Towards a free market in health care

Last week Greg Mankiw highlighted a 1994 paper on health care coauthored by Eleftheria Maratos-Flier and Jeffrey Flier, the current dean of Harvard Medical School, that is so insightful it still resonates today. Mark Perry also took a look at the paper and was quite impressed, giving particular attention to the impact of licensure. I finally got around to reading it today and offer my own summary.

The paper begins by arguing while health care reform efforts are typically approached from the perspective that government intervention is needed to correct market failures, such action has actually spawned many of the ills that plague this sector through flawed public policy. Nevertheless, the need for government intervention is often premised on at least one of three beliefs:

• People suffer from information asymmetry and are thus incapacitated in their decision-making.

• When ill or injured people are frequently unable to formulate calm, rational decisions.

• Cost considerations may result in people electing to forgo needed medical care.

To these the authors respond that:

• Market adaptations have helped to overcome the asymmetry problem.

• Most decision making about health care insurance and provider does not take place under the duress of illness.

• The freedom to make unwise decisions about medical care is a hallmark of a liberal society in which people are free to make poor decisions about many other aspects of their life.

The authors then go on to explore reasons for the cost explosion that has taken place in health care in recent decades. While demographics and technological advancements play a role they lay most of the blame on:

• The use of "cost plus" hospital reimbursement -- full cost plus a small additional payment as profit -- by Medicare/aid which discouraged financial responsibility.

• Tax subsidies for "first dollar" health insurance that led to a diminished use of catastrophic plans with high deductibles.

• Greater utilization of insurance which removes the linkage between the consumer and payment for services rendered.

• Mandated coverage by state governments, including for items such as acupuncture and in-vitro fertilization, that pushes up the cost of insurance.

• Tax policy that effectively punishes those who self-insure rather than through their employer.

Next is a discussion of what a free market health care system might look like and its characteristics. These include:

• Patients, rather than third parties such as insurers and employers, being the principal buyers of health care and insurance.

• Physicians would principally be the agents of patients instead of insurers or government.

• Hospitals would cease being agents of physicians and insurers and instead compete on price and quality for patients.

• Health insurance companies would be in the business of hedging against risk instead of buying, managing and rationing health care.

• Employers would act as agents for their employees, facilitating informed decisions and monitoring insurers. However, if they are not up to the task employees could remove them from the equation without being financially punished.

• Government could serve as an insurer of last resort, paying insurance premiums for indigent policyholders rather than directing purchasing health care for them.

Steps that could be taken to move more towards this free market direction:

• Tax equity on health care expenses regardless of employment status.

• The implementation of medical savings accounts.

• The replacement of licensure with certification to increase the supply of health care professionals.

• A review of regulatory barriers including those that stand in the way of lower cost medical education.

• Vouchers or tax credits to accommodate the uninsured and uninsurable.

Sounds like a great plan, and one that dovetails to a large extent with my own. Unfortunately, absolutely none of this is on the table in the current health care reform effort, which simply expands the government role.