Free Market Healthcare

Tuesday, August 28th, 2012 and is filed under Blog, Obamacare

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Over the past few months, we’ve been trying to impress upon conservatives the importance of arguing healthcare from a position of strength.  It’s not enough to merely oppose Obamacare.  We need to show voters how the rising costs of health insurance and healthcare have been engendered by the very interventionist policies that Democrats are now promising in an insidious attempt to fix their original sins.  The subsidies and mandates contained in programs such as Medicare, Medicaid, Obamacare, and Romneycare are the biggest factors in distorting the health insurance market.

In that vein, I found three terrific articles that cut to the heart of the lack of free market healthcare and how it is perpetuating the cycle of government.

The first is from Thomas Sowell, “Politicians Make Health Insurance More Expensive.”  This is one of the most cogent, yet simply written explanations of why healthcare is gratuitously expensive as a result of government intervention.  He rightfully points out how it is the government mandates for coverage that drive up the cost of premiums; how 50 state markets preclude increased choice and competition on a federal market, and how the tendentious treatment of employer-based coverage has exacerbated the problem with coverage for pre-existing conditions:

Too many political “solutions” are solutions to problems created by previous political “solutions” — and will be followed by new problems created by their current “solutions.”

There is no free lunch. In the case of health insurance, there is not even an inexpensive lunch.

Health insurance would be a lot less expensive if it covered only the kinds of risks that can involve heavy costs, such as a major operation or a crippling disability. While such things can be individually very expensive, they don’t happen to everybody, and insurance is one way to spread the risks, so that the protection of a given individual is not prohibitively expensive.

For years liberals have asserted that healthcare cannot follow a market-based system and must include government intervention in order to bring down costs.  It’s kind of like saying you need to rub salt in a wound in order to alleviate the pain.  Chris Conover of the American Enterprise Institute blows the lid off this myth.  Conover points to a controlled study conducted by RAND that shows how effectively consumers respond when presented with an array of health coverage choices that are based on logical market prices:

In 1974, RAND researchers randomly assigned over 7,000 individuals into various types of health insurance policies: ones with completely free care (no cost sharing), ones with a modest deductible (e.g., $200) and 25 percent cost-sharing, and ones with the equivalent of high deductible policies. All the cost-sharing policies had a maximum upper limit on out-of-pocket spending-meaning once a family spent 10 percent of income on health care, the policy paid 100 percent of remaining medical bills for the balance of that year. […]

The observed differences between these different groups were remarkable. Average health spending for individuals receiving free medical care was 32 percent higher than for those who had to pay a quarter of the bill out of pocket. Some of this extra care admittedly was valuable, but fully 93 percent of that spending difference came in the form of “waste” rather than added value to the patient. The kicker was that for the average patient, there was no measurable difference in health status between the two groups.[…]

More remarkable still is that the RAND study was a “demand side” experiment that only enrolled a few thousand families across the country. Thus, there was no incentive for the supply side to change in response to the relatively small number of patients incentivized to shop more wisely in the medical market. In a world where many more patients were fully responsible for front-end health spending and used health insurance only for catastrophic back-end expenses, we would expect to see the kind of fierce competition (and even price advertising!) we see in markets for Lasik surgery, for example. This makes the potential for savings from a market-oriented system relative to a single-payer “free care” system such as Canada’s even higher than those discovered by RAND.

The reality is that despite the federal control over almost every aspect of healthcare for seniors, there are a few areas where there is some market involvement.  And in those programs, costs are rising much slower than under programs with no market involvement.  For all the talk of how a voucher or premium support program is so risky and revolutionary, we already have a similar plan for almost 30% of seniors.  It is called Medicare Advantage – Medicare Part C.  Seniors who join Part C are presented with more choices for private health plans that join a competitive bidding process similar to Ryan’s proposal of premium support for Parts A and B.  Seniors are so happy with Medicare Advantage that Obama was forced to create a slush fund in order to reimburse the program for the cuts that he proposed under Obamacare, lest he incur their wrath.

In an informative article earlier this month, NRO’s Reihan Salam explains that to the extent Medicare Advantage has failed to lower costs, it is due to a lack of market forces:

It is important to understand that the Medicare Advantage program is really weird. Payments to Medicare Advantage plans are based on centrally determined benchmarks. But these benchmarks are thus not a very helpful guide to what might happen under competitive bidding.

Imagine that there is a federal program devoted to providing seniors with cheeseburgers. There is a publicly-run cheeseburger assembly plant that needs $15 to produce a quarter-pound burger with a toasted bun, a sliced tomato, and cheddar cheese. Costs have been rising over the years as the price of the discrete components of this standard cheeseburger have been rising, for a variety of complex, interrelated reasons. In recent years, the federal cheeseburger program has allowed cheeseburger beneficiaries to choose private cheeseburgers at public expense. Various private cheeseburger firms bid for the right to take part in this bonanza of subsidies, and on an enrollment-weighted basis they bid $14 — a bid that reflects what they need to produce that same quarter-pound burger with a toasted bun, a sliced tomato, and cheddar cheese plus enough to turn a profit.

But rather than pay these private cheeseburger firms $14, the amount of the bid, the federal cheeseburger program has devised a complicated benchmark based on what it costs the publicly-run cheeseburger assembly plant to produce said cheeseburger. The end result is that private cheeseburger firms are in many cases paid $16 to take part in the program. This doesn’t mean they pocket an extra $2 in profit, however. These private cheeseburger firms could be required to offer more or higher-quality ingredients — grass-feed beef, romaine lettuce, muenster cheese, fried onions, and so forth. So it is true that these private cheeseburgers cost the system more than the public cheeseburgers. But this reflects the benchmark and, in some cases, the fact that we’re not making an apples-to-apples comparison. And it wouldn’t surprise me if private cheeseburger firms were quite happy with the benchmark system rather than a straight-up competitive bidding system. Why wouldn’t they be?

Healthcare reform is going to be a long arduous process.  We can’t roll back a half century of socialism in one day; however, we must begin educating voters that the current vices of the system are a result of too much government involvement in healthcare, not a lack of intervention.  Voters must learn to view health insurance through the same lens that they view other products and services.  Healthcare will never work as a perfect market, but until voters are exposed to some of the costs, we will all be exposed to all of the costs.