by Steve Forbes
It is important to emphasize that America’s healthcare achievements come from the private-sector portion of its healthcare economy. Creativity lags where there is more government involvement—for example, in Medicare and Medicaid. But where the market is least constrained, exciting innovations in healthcare delivery are springing up.
According to John Goodman, founder of the National Center for Policy Analysis, these innovations include walk-in clinics in shopping malls that are providing fast, inexpensive service treating colds and providing immunizations and other routine care. No insurance is needed. Other entrepreneurial solutions include telephone consultation services, such as TelaDoc, which provide hard-to-get telephone consultations with a doctor, and mass marketing drugs through big chains like WalMart, which has helped bring down the prices of many drugs.
Prices have come down, and service has improved in medical specialties not covered by insurance—such as cosmetic and LASIK eye surgery. That’s because doctors work harder to please patients who are directly paying for their services. Not only that, Goodman says that prices in these specialties have fallen “despite a huge increase in volume and considerable technical innovation (which is blamed for increasing costs for every other type of surgery).”14
Innovation is flowering in less-regulated nations such as India, where an increasing number of Americans are seeking low-cost care. John Goodman says that these hospitals, which specialize in serving “medical tourists,” provide “high-quality care in facilities (and by physicians) that meet American standards” at one-fifth to one-third the cost in the United States. In addition, they offer customer-friendly conveniences including “package prices that cover all treatment costs, including physician and hospital fees, and sometimes airfare and lodging as well; [and] electronic medical records.”15
Why are such innovations produced mainly by free markets? Because government simply does not have the bandwidth of a marketplace where thousands of individuals and companies are testing myriad ideas until they come up with the best solution. Galen Institute president Grace-Marie Turner writes,
No one in Washington, no matter how brilliant he or she may be, can possibly be smart enough to devise a centrally-controlled system that can meet the health care needs of 300 million Americans. Only the genius of a dynamic market can respond to the demands of consumers for better quality at more affordable prices.16
REAL WORLD LESSON
In health care as in all markets, the free market is a better innovator than government because ideas are developed by many more people.
Q DON’T WE NEED GOVERNMENT INTERVENTION BECAUSE THE HEALTHCARE MARKET IS TIPPED AGAINST CONSUMERS, WHO AREN’T ALWAYS IN A POSITION TO CHOOSE WHEN THEY NEED MEDICAL CARE?
A NO. HEALTHCARE COSTS ARE HIGH NOT BECAUSE HEALTH CARE IS “DIFFERENT,” BUT BECAUSE INDIVIDUAL PATIENTS MOST OFTEN ARE NOT THE ONES MAKING THE BUYING DECISIONS.
Illness isn’t voluntary. For that reason, some argue that health care is not like other markets. You can’t always choose when and how you will use medical care the way you can choose to take an airplane flight. You can’t bargain for the best price, obviously, when you are being rushed to the hospital.
People who buy into the Rap on capitalism say the fact that health care is “different” is one reason why costs are so high and government involvement is needed. The balance is tipped unfairly against consumers. This is especially true, they say, when it comes to older and lower-income people, who need health care the most but who may be least able to make the right decisions about their care and coverage.
Yes, people may be incapacitated when they need care. There are unique conditions in every market. But the same Real World economic principles still apply: the best way to deliver the greatest level of benefit—i.e., quality services for the lowest cost to the most people—is through a market that allows people the broadest latitude to figure out ways to meet one another’s needs, where both consumers and producers have the greatest number of options and free choice.
Such conditions do not exist for virtually anyone in today’s statedominated healthcare system. The choices not only of consumers, but of doctors, hospitals, and insurers are dramatically restricted. Patients have to buy expensive insurance plans that limit how and where they see a doctor. Doctors and hospitals are locked in to making their money from third-party payments from both private and government insurers whose reimbursements function like de facto price controls and govern practice decisions.
This rigid system keeps them from coming up with better pricing solutions and new ways of delivering patient-friendly care. That’s not just because hospitals and physicians have to answer to insurance companies—but because price controls prevent them from getting the information they need to respond efficiently to the market. Have you ever wondered why it can be so difficult to find out the cost of an individual hospital procedure? Or why, when you finally do get a price, it seems to be beyond all reason? It’s not just because of Medicare-driven cost-shifting. It’s because hospitals really don’t know what it costs to serve an individual patient—because the individual patient is not their real customer. Thus, they don’t keep track of the kind of information about consumer demand in the way that, say, Starbucks or Walgreens does.
But third-party pay and cost shifting are only part of the story. State governments have added yet another layer of distortion by locking in nonessential coverage with their own regulations. Known as “mandates,” these regulations dictate the services your medical insurance must cover, whether you really want them or not.
Mandates vary from state to state. For example, about one-quarter of states today require that your health insurance cover acupuncture and marriage counseling. No matter if you’re single—or if you view acupuncture as more mysticism than medicine. If you’re in a state with this mandate, you still pay for this coverage. Insurance companies have to price their coverage on the assumption that you might avail yourself of these services—even if you never do.
Imagine if the government forced you to buy food you didn’t want when you shopped for groceries. Your bills would be enormous. That’s what’s happening in health insurance. Because of mandates, the cost of insurance in heavily regulated New Jersey is seven times higher than the same coverage in innovation-friendly Tennessee. The Center for Freedom and Prosperity, a freemarket think tank, calculates that mandates in heavily regulated states can boost premiums by more than 65 percent.
A last comparison: In 2007 the average annual family premium in Massachusetts—which has a heavily regulated state healthcare system that served as a model for the plan proposed by the Obama administration—cost close to $17,000. In New York it cost more than $12,200. In lightly regulated Wisconsin, the average family premium is only about $3,000.
Heavy state regulation of insurance also means that coverage cannot be sold across state lines. The result: smaller insurance risk pools. The funds available to cover you are not based on your insurer’s clients across the country. Risk pools are based on the size of your company’s workforce or your insurer’s clients within your state. The limited size of risk pools is one reason some patients with expensive conditions may get dropped by their insurers—their particular risk pool isn’t large enough.
Keeping sales of insurance confined to individual state markets also means that there is less competition among insurance companies—and higher premium prices.
All of this would change if you, the patient, were directly buying your insurance and health care. We discuss how consumer-driven reforms, such as making health savings accounts widely available and legalizing the selling of insurance across state lines, would restore sanity to the pricing of both medical care and insurance. Without the distortion of third-party payment, health care would not be so “different” and would begin to offer the variety and choice of other markets.
REAL WORLD LESSON
Buying health care may not be the same as buying an automobile. But that’s because government and private
insurers—and not you, the consumer—buy most health care.
Q WHAT’S WRONG WITH A GOVERNMENT-OWNED HEALTH-INSURANCE COMPANY IF THERE ARE ALSO PRIVATE HEALTH INSURERS?
A GOVERNMENT WILL EVENTUALLY PUSH OUT PRIVATE INSURERS.
In the summer of 2009, the Obama administration and congressional Democrats floated their ideas on how to fix the healthcare system: Everyone would have health insurance. People could keep their current policies. But after five years the federal government would have to approve any and all employer health plans. Employers failing to provide coverage would face a penalty.
Individuals who could not get insurance from their employer would be able to buy it from a federal government pool with a government subsidy based on their income. Private insurers, meanwhile, would be required to enroll everyone and give all people the same premium regardless of medical condition.
The problem with this plan is that a government insurer, with its unlimited resources and subsidized, low-cost coverage, would under-price private competitors and eventually drive them out of business. With the government offering low-priced coverage, many employers would figure that they don’t really need to offer private insurance. Many would opt to pay the penalty and let their employees buy from Uncle Sam.
Even if a handful of private-sector insurers remain, government, with its vast resources, will end up imposing its bureaucratic rigidities on the market. Government, after all, has more power than many WalMarts or Microsofts put together. In the Real World, when government dominates a market, it often takes over. Even if you don’t opt to use government insurance, the reimbursement policies of Uncle Sam’s mammoth insurance company will affect the priorities of healthcare providers and ultimately your care. It can force its prices and practices on the private players, forcing them to become, in effect, government appendages. Healthcare and insurance providers would be prevented from developing new market solutions that could potentially address some of today’s problems.
This is the scenario that experts like Sally Pipes of the Pacific Research Institute, Grace-Marie Turner of the Galen Institute, and John Goodman of the National Center for Policy Analysis see unfolding with such a system. Private insurance companies and healthcare providers would endure basically in name only; in practice they would function as subsidiaries of the federal government, carrying out its command-and-control policies.
Regulation would intensify. Healthcare policy analyst Michael Tanner of the Cato Institute reports that supporters of mandatory coverage intend a federal government pool “to regulate all sorts of things, including minimum benefit packages, premium caps, limits on copayments and deductibles, and ‘standards of quality and efficiency.’ ”17 Private insurers will be even less able than they are today to come up with innovative, less expensive plans that serve the needs of their customers.
Mandatory coverage does nothing to reform the fundamental problem with America’s health care—the prevalence of third-party payment for health insurance, which is helping to make coverage and care so expensive. In fact, it promises to make this economic distortion even more severe.
Think of it as extending Medicare beyond the elderly to the rest of the population. The proposed federal government insurance pool is another Medicare-like government insurance bureaucracy. Yes, it will offer people cheap insurance. But this bargain plan will unleash an even greater deluge of artificially inflated demand—on top of what we have now with Medicare and Medicaid.
A federal insurance pool would increase beyond measure the cost-shifting that has already hyperinflated the prices of medical care and insurance. Why would reimbursements from the new healthcare bureaucracy be any less stingy than those from Medicare and Medicaid? For doctors and hospitals this means that an even larger segment of the population will become a money-losing proposition. So what happens? Privately insured patients, and the taxpayer, will shoulder an even greater cost burden than they do now. With cost-shifting on steroids, private insurance would become even more outrageously expensive.
What’s likely to happen next? Calls for more government, of course.
Heritage Foundation analyst Stuart Butler wrote in the New York Times in 2008 that this is exactly what supporters of Canadian-or British-style single-payer health care are counting on. That’s why many aren’t objecting to allowing private-sector insurance to coexist with a federal program. “They see this seeming competition model evolving into their kind of system.”18
In 2006, Massachusetts adopted a mandatory coverage plan that’s basically a smaller-scale version of what today’s universal health care advocates are proposing. Like the federal plan currently under consideration, Massachusetts requires all residents to have insurance. Those who don’t buy it privately can buy through the state. It’s been a colossal failure. Sally Pipes’s analysis is that the program has caused costs to “explode.” Even tax hikes haven’t been sufficient to fund the system. As a consequence, “the entire system is only possible due to sizable transfers from the federal government.”19
What about cooperatives? Skeptics fear that these will only be disguised versions of a federal insurer—sort of a state and medical version of Fannie and Freddie. Whatever the version, a government-based system will fail to work. Will we have to ask China to fund our health care?
REAL WORLD LESSON
A government-dominated economy with private-sector players is not a free market and tends to lead to even greater government control.
Q BUT DON’T WE NEED REGULATIONS TO MAKE SURE HEALTH-INSURANCE COMPANIES COVER THE SICKEST PATIENTS?
A “GUARANTEED-ISSUE” REGULATIONS THAT FORCE COMPANIES TO INSURE EVERYONE ACTUALLY HURT HIGH-RISK PATIENTS BY MAKING THEM MORE EXPENSIVE TO COVER.
Advocates of national, government-mandated universal coverage believe it should force companies to insure everyone. Otherwise, they insist, insurers will “cherry pick” patients—they will keep healthier ones and drop the sickest people, who need coverage the most. Some states already require insurers to accept everybody. Such regulations are known as “guaranteed issue.” Despite their good intentions, guaranteed-issue regulations are a major reason that health insurance in states like New York, New Jersey, and Massachusetts has become almost unaffordable.
Merrill Matthews, director of the Council for Affordable Health Insurance, notes that:
“[G]uaranteed issue” …requires insurers to sell insurance to anyone willing to buy it, regardless of their health, or other factors that may make it much more expensive to cover them. New Jersey, for example, enacted guaranteed issue in 1994. At the time, a family policy could be purchased in the state for as little as $463 a month or as much as $1,076, depending on which of the 14 participating insurers a family chose. Now there are just 10 insurance companies offering plans in the state and the cost has soared to $1,726 per month on the low end and $14,062 on the high end.20
Well intentioned though they may be, Matthews says, guaranteed-issue regulations have so inflated the cost of coverage that “many states are ‘protecting’ their residents right into the uninsured camp.” They are one of the reasons that there are forty-six million uninsured.
Matthews believes “the best solution is to let the health-insurance market work for the vast majority of Americans and create a safety net for those who can’t get coverage.”21 For the small number of hard-to-insure individuals with preexisting conditions, he advocates high-risk pools that take all comers. The government, in partnership with the insurance industry, would fund these nonprofit insurance organizations.
Right now, some thirty-four states offer some kind of high-risk insurance to about two hundred thousand Americans. The problem has been high premium costs for those who enroll, which can make state funding difficult. High-risk pools are expensive for the same reason that ordinary health insurance is expensive—state mandates. Like private insurance, high-risk plans have to cover everything—not just catastrophic care but those nonessentials that people may not need. Merrill Matthews and others bel
ieve that high-risk pools would be less expensive and work better if the broader insurance market were deregulated and requirements like mandates were eliminated. One of the states where high-risk pools work, Matthews says, is Wisconsin, where there are fewer state regulations and consequently lower premium costs.
Allowing insurance to be sold across state lines would make it easier and cheaper to privately insure sick people. Insurance risk pools would be larger and there would be greater competition. Fewer people would need to enter high-risk pools in the first place.
University of Chicago economist John Cochrane has proposed another way to pay for patients who suddenly develop “preexisting conditions” that prevent them from changing insurers or getting new insurance—supplemental health-status insurance. The coverage would be separate from the person’s main policy. Cochrane explains: “Medical insurance covers your medical expenses in the current year, minus deductibles and copayments. Health-status insurance covers the risk that your medical premiums will rise.”22 Health-status insurance would provide you with a large, lump-sum payment to cover future premium increases if you become sick. This supplemental plan would be portable and consumer driven. Cochrane estimates it could cost about seven hundred dollars per year at age twenty-five, rising to nine hundred dollars per year at age fifty-five.
Not only would health-status insurance help to protect people from soaring premiums, but it would make insurers less likely to drop sick people. Says Cochrane: “Constant competition for every consumer will have the same dramatic effects on cost, quality, and innovation in health care as it does in every other industry.”23
REAL WORLD LESSON
The Real World consequence of forcing insurance companies to cover everyone is that it makes premiums less affordable—making it harder to insure the sickest patients.
Q DON’T DRUG MAKERS GOUGE CONSUMERS IN A FREE MARKET?
A NO. GENERIC AND OVER-THE-COUNTER DRUGS ARE USUALLY CHEAPER IN THE UNITED STATES. NEW DRUGS ARE EXPENSIVE BECAUSE OVERREGULATION INFLATES THE COST OF DRUG DEVELOPMENT.
