Free the health care market

The rate at which health care costs are rising in the United States is staggering. Within the past health care costs have risen over 100 percent. Per capita spending is nearing $8,000 and an increasing number of Americans are going without care due to an inability to pay. Many countries, including most highly developed countries, have some sort of government-assisted payment plan. It would seem that our country’s approach to providing reliable health are to our citizens is failing. Such an assessment would be misleading, however, as it fails to take into account the full purpose of the health care industry. While on one hand Americans depend on the health care industry to provide care, they also rely on the same industry to innovate, develop new technologies, and medicines. While the United States may not provide universal coverage, we perform surprisingly well in the field of innovation. The U.S. leads the world in pharmaceutical research, with seven of the 12 most productive firms being American. Also the U.S. is the leading producer of medical technology and medical professionals. Given those facts, it is no surprise that our country is also the world’s largest attractor of medical tourism (the practice of leaving one’s home country to pay for care abroad). There remains the problem of affordability, however, and the difficulty of reducing cost without affecting the quality.

Until recently, there had been very little comprehensive reform regarding the health care industry. As a result, many believe the system is governed by a largely free market system, and as such it is the free market that many believe has failed them. That, however, is not true. Though no comprehensive legislation has been passed, the free market nature of the health care industry has been slowly eliminated in a piecemeal fashion. It is, therefore, important to realize that there are options apart from jumping straight to a government-assisted program that will help our medical system push costs back down again using a laissez-faire approach.

One of the great strengths of a free market is its propensity to drive excess profits out, thereby driving costs for consumers to the lowest possible level. That feature (called perfect competition, in economics) is dependent upon no barriers to entry into the market existing, and no differentiation between goods and services. It is for this reason that the commodities market (i.e. wheat, ore, etc.) fluctuates with almost direct market correlation, while airplanes are a bit more removed from the market effects.

The health care industry is about as removed from competitive market forces as any industry gets due to requirements to perform virtually any service. An MD is required, for instance, to perform a colonoscopy. Such a procedure is important for most individuals over the age of 40 to have performed. The procedure is simple and any results must be analyzed later anyway, but despite the fact that any RN is capable of performing the service, only an MD is legally permitted. That creates a situation in which the supply of providers is far outstripped by the number of individuals who need the procedure due to the fact that a medical degree is one of the most difficult degrees to acquire in the United States.

Another barrier for health care costs is actually linked to a separate industry: insurance. One of the reasons why health care costs have become so high is not due to the fact that we have 50 million Americans uninsured, but because we have 260 million who are insured. To see how that came to be, it is important to realize that most of those Americans have gained coverage through employer-provided insurance. Employers began providing health insurance mid-20th century in order to provide compensation for their employees who would avoid taxation. Today, many employer-provided perks have become taxable income, but health insurance has been chosen as a fringe benefit (meaning it remains non-taxable). If one’s employer does not provide him with health insurance, however, the amount spent by that individual throughout the year on his privately purchased plan is not tax deductible, which essentially creates a premium cost that varies with each individual’s marginal tax rate. One thing the government could do to alleviate that burden is to extend the tax break from the business to the individual.

A further suggestion to help alleviate the cost of insurance concerns consumer choice. The government’s prohibition of interstate competition places a drastic limitation upon consumer choice, which prevents consumers from being able to shop for the best possible provider. Such choice would help the profitability of the provider as well as the price for consumers by allowing more consumers to invest in the same plan, creating economies of scale for the insurance provider.

Furthermore, choice is limited in what coverage companies can offer to begin with, as well as what the companies can legally charge in deductibles (the current limit is $5,800). Such limitations force consumers not at risk for certain diseases to pay for that coverage. In addition, the deductible limits consumer’s ability to trade more risk for more return, as well as a provider’s ability to hedge risk with a higher premium. Any consumer that falls outside of the range of regulation will end up not purchasing care at all (because they are healthy and don’t want to pay for excessive coverage) or will be denied coverage (because providers cannot take on their risk without a higher deductible).

The health care market is complicated and misunderstood. To jump straight to a government-funded solution before first addressing what has made our system what it is, is both reckless and ill-informed.

 

By Mark Davis

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