Health care and magic

The most common element of magic tricks is misdirection. The magician draws your attention to one thing so you won't see what he is doing with something else.

As a personal finance writer, I don't think about magic often. I try to stick with the evidence and the odds. Then I thought about Penn and Teller, the popular duo with a long-standing act in Las Vegas. Lone-wolf magicians perform most magic. Penn and Teller are unusual. They operate as a team, a bit like our health care institutions. Health care has become an elaborate institutional magic trick. In one misdirection after another, the price always disappears.

Is that just too weird? I don't think so.

• The existence of employer-provided health insurance is a misdirection. It encourages us to think that health care is free, or at least paid for by someone else.

• The existence of private health insurance is a misdirection. Private insurance that excludes pre-existing conditions fools us. It allows us to think that health care is less expensive because it excludes many who are really sick. Remember, insurance is about sharing risk.

• The existence of government plans that provide health insurance is yet another misdirection. It also gives the illusion that health care doesn't cost much. Another taxpayer is picking up the tab.

In fact, the fundamental problem with health care is that it costs too much. Rather than attack that problem, the institutions that live on health care dollars connive to provide colossal misdirection. Their goal? Preserving the illusion that health care is affordable for the vast majority of Americans.

It isn't. We can see this by doing a few exercises with a handy online calculator on the Kaiser Family Foundation website. It allows you to estimate the cost of health insurance under the Affordable Care Act. It does this for households of different size and income. It will give you a clear idea of the cost of insurance and how much your subsidy, if you qualify, will be. It also unmasks the total costs. Here are a few examples, all assuming a silver plan.

• A 24-year-old single worker earning $30,000 a year will pay $2,497 a year after a subsidy of $312. That means health insurance will cost 8.32 percent of income rather than 9.4 percent. That worker is also paying 7.65 percent of income in employment taxes. His marginal income tax rate is 15 percent and his average income tax rate is 7.8 percent. So 24 percent of his income comes off the top before a dime can be spent on living expenses.

• A young couple, ages 27 and 25, with no children and earning $50,000 a year will pay $4,830 a year after a subsidy of $929 a year. Their out-of-pocket health insurance cost is 9.66 percent of income. They'll pay an additional 7.65 percent in employment taxes. Their marginal tax rate is 15 percent and their average tax rate is 6.9 percent. Again, 24 percent of their income comes off the top, before living expenses.

• A 55-year-old single worker earning $40,000 a year will pay $3,864 a year, after a subsidy of $2,395 a year. This means his health insurance will cost him 9.66 percent of income rather than 15.6 percent. Like the younger worker, the older worker is paying 7.65 percent of income in employment taxes. He also has a marginal tax rate of 15 percent and an average tax rate of 7.8 percent. So a bit over 25 percent of income comes off the top, before living expenses.

Exercises with other household types produced similar results. But the most important fact is the cost of health insurance. Without subsidy, it ranged from about 10 percent to 19 percent of income. The actual cost of health insurance often exceeds what individuals and families pay in employment taxes or income taxes.

But even at these high figures, the cost of health care is incomplete. The calculator also provides an estimate of the health care expenses covered by insurance. The typical figure is 70 percent. In other words, even with subsidies, workers may face expenses that can cause personal bankruptcy. The all-in cost of health care blows away the cost of employment taxes or income taxes.

If you'll excuse the technical jargon, this is what some call "a real pickle" for people on the lower end of the wage scale. The fundamental reality is that health care costs too much. That fact, not renewed misdirection, should be the starting point for renewed health care reform.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser.