Unleash the free market in healthcare!

What’s ailing our current health care system and what can we do to improve it? I have been discussing in prior posts what’s ailing our current health care system, and why I think political solutions will only perpetuate the problems.  So what are my big ideas?  I don’t claim to have all the answers, and the ideas I’m about to present aren’t even original.  However, I think more people need to at least hear the ideas and their underlying rationale to decide for themselves what makes sense. 

As I’ve written before, the biggest problem with the United States health care system is the primacy of 3rd party payments .  Any industry built on a foundation of consumption unlinked payment is going to suffer massive distortions which will lead to inefficiency and constant cost escalations.  We are living in this world right now.  I argue that the problems we face are not due to the free market, but occur because of the absolute lack of it.  So how do we increase free market forces in health care?  There are two fairly simple steps that would help.  Firstly, we need to move away from the current model of using health insurance to pay for most medical expenses.  Additionally, we also need to break the irrational link between employment and health insurance.   The beauty is that both of these goals can be accomplished without the use of any tax dollars or government coercion!

Americans like choices; go to any grocery store and see the magnitude of options the free market present us.  Health care and its financing need be no different, however today our choices are severely limited.  One of the easiest steps we could take would be to deregulate the health insurance industry at the federal and state levels.  What happens today is that each state establishes its own health insurance regulatory board empowered with determining what policies can be legally sold.  Policies from other states are prohibited.  The Affordable Care Act (affordable to whom?) took that concept to the next level, directing insurers what policies must cover, and what may be charged.  Think of that, government bureaucrats are telling the very people whose livelihood depends on accurate risk projection, how much they are able to charge for said risk! Today, every medical special interest group works very hard to make sure their services must be covered under every policy sold, regardless of consumer preference.  This means that when you buy a policy, you are forced to insure against the need for all conceivable services (mental health, substance abuse treatment, acupuncture, obstetrics services, and the list goes on and on), regardless whether you want to or not.  The medical special interests spend a ton of effort making sure that you as a consumer must pre-purchase their services.  I’d rather they put more effort into convincing us to use their services freely.  The resulting “comprehensive” plans are of course going to be very expensive.  I suspect that most of us, if given the choice, would rather purchase policies that cost less, and are more tailored to our individual wishes.  This is currently illegal, and need not be.  All Congress and the President would have to do is sign legislation which allows insurance policies sold across state lines.  After that, only one state would need to allow more tailored insurance plans to be sold, and let the competition commence!  Notice this idea costs no tax money, and forces nothing upon anyone.  This simply allows medical consumers more options in deciding what health insurance plan suits them best, ranging from expensive comprehensive to bare bones catastrophic plans.

Another piece of low-lying fruit, would be to break the link between employment and health insurance.  Why does it make any sense for your employer to buy your health insurance?  Is health insurance more vital than your clothing, housing, or food?  Those other essential daily items are purchased with your pay; health insurance need to be no different.  The reason for the status quo can be found in the tax code.  Currently, employer-provided health insurance is not taxed.  This means that if your employer provides a $30,000 comprehensive family plan (which comes at the direct expense of your cash compensation), you don’t pay tax on that $30,000.  This distortion encourages employers and employees alike to rationally favor higher-priced health insurance plans.  The tax code is encouraging us to buy more health insurance than we otherwise would, leading to the overconsumption problem I’ve already discussed.

I suspect that if employer-provided plans were not tax-advantaged, and that if consumers had the choice to purchase truly catastrophic plans (high deductible), more people would go that route.  Once more people are choosing (not being forced) to buy high deductible plans, most medical services would begin to be paid for directly.  Once things are being paid for directly, consumers begin to act more rationally when it comes to medical services.  People will ask questions about the need for services, and demand better quality at lower cost, just like in every other industry where the free market has some elbow room.  This idea always generates big resistance as people have the erroneous assumption thatmedical costs are static.  Who could afford to pay directly in today’s prices?  This concern is valid, but the error is that pricing is not static.  When consumers are applying downward price pressure, and being more discriminate in what they purchase, prices are bound to fall.  We already see this effect in the few areas of medicine where direct cash purchasing occurs; cosmetic and corrective vision surgery. 

Ok so, where will anyone find the money to buy medical services?  Well, that pricey health insurance plan your employer was buying for you (currently mandated by the ACA) will now just be re-partitioned to your cash compensation.  It matters not to the employer whether you are paid in cash or in health insurance, it all adds up to the same amount to them.  With that windfall, you now have more cash to save in order to pay for medical services when needed or buy whatever you else want.

This discussion is not meant to be a comprehensive solution to our problems, there are many other issues to discuss.  Of course as a wealthy country we do not wish to see disabled people or children suffer, and various ideas could be debated as to how to best ensure they receive needed medical services.  As individuals, it’s in all of our interests to have as many able-bodied adults as possible working and producing things that make our lives better.  However, most people already work, and can pay for their medical services directly.  I don’t wish to prevent anyone or their employer from buying a “comprehensive” health insurance plan.  I just wish we had more choice in the matter, and not have that decision altered by arbitrary tax laws.  We don’t need a one size fits all government directed policy which determines how we all consume and finance health care.  The status quo is failing us, let’s move in a direction of economic freedom!