Here's an Easy Way to Add Some Market Competition Back into Healthcare
It is widely acknowledged that healthcare in the United States is the most expensive in the world. Per capita expenditures are roughly double that of other major economies. Some will argue that you get what you pay for, but the quality of care in the US is usually ranked as mediocre. This combination of high cost and poor performance resulted in a recent ranking of the U.S. in last place among major industrialized countries:
The U.S. ranks last of 11 nations overall. Findings in this report confirm many of those in the earlier four editions of Mirror, Mirror, with the U.S. still ranking last on indicators of efficiency, equity, and outcomes.
Some people are hopeful that full implementation of the Affordable Care Act will eventually reduce cost and improve outcomes. Austrian-school economists, however, continue to argue that the U.S. healthcare system will continue to face some combination of higher costs and rationing of services because of the ACA and that virtually all aspects of mainstream healthcare are government monopolies, including doctors, drugs, and hospitals. In fact, some people believe we are heading to a disaster in healthcare while others feel we are destined for a national healthcare system.
However, there are simple and straightforward solutions to the healthcare mess. These solutions not only restrain prices and therefore cost, but they would also improve access and healthcare outcomes.
It could be as simple as providing a waiver for people who wished to operate in a parallel healthcare system. This would involve the following:
- Unlimited tax credits for catastrophic health insurance.
- Unlimited tax deductions for prepaid health savings accounts and out-of-pocket medical expenditures.
- Leave everything else the same (except the added waiver from the ACA).
Catastrophic health insurance, or “major medical,” is a type of insurance that only provides benefits in the case of a catastrophic health event such as such as a heart attack. This is the only type of health insurance that is economically rational because no one wants to collect any benefits any more than people want their house to burn down. Another benefit of this type of insurance is that it is relatively cheap as people rarely collect and it is an inexpensive business to run. It does not qualify as having insurance under the ACA.
A New Market in Health Insurance Exchanged for Tax Credits
A tax credit is when you pay for a good or service it comes out of the bottom line of your income tax bill. For example, you calculate what you owe the IRS to be $5,000 and you purchase a catastrophic health insurance policy for $900 per year. Your tax bill decreases to $4,100. If you buy your housekeeper a similar plan, your tax bill decreases to $3,200. There is plenty of incentive to purchase this insurance and for many people to be so covered.
People with a large tax bill would suddenly be motivated to purchase health insurance for those with a small tax bill. You can well imagine that charities, churches, and hospitals would also have the incentive to organize a “market” so that rich people could help cover poor people. Meanwhile, insurance companies would have an incentive to negotiate realistic prices on hospitals and providers in order to offer low-priced policies.
Health Savings Accounts
Tax-deductible health savings accounts are already popular. Money taken out of your paycheck and deposited into this type of account means you pay less in taxes. You could also help jumpstart the process by giving a tax credit for, say, the first $2,000 put into such accounts. People could further reduce their taxable income by opening such accounts for their children, employees, and people in need of assistance.
Patients and their doctors act very different if they are paying for services with a health savings account or out of their pocket compared to when they are paying with comprehensive health insurance with low copays. If they have insurance, then there is no mention of price between doctor and patient. Under these conditions, both patient and doctor generally prefer the most expensive option. If the patient is paying with their health savings account, then price is always discussed and is an important determinant of treatment.
Here the patient is a real consumer and I have found that doctors are readily willing to work with their patients on alternatives. Lower cost options often have a longer proven track record of effectiveness and can also be safer.
You can see this phenomenon in your local pharmacy. People with insurance go to pick up their prescriptions only to find that the insurance company is refusing to pay for a particular prescription for some reason. So instead of the $7 price in the past, the pharmacy now wants $120 for the same drug and the customer refuses to pay.
Last year I was given a prescription for something I had been given in years past. When I approached the cash register the pharmacy technician who retrieved the prescription said “you don’t want this one.” When I enquired why, he said that it was $151! In the past it was 8-9 dollars, but now the insurance company refused to pay for some reason.
I asked if there were any over-the-counter alternatives, he responded that a nearly identical product could be found on isle #8 for about $5 that was 1% rather than 2% strength.
Two great things happen when people start dropping their comprehensive health insurance and start to put money into health savings accounts.
First, by becoming price sensitive it puts competitive pressures on suppliers. This will help bring price in line with cost and help push costs lower and squeeze profit margins of monopoly providers, i.e., pharmaceutical companies, doctors, and hospitals. Alternatively, you could use your money to purchase a concierge medical service which have a strong incentive to provide very good and effective service, but also to be frugal on the cost side.
Second, price sensitivity will also make account holders more health conscious. If you don’t use your health savings money on healthcare it can be transferred to retirement savings. Given that most modern healthcare expenditures are lifestyle issues, including a high percentage of diabetes, heart disease, cancer, etc. Most people can actually choose to be healthier or sickly. Health savings accounts encourage people to be healthier while comprehensive health insurance encourages people to be sickly.
These reforms can exist along the side of the incumbent healthcare system. Eventually, the incumbent system and the tax breaks can be abandoned. The medical markets will be fixed, competitive, and responsive to consumers. Americans will become both wealthier and healthier. Unfortunately, the medical monopolies have no interest in going from 1/6 of the economy to 1/10 of the economy —and they have friends in high places.