The New York Times calls it "possibly the most complex legislation in modern history." The health care "reform" currently being hammered out by the Democratic leadership of the House of Representatives already clocks in at $1 trillion and 1,000 pages—and it's nowhere near done. But one thing is clear: the legislation attempts to substitute top-down mandates from a centralized bureaucracy for the distributed decisions made by millions of consumers, physicians, and insurers acting in a marketplace. This will fail.
While congressional reform efforts screech and shudder along, let's take a moment to dream: What would real reform look like? It would be consumer driven, transparent, and competitive.
Right now consumers are locked into the health insurance and health care plans that their employers choose, thanks to previous government meddling with the health care system and the tax code. Consequently, most consumers simply don't have a clue what their health insurance costs. They have no way to reduce those costs, and no incentive to do so, even if they could.
Harvard University business professor Regina Herzlinger is stuck in exactly the same place as most Americans—her employer, in this case, the president of Harvard, buys her health insurance for her. "I wouldn't permit him to buy my house or my clothing or my food for me. Yet as my employer, he could take up to $15,000 of my salary each year and buy my health insurance for me, without knowing anything about my preferences or needs. It's ridiculous." Indeed it is.
Third party payments are the main source of dysfunction in the American health system. "The devil systematically built our health insurance system," once suggested Princeton University health economist Uwe Reinhardt. As evidence, Reinhardt pointed out that it "has the feature that when you're down on your luck, you're unemployed, you lose your insurance. Only the devil could ever have invented such a system."
So the first step toward real reform is to give consumers responsibility for buying their own health insurance. The employer-based health insurance system must be dismantled, and the money spent by employers for insurance should be converted to additional income. This would immediately inject cost consciousness into health insurance decisions.
Since governments have been intervening in and distorting medical markets for more than a century, there are no examples of truly free-market medicine in any of the developed countries. (Switzerland is probably the nearest that any developed country comes to having a free market in health care and health insurance.) So it is impossible to know what might have happened had health care markets been allowed to evolve. While there are hints of what a market system might look like embedded within our current mess, much of what could happen under medical markets is tough to predict. Nevertheless, here's one partial vision of how a system of competitive health care and health insurance might develop if real reform were adopted.
The typical American might purchase high-deductible health insurance policies that would cover expensive treatments for chronic diseases such as heart disease, cancer, AIDS, diabetes, multiple sclerosis, or the catastrophic consequences of accidents. Coverage would also include expensive treatments such as heart surgery, organ transplants, dialysis, radiation therapy, etc. In addition, Americans would be able to buy health-status insurance that would guarantee that they could purchase health insurance at reasonable prices in the future.
The good news is that such policies are available even now. A quick check on online health insurance clearinghouse eHealthInsurance pulls a quote of $131 per month from Anthem Blue Cross Blue Shield for a single 55-year-old male with a $3,000 annual deductible, no co-pay after the deductible, reasonable pharmaceutical benefits, and lifetime maximum benefits of $7 million, with a health savings account (HSA) option. With HSAs, consumers make annual deductible contributions, which lowers their income tax bills, and then take tax-free withdrawals to pay for routine uninsured medical costs. That was the cheapest plan, but over 80 other insurance policies were available. Of course, as deductibles went down, the prices for other plans went up. The UnitedHealth Group has begun offering a policy that guarantees purchasers the right to buy an individual medical insurance policy in the future even if they become sick.
So markets mean more choice in health care, but would they make it cheaper as well? President Barack Obama famously read surgeon Atul Gawande's New Yorker article, "The Cost Conundrum." Gawande argues that medical costs are high because incentives are skewed toward providing ever more treatment as a way for physicians to earn more money. Gawande analogizes health care to building a house without a general contractor. Without someone keeping an eye on what's really necessary or desirable, house buyers would pay an electrician for every outlet he recommends, a plumber for every faucet, and so forth. Doctors get paid for each procedure they recommend. Curing patients becomes an incidental side effect of their treatments. What matters, says Gawande, is not who pays.
Gawande gets his diagnosis right, but botches his prescription. Cost-conscious general contracters exist in the housing market because of consumer demand, not government mandate. Similarly, consumer choices have driven the housing market to create the huge variety of options including high-rise condos, gated communities, rental apartments, manufactured housing, townhouses, and suburbs filled with ranch houses, Tudors, and Cape Cods. Competition in medicine would force physicians, hospitals, pharmaceutical companies, and other practitioners to figure out ways to reduce costs. Perhaps a medical general contractor model would prove most effective at lowering costs, but why not let some people go a different route?
Gawande also argues that consumers are not in a position to negotiate prices. In the New Yorker article, Gawande and Texas cardiologist Lester Dyke try to imagine how an elderly woman might bargain over bypass surgery. Gawande writes:
"They discuss the blockages in her heart, the operation, the risks. And now they're supposed to haggle over the price as if he were selling a rug in a souk? "I'll do three vessels for thirty thousand, but if you take four I'll throw in an extra night in the I.C.U."—that sort of thing? Dyke shook his head. "Who comes up with this stuff?" he asked. "Any plan that relies on the sheep to negotiate with the wolves is doomed to failure."
But Gawande and Dyke miss the crucial point—markets force the wolves to compete among themselves and end up benefiting the sheep. Cardiac surgeons and all other physicians would be vying with one another for patients helping to push down the costs. Competition would provide a strong impetus for medical practitioners to provide consumers with good information about the effectiveness of various treatments and drive innovation. Heart patients in future medical markets would be in a much better position to consider the risks, benefits, and costs of bypass surgery, stenting, pharmaceuticals, and/or stem cells for treating their disease.
Once consumers are unleashed, the medical marketplace would be transformed. Most likely, a lot of routine care would be done through retail health centers located in shopping malls, drug store chains, and mega-stores. Such centers would not be staffed with physicians but with nurse practitioners or other qualified personnel. Consumers would generally pay for routine, everyday care directly out of their health savings accounts.