Free-Market Medicine

A four-point plan for health-care reform.

By Paul Howard
Wednesday, August 20, 2008

If you’re not depressed about America’s “private” health-care system, you’re probably living in a cave somewhere in the Rockies. The bad news seems neverending: health-care costs keep going up, insurance coverage keeps going down, and routine errors — from deadly hospital infections to drug mix-ups — plague the system.

For all of America’s vaunted innovation — we lead the world in creating new drugs and devices that fight disease and save lives — health care is extraordinarily expensive, and quality can be maddeningly uneven. Americans, normally cheerful capitalists, can be forgiven for thinking that government should step in and fix the mess.

That would be a mistake.

After all, government helped create much of the mess to begin with. The tax deduction for employer-provided health insurance, which dates back to World War II, leads employees to choose plans with high premiums (paid with pre-tax dollars), but low deductibles for routine care, driving up health-care costs. Medicare pays for quantity of care, not quality — leading to massive spending disparities in care for chronically ill patients across the country; data from Dartmouth researchers shows that more money doesn’t translate into better care. Meanwhile, other state and federal regulations strangle innovation and discourage competition.

The solution is to make health care much more like other sectors of the economy, where competition drives entrepreneurs to offer a wide range of affordable products and services to consumers — like $300 laptops, cut-rate vacation packages sold online, and discount brokerage firms. To unleash a new wave of entrepreneurial energy in health care, policymakers should focus on a four-point plan of action:

Play fair in health care
Imagine charging low-income Americans more for health insurance. Outraged yet? We already do that. The tax deduction for employer-provided health insurance favors higher-income workers, who get a bigger deduction and are more likely to work at firms that offer insurance. Low-income Americans working at jobs that don’t offer insurance end up paying much more for their insurance out of pocket — if they can even afford it. The tax penalty against individually purchased health insurance (30 percent or more, depending on income) is regressive and unfair.

A tax deduction or tax credit for everyone who purchases their own health plans would be much more equitable, giving millions of uninsured access to insurance. A risk-adjusted voucher for our poorest, sickest patients (think cancer) would allow them to buy into insurance markets and encourage insurers to seek them out. Employers, unions, and other civic groups could act as buying clubs for their members — helping them navigate the system and find the best values.

One nation, one market
A 2007 study from eHealthInsurance found that monthly individual insurance premiums ranged from a low of $98 in Iowa to $338 in New York; the national average was $148. The disparity is partly explained by state regulations (like mandated coverage for chiropractors) that drive up costs. It’s time America became one market when it comes to health insurance — allowing consumers to buy insurance from across state lines. Freed from expensive state mandates, insurance would become more affordable, consumers would have more choices, and companies could target marketing efforts at the uninsured, newly empowered with tax-advantaged dollars.

Stop being part of the problem
When it looked like retail health-care clinics might open in Boston, Mayor Thomas Menino went ballistic: “Allowing retailers to make money off of sick people is wrong.” Menino’s kneejerk response is typical of policymakers who think markets and health care can’t mix. They couldn’t be more wrong. In a recent report from the Deloitte Center for Health Solutions, researchers found that retail clinics in the U.S. have grown from about 200 in 2006 to over 1,000 this year, getting high marks from consumers for convenience and quality of care. Compared with a doctor’s office or ER visit for minor ailments, retail clinics offer consumers accessible, high-quality treatments at an affordable price. Deloitte praises the clinics as an innovation whose “potential is profound.”

Retail clinics prove that high-quality care can be delivered by skilled nurse practitioners in non-traditional environments — but some states, like New York, prohibit the “corporate practice of medicine” (which limits the ability of for-profit companies to employ health care professionals) or try to slap retail clinics with restrictive regulations that drive up costs. State “certificate of need” laws also prohibit competitors from challenging local hospital monopolies with higher quality or more affordable services. Rather than stifling innovation and competition to protect existing providers (like nonprofit hospitals), policymakers should throw out their old assumptions and find new ways to encourage choice and competition in health-care markets.

The feds need to lead by example
Would you rent a television for $7,000 over three years if you could buy it for a tenth that price? No? Well, Medicare would. Medicare pays fixed prices for Durable Medical Equipment, set by 1980s-era regulations. According to HHS Secretary Michael Leavitt, Medicare rents an oxygen concentrator at the price quoted above — with Medicare patients shelling out a 20-percent co-payment for the rental ($1,418) — that it could buy outright for only $600. When Medicare was set to implement a competitive bidding program for DME last month, Congress killed it.

Government spending on health care, particularly for Medicare, is out of control and unsustainable. One of the few bright spots is Medicare Part D, where competition and consumer choice for prescription drugs have made the program a success with seniors and saved taxpayers billions of dollars. If Congress is serious about lowering health-care costs and sustaining Medicare for the long haul, it will have to embrace competition and choice throughout the program.

The best thing that government can do to “fix” health care is to make it more like other, more competitive sectors of the economy by setting the basic rules for competition and transparency, policing fraud and corruption, and then getting out of the way and letting markets and consumers decide what works. This is the formula that explains America’s leadership of the global economy — and it’s a long overdue prescription for health-care reform.