Academic journal article The Cato Journal

Envisioning a Free Market in Health Care

Academic journal article The Cato Journal

Envisioning a Free Market in Health Care

Article excerpt

Although President Obama and the Democratic Congress were able to pass landmark health legislation, their efforts to reform health care ran into predictable political roadblocks. In a severe recession, taxing business and labor is obviously not helpful to economic recovery. Moreover, an array of overreaching sales pitches--claims of additional coverage without additional costs or rationing--piqued the cynicism of the general public. Given historical spending and budget deficits, an expensive new federal program is difficult to swallow. Mandates and restrictions on health insurance can only exacerbate the problem of rapidly rising health care costs (Tanner 2010).

Perhaps most important, although many people express dismay with the health care system, they are generally content with their own health care and health insurance. They might be willing to help others get care or insurance, but become quite concerned if reform might include a dramatic change in their own status.

Need for Real Reform

One can speculate whether "Obamacare" will persist, particularly in light of recent constitutional challenges to the individual mandate, or whether economic and political markets will adjust significantly. The legislation imposes a burden on those with private insurance and will lead to higher costs for many taxpayers. Moreover, a sluggish economy--made more sluggish by Obamacare--will limit government spending initiatives, especially at the state and local levels. Given the current state of America's health care system, with extensive third-party payment and favorable tax treatment, there is need for real reform.

Santerre (2007) provides a "health misery index" from 1940-2006 that indicates the sum of "excess" medical inflation (above increases in the CPI) and estimates of the percentage of those without health insurance. The index declined consistently from 1940 to 1975: excess medical inflation was low and relatively stable, while the proportion of uninsured Americans decreased in all except two years--from 90.7 percent to 12.6 percent. The spread of private insurance was responsible for most of this decline prior to the creation of Medicaid and Medicare in 1964, when the proportion of uninsured was 27.9 percent. Since then, the spread of public insurance has been the most significant factor in decreasing the percentage of uninsured. Santerre's index bottomed out in 1980 at 13.1 before trending slightly upward to a high of 16.6 in 2006 (see Cutler and Gelber 2009).

Table I presents measures of excess medical inflation in medical care, physician services, dental services, and prescriptions. There was medical deflation until the growth of subsidized private insurance in the 1950s.

Such measures are admittedly simplistic, but they point to a few realities. First, it would be useful to have objective measures of health, health insurance, and health care. But such measures are difficult to find and subject to abuse. Second, there is causation between the short-run benefits and long-run costs of government involvement. Figure 1 illustrates that health care expenditures have risen steadily as third-party payments--through low-cost government health insurance as well as through employer-provided coverage exempt from taxes--have increased.

The status quo is suboptimal with respect to (1) access to health care and health insurance, (2) affordability to individuals and cost to taxpayers, (3) the unfortunate connection of health insurance to employment, and thus the problem of portability (Adams 2004), and (4) inequities in the available subsidies. If the status quo is unacceptable, then two basic choices remain: increase government involvement in health care or let the free market operate.

If one wants to increase the role of government, then to what extent and at what level? For example, should government operate health care facilities and set pay rates for doctors or empower poor people with the resources to acquire privately produced health services? …

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