A COMMON LIBERAL REFRAIN is that conservatives have no real
health care agenda of their own— other than, of course, opposing
Obamacare. For instance, in the midst of debate over the
president’s signature health “reform” bill, one progressive Florida
congressman famously told the House that the GOP’s plan was for
sick Americans to “die quickly.”
Baloney. Conservatives could probably stand to put more emphasis
on the latter part of “repeal and replace,” but the fact is that
many free-market health care reforms enjoy broad consensus on the
right.
The Supreme Court is expected to rule on the constitutionality
of Obamacare in late June—after this magazine hits the press. But
while the court’s decision could be explosive politically, it will
not change the need for conservatives to articulate a strong
alternative to state-centered health care. The answer is patient
power.
EXPLODING HEALTH CARE COSTS in America stem ultimately from what
is known as the thirdparty payment problem—that is to say, the
great majority of health costs are not paid by the patients
themselves. There is almost always some third party, whether it be
an insurance company, an HMO, or the government, footing the bills.
Indeed, in 2008, 84 percent of health expenses were paid for by
private health insurance or government programs such as Medicare,
Medicaid, or CHIP.
Consequently, the consumer has no incentive to control costs. To
put it in formal economic terms, the consumer has an incentive to
spend until the marginal benefit of additional spending is zero.
For instance, if a $1,000 procedure costs you nothing, it’s worth
doing—at least in economic terms—for just $1 Of benefit. In an
efficient market, consumers spend until the marginal benefit is
equal to the marginal cost. That $1,000 procedure should only
really be worth it for $1,001 of benefit.
In more colloquial terms, the problem is that consumers have an
incentive to spend on health care until it hurts, and they have no
incentive to shop around. Even worse, doctors and specialists not
only have no incentive to control costs, but they actually have a
direct financial interest in spending more. Health care providers
have no incentive to compete on price, so they compete primarily on
quality and secondarily on convenience.
That explains why the American health care system produces far
and away the highest quality care in the world: The rewards go to
he who creates the best new innovations and most effective new
treatments. It also explains why new technology— which drives down
costs in every other field—actually increases costs in
medicine.
The only solution is to unite the decision over what health care
services to purchase with the economic responsibility to pay for
them, so costs can be weighed against benefits. And there are only
two ways to do that: either the third-party payer (the government
or insurance company) is given the power to decide what treatments
the patient is allowed to consume, or the patient is given market
incentives to consider the full costs of his health care.
Obamacare (and most foreign systems like Britain’s National
Health Service) effectively impose the first alternative. With 159
new bureaucracies, boards, agencies, commissions, and programs to
govern American health care, plus the individual and employer
mandates that require specific health insurance policies, Obamacare
could be rightly Labeled “government-centered health care.” The
government takes primary responsibility for paying health expenses.
The government takes primary responsibility for deciding what
health care services its citizens are allowed to consume. The
government, then, decides whether each individual’s health care is
worth the price. This is why the concept of the government “death
panel” expresses a fundamental truth about Obamacare.
WHAT AMERICA NEEDS NOW is the opposite, a patient-centered
alternative that maximizes consumer power, choice, and control over
health care and its financing. The intellectual godfather of this
approach is John Goodman, president of the National Center for
Policy Analysis (NCPA) in Dallas and author of the 1991 book
Patient Power published by the Cato Institute.
Central to this concept are Health Savings Accounts (HSAs),
which were first proposed in 1981. HSAs include an insurance policy
with a high annual deductible, in the range of $2,000 to $6,000
(the higher the better). Such high deductibles reduce the cost of
the insurance so much that the savings would mostly cover the
deductible in the first year. The HSA funds earn interest tax-free
and roll over year after year. After one healthy year with few or
no medical expenses, the patient has enough money in the account to
cover all expenses below the deductible.
This transforms the incentives of third-party payment. For all
but the most catastrophic health expenses, the patient is
essentially using his own money. Whatever he doesn’t spend he can
keep for later health expenses or for retirement. The patient,
then, will try to avoid unnecessary care and will look for the best
prices for routine visits or services.
In turn, since patients are then concerned about controlling
costs, doctors, hospitals, and other health providers compete not
just to maximize quality, but also to lower prices, as in all
normal markets. (This competition will become more intense and
effective the more widespread HSAs become.) These incentives would
flow all the way through to the developers of new technologies, who
would compete to develop technologies that both improve quality and
reduce costs.
Federal legislation providing for HSAs was adopted by the
Republican congressional majorities in the 1990s and has improved
over the years. These HSAs have been proven to cut the growth in
health spending by as much as 50 percent. Participation in HSAs and
similar high-deductible plans has soared in recent years and may
now exceed HMO enrollment.
PATIENT POWER REFORMS replacing Obamacare would expand HSAs
throughout the health care system. Workers should be allowed the
freedom to choose them in place of employer-provided coverage, the
poor to choose them for their Medicaid coverage, and seniors to
choose them for Medicare.
These reforms should be complemented by the Consumer Choice Tax
Credit, which would effectively level the playing field and give
everyone the same tax relief enjoyed by employer-provided health
plans. Anyone could use the refundable credit to help pay for
insurance coverage. Paul Ryan proposed $2,300 for individuals and
$5,700 for families.
Workers would then be free to choose the health insurance
coverage they prefer, using the credit to help pay for it, rather
than being stuck with the insurance chosen for them by their
employers. Their policies would be their own property, and
therefore would be completely portable, so the worker would not
lose health coverage if he changes jobs or becomes unemployed. The
credit could be financed on a revenueneutral basis by replacing the
Obamacare tax credits for the purchase of health insurance.
Allowing consumers to buy health insurance across state lines
would maximize consumer choice and competition, which would further
reduce costs. Unnecessary regulations should be repealed. That
includes the thousands of state special-interest benefit mandates,
guaranteed issue and community rating, and rules that prevent new
health providers from entering markets, such as requirements for a
“certificate of need.” Tort reform, of course, would also reduce
health costs.
PATIENT POWER CAN BE EXTENDED to provide a complete safety net,
ensuring that no one will suffer lack of essential health care, for
just a small fraction of the cost of Obamacare. Moreover, this can
and should be accomplished with no individual mandate or employer
mandate. Obamacare, by contrast, for all of its trillions in future
taxes and spending, and both its individual and employer mandates,
still leaves millions of Americans uninsured.
Conservatives should begin by giving Medicaid block grants back
to the states, as we discussed in the June issue. Each state could
then tailor its plan. Some might use the money to provide vouchers
that the poor could use to purchase private health insurance,
liberating them from the Medicaid ghetto.
A second step necessary to ensure a complete safety net is to
allow each state to use part of its Medicaid block grant to set up
a high-risk pool. Those among the uninsured who become too sick to
purchase health insurance in the market, perhaps because they have
contracted cancer or heart disease, for example, could receive
guaranteed coverage through the high-risk pool. They would be
charged a premium for this coverage based on their ability to pay.
Federal and state funding would cover remaining costs. Such
high-risk pools already exist in more than 30 states, and for the
most part they work well at relatively low cost, because few people
actually become truly uninsurable.
The law already provides that insurers cannot cut off existing
policy holders or impose discriminatory rate increases because
people become sick while covered. That would be like a fire insurer
cutting off coverage for an already burning house. If this law
needs to be modernized, it should be.
With these reforms, those who have insurance can keep it; those
who can’t afford it are given the necessary help to buy it; and
those who still remain uninsured and then become too sick to buy it
have a backup safety net in the high-risk pools. Everyone can be
assured that they will get essential health care when they need
it—no individual or employer mandate necessary.
Those who have insurance can keep it; those who can’t afford it
are given the necessary help to buy it; and those who still remain
uninsured and then become too sick to buy it have a backup safety
net in the high-risk pools.
Stephen Moore is senior economics writer for the Wall Street
Journal. Peter Ferrara is director of entitlement and budget policy
for the Heartland Institute and senior fellow at the National
Center for Policy Analysis.
