Category Archives: healthcare reform

How Can We Achieve a Free Market in Healthcare?

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My last post, “Why Is American Healthcare So Expensive?” suggests that we don’t have enough “skin in the game” because most costs are paid for by third party insurance companies.  One way to alleviate this problem is to subsidize insurance coverage only for catastrophic care with a high deductible and to encourage health savings accounts to pay for routine healthcare expenses.
CaptureBut the University of Chicago’s John Cochrane points out in “After the ACA: Freeing the market for health care” that getting to a true free market in healthcare “will be a long hard road” because “both supply and demand must be freed.”

  • Health care supply. Cost reduction only comes from new entrants into a business, not reform of old businesses. But in 36 states, for example, every new hospital or even major purchase requires a Certificate of Need issued by Hospital Equalization Boards which have explicit mandates to defend the profitability of existing hospitals.
  • Health care demand. True “need” is simply not a well-defined concept when a third party is paying the bills. The consumer must pay a lot closer to the full marginal cost of healthcare, or perhaps receiving the full financial benefits of any economies which he is willing to accept.

What are the objections to establishing a free market system?

  • The homeless and mentally ill, etc. Charity will always be needed for those who fall through the cracks. This doesn’t require a nanny state for the rest of us.
  • Adverse selection. In a free market sick people are more likely to buy insurance and healthy people to forgo it. Sick people would pay more but “health status” insurance and guaranteed renewability will mitigate this problem.
  • Shopping paternalism, i.e. people faced with serious illnesses are incapable of making cost-based decisions. These people and their families will simply have to learn to shop around. In a competitive market, a hospital which routinely overcharges cash customers will be “creamed by Yelp reviews.”

Conclusion.  There are only two ways to get health care spending under control.  A single payer system with rigid regulations and severe rationing or else a deregulated free market system where individuals have primary responsibility for their own care.  Americans are likely to prefer the second option if given a clear choice.

Why Is American Healthcare So Expensive?

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The U.S. spends almost 18% of GDP on healthcare costs, double what any other developed county spends.
CaptureThere are many reasons for our excessive healthcare spending.  For example:

  • As illustrated in the above chart, many medical procedures are far more expensive here than in other countries.
  • Profit levels in the healthcare industry are often very high, for example: 16.4% for pharmaceuticals, health-care information 9.4%, home healthcare firms 8.5%, medical labs 8.2% and generic drug makers 6.5%.
  • Health insurers, on the contrary, have a very low profit margin, (2.2% in 2009), and so can hardly be blamed for the high cost of healthcare.

The Affordable Care Act greatly expands access to healthcare but does very little to control costs.  The Manhattan Institute’s Avik Roy has outlined a plan, “Transcending Obamacare: A Patient Centered Plan for Near-Universal Coverage and Permanent Solvency” which would reform Obamacare by making it more like two very successful and low cost consumer-driven plans, those in Switzerland and Singapore.
These two countries feature government sponsored health savings accounts, backed up by insurance for catastrophic care.  What happens is that out-of-pocket spending for healthcare per individual is higher in Switzerland and Singapore than it is in the U.S., as indicated in the chart below.
Capture1In other words, the real reason for our high cost of healthcare is that Americans don’t have enough “skin in the game.”  We have very little incentive to hold down the cost of our own care because it is mostly paid for by third party insurance companies.
As the cost of healthcare continues to climb, such changes are already beginning to creep into the health insurance market place.  Private companies are raising the deductibles on the insurance plans which they subsidize.  The bronze, silver, gold and platinum plans on the ACA exchanges differ largely by the level of the insurance deductible.
Avik Roy’s plan referred to above in essence speeds up the process of converting the ACA into an efficient, consumer-driven healthcare system by making it more flexible and therefore more adaptable to market forces.

What Will True Healthcare Reform Look Like?

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My last post, “Progress on Medicaid Reform,” discusses innovations that several states have adopted to improve the delivery of Medicaid and to make it more cost efficient. But what we really need is a complete overhaul of American healthcare, including the Affordable Care Act, as I have also recently discussed, in order to eliminate perverse marketplace incentives as well as to achieve real cost control.
CaptureAn excellent discussion of what real healthcare reform would look like is given by John Goodman in, “Healthcare Solutions for Post-Obamacare America.” Mr. Goodman gives six principles for commonsense reform:

  • Choice. People should be free to choose a health plan that fits individual and family needs, rather than one designed by bureaucrats in Washington. This means no mandates, either for individuals or employers.
  • Fairness. Any subsidy should be in the form of a fixed sum tax deduction or credit and everyone should get it as long as they obtained credible private health insurance. The amount of the subsidy would be comparable to the cost of Medicaid enrollment.
  • Universal Coverage. Since some people will turn down the offer of a tax credit, unclaimed credits can be used to reimburse safety net healthcare institutions.
  • Portability. Portability insurance should be available to employees in case they change jobs or become self-employed.
  • Patient Power. Health Savings Accounts need to be made more available and also more flexible so that they can wrap around any third-party insurance plan, as indicated in the above chart.
  • Real Insurance. Under ACA millions of people are losing access to out-of-network providers. People should be allowed to purchase “change-of-health-status insurance” in case they develop expensive-to-treat conditions.

The ACA addresses the access problem for healthcare but has little effect on the cost problem.  American healthcare, both public and private, is way too expensive.  This is why fundamental change is still needed.