Markets, Not Mandates

What would real health care reform look like?

While congressional reform efforts screech and shudder along, let's take a moment to dream about real health care reform. Imagine a system that is genuinely transparent, competitive, and driven by consumers.

Right now, thanks to incentives built into the tax code, patients are locked into the health plans their employers choose. Consequently, most of us don't have a clue what our health insurance and health care cost. We have no way to reduce those costs and no incentive to do so even if we could. Worse yet, it's precisely when you need the system the most that it fails you. In the words of the Princeton economist Uwe Reinhardt, "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 procuring their own insurance. The laws undergirding the third-party payment system must be dismantled, allowing the money employers spend for insurance to be converted into additional income for the employee. This would immediately inject cost consciousness into insurance decisions.

What would the results look like? It's impossible to predict all the specifics, but here's one partial vision of what markets might bring us.

The typical American might purchase high-deductible insurance policies that cover expensive treatments for chronic diseases such as heart disease, cancer, AIDS, diabetes, and multiple sclerosis, as well as the catastrophic consequences of accidents. Coverage would also include expensive treatments such as heart surgery, organ transplants, dialysis, and radiation therapy. In addition, we'd be able to buy health status insurance that would guarantee that we could purchase insurance at reasonable prices in the future.

Such policies are available already. The online 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-payment after the deductible, reasonable pharmaceutical benefits, and lifetime maximum benefits of $7 million, with an option for health savings accounts. (With such accounts, consumers make annual tax-deductible contributions, then take tax-free withdrawals to pay for uninsured medical costs.) That was the cheapest plan, but more than 80 other insurance policies were available. As deductibles went down, of course, the prices went up.

A lot of routine care could be handled through retail health clinics located in shopping malls, drug store chains, and megastores. Such centers would be staffed not with physicians but with nurse practitioners or other qualified personnel. Consumers generally would pay for routine, everyday transactions directly out of their health savings accounts.

Competition would also reveal more medical information. Even in our stunted marketplace, Angie's List allows consumers to submit reports about their experiences with physicians. In a real health care market, sources of information for comparison shopping would proliferate, just as there are now dozens of publications devoted to comparing the features and prices of cars, computers, guns, and vacations. A corps of savvy shoppers in the health care market will mean better price and quality comparisons for everyone.

For a hint of what free market medical shopping might be like, check out the California government's admittedly clunky website for comparing the costs of common surgeries. Browsing there reveals that the price of a heart valve replacement varies from $72,000 to $368,000, while angioplasty runs from $9,000 to $204,000. Other sites, such as newchoicehealth.com, enable consumers to shop for relatively routine procedures such as colonoscopies, laparoscopic hernia repair, and MRI scans. A colonoscopy in Washington, D.C., for instance, could cost anywhere from $580 to $1,386.

Would health care be cheaper as well? President Barack Obama famously read the surgeon Atul Gawande's June 2009 New Yorker article "The Cost Conundrum," which argues that medical costs are high because incentives are skewed toward providing ever more treatment so physicians can 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, home buyers might well 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.

Gawande gets the diagnosis right, but he botches his prescription, calling for the government to impose such a general-contractor model. But cost-conscious contractors exist in the housing market because of consumer demand, not government mandate. Similarly, consumer choices have driven the housing market to create a huge variety of options, including high-rise condominiums, 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 argues that consumers are not in a position to negotiate prices. Quoting the Texas cardiologist Lester Dyke, he tries to imagine how an elderly woman might bargain over bypass surgery. "Who comes up with this stuff?" Dyke asked him. "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. Physicians would vie with one another for clients, pushing down costs. Competition would also give doctors more of an incentive to provide patients with good information about the effectiveness of various treatments. Dyke's hypothetical heart patient 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 her disease.

Opponents of markets in health care worry that patients in extremis will be in no position to make such decisions. But the slow progress of the kind of chronic illnesses that are driving up health care costs, such as cancer and coronary artery disease, allows consumers time to shop around for suitable treatments. Prostate cancer patients can evaluate and choose between options such as watchful waiting, various radiation therapies, surgery, and, soon, a new biotech immunological treatment. Information gathering would take no more time than the current wait for a follow-up appointment.

As medical care becomes ever more affordable, the government could dismantle its medical entitlement programs—Medicaid, SCHIP, and Medicare—and instead provide vouchers directly to the poor, who could then purchase health insurance and health care in the private market.

Hardly anyone in Washington is interested in such changes. If a health care bill does pass this session, it will probably make the system worse, not better. But if Obama's top-down proposals collapse, perhaps they will open up a policy discussion about how markets, not mandates, can improve health care and reduce its costs. A man can dream.

Ronald Bailey ([e-mail]) is reason's science correspondent.