The Free Market Solution to Rising Health Care Costs

Posted by Enrique on 08.07.2008

Poison was the cure



We all know that health insurance costs are increasing, but most of us are ignorant about the intricacies of the health care system. Our elected representatives are equally uneducated about the economics of health care, which is unfortunate, because their usual solution to a problem involves expanding government power. As many as 47 million Americans are currently uninsured, and many well-meaning politicians believe the best way to help them is by creating a government monopoly on health care. And I'm sure many patriotic Americans agree with them.

I don't claim to be an expert on the American health care system. Hell, I can barely dress myself in the morning. Still, I've always had this crazy notion that free people and free markets are really terrific. If capitalism has gotten us this far, surely it's part of the solution to one of the most pressing issues of our time. For our story this week, let's look at new warning signs from Oregon and Massachusetts of the downsides of government health care, and examine whether or not free markets are the cure for what ails us.

The story so far…

When pollsters ask "Do you favor universal health care?" most American say they do. Pollsters never ask "Do you favor a government health care monopoly rife with inefficiency and rationing of medical services?" but that's beside the point. Many, if not most, Americans are very comfortable with the idea of government-run health care. After all, we already have Medicare, and most states offer some kind of health coverage for disadvantaged residents.

Oregon has a decade-old program that insures low-income families called the Oregon Health Plan. A couple of months ago, 64-year-old Barbara Wagner of Springfield had a recurrence of lung cancer, and was prescribed a cancer drug that cost $4000 a month. OHP bureaucrats denied it, offering instead to cover the cost of maintaining Wagner's comfort while she died. The fact is, when you make cancer treatments "universal," the only way to cope with the increased demand is rationing:

"We can't cover everything for everyone," said Dr. Walter Shaffer, medical director of the state Division of Medical Assistance Programs, which administers the Oregon Health Plan.

"Taxpayer dollars are limited for publicly funded programs. We try to come up with polices that provide the most good for the most people. Most cancer treatments are high priority on the list," Shaffer said.

This is the natural consequence of delegating the responsibility for our wellness to the government. When public money is involved, the government needs to make decisions on whose life is worth prolonging. Luckily for Ms. Wagner, the drug company Genentech offered to foot the bill for her treatment. Imagine that – a private, profit-driven corporation exhibiting more compassion than the government. Boggles the mind.

A few years ago, the state of Massachusetts created a plan called Commonwealth Care, which provides coverage for residents earning up to 300% of the poverty level. It was an achievement Mitt Romney frequently touted during his failed presidential bid. It's amazing to think we've arrived at the point where a Republican candidate thinks it's good politics to brag about his own fiscal ineptitude:

As [Commonwealth Care] gets overwhelmed, budget gaskets are blowing everywhere. Mr. Patrick had already bumped up this year's spending to $869 million, $144 million over its original estimate. Liberals duly noted that these tax hikes are necessary because enrollment in Commonwealth Care is much higher than anticipated. But of course more people will have coverage if government gives it to them for free. The problem is that someone has to pay for it.

Thus the extra tab of $129 million, which may need to go higher because it relies on uncertain federal funds from Medicaid. For now, [Governor Deval] Patrick wants one-time (yeah, right) charges of $33 million on insurers and $28 million on providers, plus some shuffling of state funds. The balance comes from an estimated $33 million boost in the state's "pay or play" tax: If businesses don't offer "fair and reasonable" insurance to their employees, they get hit.

As the Wall Street Journal notes, those "one-time" costs will be passed on – to employers through higher premiums, and thus to employees through increased withholdings. Those insurers and providers won't pay the tax – the people of Massachusetts will pay it for them.

Despite the obvious drawbacks of government health care, many Americans are skeptical that the profit-driven private sector can provide equitable solutions. In fact, a significant number of people seem to believe that our current health care system demonstrates the failure of the free market to provide affordable health care services. But the U.S. health care system isn't anything close to a free market. Although many health care providers are private corporations, by and large they are insulated from competition by government regulations. You can't have a free market without competition.

You and I can't buy health coverage across state lines, meaning insurance companies don't have to compete nationally. And even if they did, every state legislature has laws requiring insurance companies to cover a wide variety of services in order to operate. It costs a lot of money to cover all these mandatory treatments and surgeries, but insurance companies happily pass those costs on to the consumer. After all, what's the consumer going to do? Move to another state with different health insurance regulations? There aren't any U.S. states without mandates on health coverage. Certainly, such mandates vary by state, but how many uninsured people have the wherewithal to pull up stakes and move to a different state with marginally less restrictive insurance regulations? No other industry in America is insulated from competition like the health care sector.

How can we be sure that competition will drive down the cost of medical services? Because competition has already reduced costs in one sector of the health care industry – elective cosmetic procedures:

When patients are in control of their health-care spending, things get better. Lasik surgery isn't covered by most insurance policies, so patients pay for this high-tech procedure out of their own pocket. It's for this reason that laser surgeon Brian Bonanni gives out his cell phone number and e-mail address to all of his patients. He knows that he has to attract patients by making himself available.

Competition has also made Lasik cheaper: While in nearly every other field of medicine, prices have gone up faster than consumer prices in general, the price of Lasik has fallen by as much as 30 percent. The quality of the surgery has also improved. The difference is that people care about prices when they spend their own money, so providers compete to offer services that are faster, better and cheaper.

The answer to rising health care costs is medical reform that restores competition to the health care market. Reason Online has a terrific article that looks at how government has protected the health care industry, and provides another example of how competition drives down costs:

The "solution" is either socialized medicine (with government control over costs and availability) or competition and transparency. The latter should be the American solution. However, federal and state governments often make competition very difficult. Still, it is slowly appearing. New services advertise basic heart and blood tests for about $200, as compared to more than $2,000 in most hospitals. A new system of "Minute Clinics" are appearing in some CVS drug stores for $59 per visit, and Wal-Mart is starting up similar clinics with $4 generic medicines. These clinics are staffed by nurses and backed up by doctors and databases. They can handle some 80% of common ailments. However, many states restrict them and the American Medical Association is now attacking them. Such systems could provide major savings for many children's sicknesses and save parents immense amounts of time spent waiting for doctor's appointments.

Some folks may be squeamish about relying on Wal-Mart for health care. But when you're uninsured, a company like Wal-Mart can provide affordable access to non-emergency medical services. So naturally the AMA – which is made up of doctors employed by hospitals and health care groups that hold regional monopolies – wants to create a barrier to Wal-Mart entering the market.

Of course, Wal-Mart can't drive down health care costs on its own. Reform will only happen when enough Americans become educated on the economics of health care, and demand less intrusive government regulations. I don't expect that to happen any time soon, but that doesn't mean I'm not doing my part to reduce health care costs. As of this writing, I smoke approximately one pack of Marlboro "ultra light" mentholated cigarettes per day. If I keep it up, I'll die relatively young, and won't be a burden on the system. No need to thank me.