

Senator: That reminds me. I was thinking. Every person in this country has a right to proper shelter and transportation and vacations and ...


As silly as this all sounds we have lived Act I, once we substitute medical services for food. We are part way through Act II, but before we complete it, shouldn't we stop and ask how we got her in the first place? Why do we think socialized medicine is a good way to go when socialism doesn't seem to work anywhere for any type of problem?

And before we argue that medical services require special treatment, we should think about what makes them so special. Some might say they're special because everyone needs some in order to live. But that's also true of food, and universal care does not mean universal insurance. Providing a safety net is not the same as providing equal access to all. We can provide care to those unable to pay as we do with food—through programs like food stamps, school lunches, charity meals, etc.

Others might say that medical services are special because there are risks of very big hits. That is true, and these risks are what people should insure against.

The insurance to protect against big medical expenditures should be continued, but the prepayment for ongoing medical services—the Masterfood cards—should be dropped. If people paid the ordinary costs of medical care as they do for other services, many of the problems of cost, access and record-keeping would be resolved.