Free-Market Medicine

Monday, August 13, 2012

The Supreme Court has allowed the president and Congress to put the country’s health policy on a path that will restrict individual choices, stifle innovation, and sharply increase health care costs. Now the only recourse is to repeal the law through the legislative process and replace it with policies that rely on the power of the markets.

The American health care system’s principal strength is its ability to produce ever more impressive innovations. The United States has no equal in developing new medical technologies, surgical procedures, and pharmaceuticals. These extraordinary advances are not the product of government direction but rather the efforts of scientists, investors, and entrepreneurs pursuing their individual goals and aspirations in a competitive market system. The Affordable Care Act puts these strengths at risk.

The law also exacerbates the central problem of our health care system: high costs without corresponding value. The individual mandate will require that people buy health insurance with generous benefits and limited cost-sharing. This flawed conception of health insurance has created the bad incentives that have led us to where we are today.

The principal factual claims made by supporters of the individual mandate are that failing to purchase conventional health insurance causes harm to the uninsured person (in the form of worsened health) and to others (by shifting the burden of the costs of care). The evidence for these claims is weak at best.

Peer-reviewed studies from the National Health Insurance Experiment and other data dating back to the 1980s have concluded that there is little or no causal relationship between health insurance and a person’s health outcomes.

What about the claim that the costs of caring for the uninsured are significantly shifted onto doctor and hospital bills, thereby raising insurance premiums? George Mason University professor Jack Hadley and John Holahan, Teresa Coughlin, and Dawn Miller of the Urban Institute published a comprehensive, peer-reviewed study of this question in Health Affairs in 2008. It concluded that private insurance premiums “are at most 1.7 percent higher because of the shifting of the costs of the uninsured to private insurance.”

The problems with the U.S. health care system are mainly the result of a handful of government policies that have prevented market forces from reducing costs and making services more widely available. So what can we do?

  • Fix the tax code. First and foremost is the federal tax code’s long-standing exclusion from taxation of employer-sponsored health insurance. The exclusion has created a tax advantage for buying health care through insurance rather than directly with out-of-pocket dollars. This, in turn, has caused consumers to overuse health care services, as they and their physicians perceive that someone else is footing the bill. This drives up health care costs.

Policy makers should make the tax treatment of health care neutral by allowing out-of-pocket expenses and individual insurance to be tax-deductible. Alternatively, neutrality could be achieved by eliminating the tax exclusion for employer-sponsored health insurance. The Affordable Care Act’s tax on high-cost health plans is a first step toward tax neutrality. Unfortunately, the act couples this policy with others that work at cross-purposes.

  • Redesign Medicare and Medicaid. The Affordable Care Act includes numerous reforms to the way Medicare pays health providers. Some of those reforms are on the right track. But in Medicare, the main problem is the nearly complete neglect of patient incentives. The Medicare Part B average co-payment rate has fallen by nearly half during the past thirty-five years. One near-term solution is to allow beneficiaries to choose health plans that have lower premiums but higher deductibles, more co-insurance, or more tightly managed networks of providers than those in traditional Medicare. The long-term solution is to provide beneficiaries with a defined level of support to allow them to purchase a private insurance plan. Such an approach is modeled on today’s Medicare prescription drug coverage and is similar to one proposed by Representative Paul Ryan and Senator Ron Wyden.

In Medicaid, the emphasis on access to health insurance rather than access to health care has stifled innovation in delivering care to the uninsured. The Affordable Care Act does little to change this. Medicaid should be converted to a block grant in which states are given a fixed sum and allowed greater flexibility to experiment with new approaches, such as delivering care through organizations that tailor available services to patient needs at reduced costs.

  • Reform insurance markets. State price controls and the proliferation of state mandates that insurers cover particular medical services and providers have driven up the cost of insurance by as much as 15 percent, made it less portable, and increased the number of uninsured by as many as ten million. Unfortunately, the Affordable Care Act enshrines many of these flawed policies into federal law.

The key objective of insurance regulation should be to increase the availability of low-cost, portable health insurance—insurance that delivers the benefits people want at a price they can afford. To this end, individuals should be allowed to buy insurance across state lines or in a federal market free of insurance mandates.

The Affordable Care Act will expand the reach of government into our personal health care choices while worsening the problems of our current health care system. Market forces, if allowed to work properly, are the best way to reduce the growth in costs, encourage continued innovation, and ensure that consumers have access to quality health care.