Do you know what a “flex plan” for medical expenses is? I have them, and they’re great. A limited number of them are authorized by current law, and whether you have access to one depends on your employer and insurance company.

The new health-care legislation (the Compulsory Insurance Act, or “Obamacare”) severely curtails the use of flex plans. If you have one, this will feel like it was done out of malice. But stay with me for a moment.

A flex plan is usually coupled with a high-deductible insurance policy. It allows you to spend some of your pre-tax earnings on qualified health expenses, up to an annual limit determined by your income. The limit might be $4000 or $6000, or whatever you work out with your employer. This does two magical things: it works around the distorting effect of the tax preference given to employer-provided health expenditures; and it allows people to discipline the health care market by spending their own money rather than that of a third party.

In this decades-long debate we’ve had on health care, conservatives and economists have always made the point that people will prevent massive price inflation when they have to spend their own money. Price signals work. They’re the mechanism through which supply and demand come into balance. But there are no discernible price signals when people spend other people’s money for ordinary expenses like routine doctor visits. That’s one of the key drivers of the rampant inflation we see for medical services.

You’ll get this effect with any kind of third-party payer system. That includes the “first-dollar” medical plans or “Cadillac” plans so beloved by Big Labor unions and government employees. It also includes Medicare, Medicaid, a “public option,” and a full-boat single-payer system.

But wait, you say! Health spending is different from all other spending because it’s not discretionary! No, that isn’t entirely true. Medical expenses from emergencies, accidents, and catastrophic chronic conditions are the ones that people generally don’t plan for and can’t easily afford out of pocket. Everything else IS discretionary.

But guess what? Those unpredictable large expenses are the reason health insurance was invented in the first place. You don’t experience those every year. In fact, each individual experiences a need for major medical care so infrequently that you can underwrite the risk across a large pool, just as is done with property/casualty and life insurance.

That’s the way health insurance is supposed to work. It’s a severe distortion to suppose that the job of health insurance is to cover every single dollar of health spending, or perhaps every dollar minus a small co-pay.

And of course, the distortion is carried much farther when this misunderstood mode of paying for health care becomes a desire for a government payer or a “public option.” This isn’t insurance at all, it’s just a payment plan.

The right way of paying for health care is for individuals to pay for the routine stuff out of pocket, applying price-discipline to avoid over-utilizing care and keeping the market under control. AND ALSO, they buy a low-cost, high-deductible major-medical policy to cover the big stuff.

If we could possibly go to that world, then we wouldn’t be asking why our nation pays twice as much per-capita as every other developed country, in order to get basically the same health outcomes.

(Aside: Yes, I’m very well aware that the US has by far the best care for end-of-life and extreme conditions. You’d expect nothing less from a system that is so heavily overfunded. But on a quality-of-life weighted basis, I don’t rate this to produce better outcomes overall.)

(Another aside: Yes, I’m very well aware of the argument that underinsured people will avoid preventive care, ending up with larger, more expensive problems later. But that effect is partially overstated by the health industry, which wants the extra revenue. And the part of this argument that is real can be handled as out-of-pocket routine expenses, once we get those costs under control through proper price-discipline. This is an education problem, not an economic problem.)

Getting back to flex plans: you have a much healthier approach to healthcare spending if you combine them with a high-deductible insurance policy. This becomes a powerful driver to control routine health-care costs, because individuals are spending their own money. And it’s AUTOMATIC too. It doesn’t need constant effort from bureaucrats.

So what does Obamacare do instead? It severely curtails the use of flex plans by limiting them to $2500 per year. (The average annual cost of health care in the US is more than $7000 a year per-capita.)

For people who use flex plans, the sharply reduced amount means they’ll have to either buy a much more expensive insurance policy, or go uninsured. It’s a totally crazy move which flies in the face of Obamacare’s stated objective of making healthcare more affordable for everyone.

So you might think this was done out of malice, especially if (like me) you’re one of the people who suddenly have to spend more on coverage. But no, there’s another factor at work. Take a look at one of the distinctive features of the Senate’s legislation: the 40% excise tax on so-called “Cadillac” insurance plans.

This is ultimately a form of community rating. The idea, praised by economists and commentators on the left, is to curtail health spending by forcing people to spend their own money on routine expenses.

Doesn’t this sound familiar? The plan was severely watered down by labor unions, who are the people that originated most of the Cadillac plans. What was supposed to happen is that if your insurance plan costs more than $23,000 a year (an extremely high number), you would pay a 40% excise tax on the premiums in excess of that amount.

Theoretically, the tax would cause your employer to stop providing such valuable insurance, and the unavailability of it would make you more careful about your spending.

In another Rube Goldberg-esque touch, the excise tax was also supposed to generate revenue through the income tax. How? Because employers would increase your salary by the amount of the insurance premiums they would no longer pay (because too heavily taxed), and the government would get income taxes on the extra income. They forgot that unemployment is nearly 10% and competition for labor is not strong. Your employer would keep the extra money, not increase your income.

This whole goofy idea was hailed by Obamacare proponents in the Senate as a way of controlling overall costs by using pricing signals, as Economics 101 suggests. What a concept! But they were going around the block to get next door. Just use flex plans widely and allow people to buy less-expensive, higher-deductible insurance policies. You’ll get a much stronger, faster and more efficient price-controlling effect.

Instead, the Senate legislation cuts the easy way and enacts the hard way. That’s why I say that something other than malice is at work here.

It’s called STUPIDITY.

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