If you want to know what the solution to America’s health-care problems looks like, reach into your pocket: About 90 percent of Americans own cellular phones, up from less than 1 percent 20 years ago. The cell-phone market is a highly democratic one in that working-class and poor Americans have access to roughly the same range of products and services as middle-class and wealthy Americans, and practically everybody has access to products and services that 20 years ago were reserved to millionaires, to the extent that they were available at all. Remember those gigantic cellular bricks that Wall Street traders toted around in their briefcases back in the 1980s? Those were pricey status symbols in the Reagan era — Motorola’s two-pound DynaTAC 8000X cost the equivalent of $9,000 in today’s money, and the service fees were enormous — but using one today would get you laughed out of the poorest trailer park or housing project in America.
Americans are used to seeing some products and services getting better and cheaper all the time. But some services don’t, and they’re important ones: health care and education are the best examples. The market for health-care services is a lot like the market for cellular phones: It is driven by technology and innovation and, because the capital costs of building a cellular network or a hospital MRI clinic are substantial, the markets tend to be more efficient when there are larger numbers of participants. If you could take an iPhone back to 1982, it would seem like something out of science fiction. But a 2009 visit to the doctor’s office is depressingly similar to a 1982 visit to the doctor’s office, and in many ways is worse: It’s more expensive, the insurance and billing systems are even more frustrating, and the record-keeping is frequently defective. The system is plagued by fraud, waste, and malfeasance. There have been some great innovations in medical technology, but there has been regress when it comes to affordability, freedom of choice, and transparency. Why?
The most important difference between the market for cell phones and the markets for health care and education is this: who spends the money. If you buy a cell phone, you spend your own money to meet your own needs, and you have an incentive to get the best value for your dollar. It’s a pretty competitive market, so providers have to answer to you. AT&T may be a powerful corporation, but the lowliest consumer has the power to fire it and choose another provider. You are in control. In health care, you have to convince somebody else — either an insurance company or the government — to spend money on you, and other people don’t really want to spend money on you. The government has an incentive to ration or deny care, and health-insurance companies have an incentive to create impenetrable bureaucratic barriers between you and their money. There’s a reason why claims forms are so complicated, and it’s not that there aren’t enough English majors to go around. In return, you don’t care how much a particular medical treatment costs, only whether your insurance or government plan will cover it — but you’d never buy a $9,000 cell phone. Milton Friedman described the four ways to spend money, and the health-care system uses the worst of them. Economists call this a “third-party-payer problem,” and it is at the root of much of what ails our health-care system.
There is much to lament about that system, and real reform is needed. A meaningful body of reforms would do three things: 1) establish a real market for health-care services and health insurance, one that is fiercely competitive and driven by consumers who are not beholden to their employers, the government, or any concern other than their own needs; 2) take intelligent steps to reduce the expense of health care and health insurance, and the bureaucracy attached to them; 3) offer intelligently designed support for the poor, the sick, and other vulnerable participants in the market.
Here are ten things that would go a long way toward getting that done:
1) Insurance Choice. The third-party-payer problem isn’t limited to insurance companies and government programs. Every company says that its people are its most important asset, but you’ll notice that your name doesn’t show up on the balance sheet. Your employer’s motives in shopping for insurance are different from yours: For the boss, insurance is just another personnel expense, something to be included in wages. (Don’t worry, your salary is getting docked to offset the expense.) Most companies offer two or three options to their workers, and some only a single option, even though the 22-year-old kid in the mailroom has radically different needs from the 46-year-old mother of two. But you’re stuck getting your insurance through your employer, because the tax code makes it very difficult and very expensive to buy your own insurance. The first reform would be to give Americans refundable tax credits against the purchase of personal health insurance, thereby equalizing the tax treatments of individual and employer-based insurance spending. You don’t buy your groceries at the company store, and you shouldn’t have to buy your health insurance there, either. You buy it, you keep it, you take it from job to job and from city to city, and you don’t lose it if you lose your job.
2) Real Competition: A National Market for Health Insurance. Insurance companies are not your friend. They want to make a profit, and they will do that by charging you as much as they can and by spending as little as they can on you. But the same is true of cell-phone providers. The way to make them behave is to make them compete. Health-insurance companies are, like most of the financial-services industry, incredibly coddled, fat and lazy corporate dinosaurs protected like arctic whales by blubbery layers of regulation, licensing, and market restrictions. One of the most important restrictions is that health-insurance providers have to be individually licensed in every state, an expensive, cumbrous process that prevents the emergence of a competitive, nationwide market in health insurance. This problem is compounded by state-level mandates that force consumers to buy coverage they may not want or need. (Really, does everybody in Montana need coverage for infertility treatments? Everybody?) The second reform would be to let any insurer sell a policy in any state to anybody who wants to buy one — empowering consumers to shop in a large market and, equally important, to escape state-level mandates that force them to buy coverage they do not want or need. In most states, the health-insurance market is dominated by one or two big players who have no real incentive to improve their prices or services. It’s time to make them sweat.
3) Price Transparency. Here’s an experiment for you: Pretend that you need a particular medical service — anything from a heart stent to having a broken finger set — and then call around to your local hospitals to see what it would cost. You will have a hard time getting an answer, and in many cases will not be able to get one at all. Why? Because doctors and hospitals don’t answer to you — they answer to your insurer, and they have important financial reasons to obfuscate and mislead when it comes to pricing. Keeping price information out of patients’ hands allows providers to pad the bills and inflate prices. Partly this is done as a defensive maneuver: Insurers don’t want to pay your bills, so they will try to drive down invoices, so providers inflate costs to give themselves a stronger negotiating position. But markets cannot function without prices; if consumers are going to be empowered make their own health-care decisions, providers must make real prices available.
4) High Ceilings for HSAs (and No Taxes). Some things will probably always have to be paid for by insurance: That’s why we have insurance, after all — for catastrophic developments like heart failure, cancer, or car wrecks. But at present we use insurance to pay for everything from flu shots to sex-change operations. The best way to get rid of third-party-payer problems is to have consumers spend their own money — not their insurers’ money, not taxpayers’ money. To that end, health savings accounts should allow Americans to set aside (and invest!) relatively large amounts of pre-tax dollars, and there should be no taxes on interest or capital gains generated by those accounts. Nobody likes to think about it, but you know you’re going to need that prostate exam some day — so you should be able to set aside money to pay for it without getting hit by the tax man. And consumers will get better prices and better service when they are paying for such procedures out of pocket.
5) Insurance on Your Insurance. Lots of reformers, including conservatives such as Bobby Jindal, want to require insurance companies to cover pre-existing conditions. That would be a mistake: It would only entrench the third-party-payer model, and it would use a statutory mandate to socialize costs, which makes it the equivalent of a government entitlement program. What is needed, as John H. Cochrane of the Cato Institute has argued persuasively, is a two-pronged approach to insurance: health insurance of the familiar sort, and what he calls “health status” insurance, which is, essentially, an insurance policy that keeps you covered in the event you develop a chronic condition that would normally render you uninsurable. As Cochrane describes it, “If you are diagnosed with a long-term, expensive condition, a health-status insurance policy will give you the resources to pay higher medical insurance premiums. Health-status insurance covers the risk of premium reclassification, just as medical insurance covers the risk of medical expenses. With health-status insurance, you can always obtain medical insurance, no matter how sick you get, with no change in out-of-pocket costs. With health-status insurance, medical insurers would be allowed to charge sick people more than healthy people, and to compete intensely for all customers. People would have complete freedom to change jobs, move, or change medical insurers. Rigorous competition would allow us to obtain better medical care at lower cost.” As a solution to one of the thorniest health-care problems, it beats a statutory mandate hands down and deserves a chance to prove its merit.
6) Tort Reform. The plaintiffs’ bar is an infection in the health-care industry, and there is a cure. States such as Texas have experimented with such commonsensical measures as reasonable limits on non-economic damages (the “pain and suffering” awards) and pre-trial review of medical malpractice claims by a panel of doctors. These measures have lowered out-of-pocket expenses for doctors and hospitals (expenses that get passed along to patients) and, in some states, increased the number of physicians in the market, particularly in high-risk specializations such as obstetrics and pediatric surgery. More competition means better service and lower prices. It’s time to starve the ambulance chasers.
7) Non-Physician Competition. The physicians could stand a little more competition, too. Medical-licensure laws and the AMA’s cartel status mean that full-on physicians — expensively trained and often highly specialized — have a monopoly on performing procedures that could be done just as well, at a lower cost, by non-physicians. We have, in essence, one model of what it means to be a doctor, but the level of education and skills needed to do heart transplants and brain surgery is not the same as that needed to set a broken finger or to put four stitches into an elbow after a skateboarding accident. We should have an array of specialists and technicians available for most kinds of routine medical treatment, with nurse-practitioners and similar providers leading the way. The belief that every procedure has to take place under the ultimate supervision of an AMA-certified physician is cartel paternalism and a relic of the past.
8) Approval/Patent Reform for Drugs and Treatments. A streamlined FDA approval process and better patent protection would make pharmaceuticals, biotechnology, and medical devices less expensive. Pharmaceutical companies, like insurance companies, aren’t your friend: They’re in it to make a profit. But they are, let’s not forget, the guys who invent new medicines, treatments, and therapies, and Congress isn’t going to do that. What Congress can do, unfortunately, is ensure that the pharmers do a lot less research and development by passing price controls and by weakening protections for pharmaceutical patents and other intellectual property related to health care. A long period of patent protection, with robust enforcement of property rights, would give the companies that develop drugs and treatments a healthy interval over which to recoup their investment and generate a profit — and the bigger their profits are, the better off we are, as much as their commercials may annoy us. Likewise, the current FDA approval process is an abomination: It’s time-consuming and expensive, and it doesn’t do all that great a job of keeping dangerous products off the market. The first step is to make experimental and early-stage therapies available to people with life-threatening conditions. It is nothing short of perverse that Americans dying of fatal diseases are denied possible therapies because the FDA worries that they are too dangerous. More dangerous than late-stage cancer?
9) Provisions to Force Medicare and Medicaid to Compete. Market-based reforms will go a long way toward making health care more accessible, less expensive, and more secure for the great majority of Americans, but government programs are not going away, and the very poor, the very sick, and the otherwise vulnerable will still need some form of public support. But those programs can be vastly improved, and Medicare is the place to start improving them. Every Medicare enrollee should be given a voucher equivalent to the value of his Medicare benefits and then allowed to choose from any available health-care plan in the marketplace. And thrifty Americans who choose private plans that cost less than the value of their Medicare benefits should be allowed to keep the difference. Likewise, some Medicaid benefits should be voucherized. The Supplemental Nutrition Assistance Program, a.k.a. food stamps, is far from a perfect program, but a debit card covering such routine expenses as vaccinations and physicals would considerably improve access to health services for many poor Americans.
10) CHIP Registration for Eligible Kids. CHIP, the Children’s Health-Insurance Program, is another imperfect entitlement regime, but it’s the one we have and it is unlikely that we will replace it. Democrats constantly are trying to pour more money into CHIP as a means to channel federal bucks into the state-level bureaucracies, and George W. Bush took a lot of heat for vetoing two CHIP funding increases. But the real problem with CHIP is not that it’s not generous enough, it’s that many of the children who really need it aren’t enrolled. This is not entirely surprising. We have a lot of data, through the food-stamp program and similar initiatives, about who and where these kids are. The best thing we could do to achieve CHIP’s goals is to enroll the kids who most need its coverage and who cannot very well be expected to enroll themselves.
– Kevin Williamson is deputy managing editor of National Review.