For the last half century, the chief object of American health policy has been to ensure that consumers pay the smallest possible fraction of the cost of medical care at the point at which treatments are delivered. Obamacare, the State Children’s Health Insurance Program, Medicare, Medicaid, the U.S. Veterans Health Administration (VHA), and tax-advantaged private insurance arrangements—along with the long list of coverage mandates that go with them—all reduce direct financial responsibility for medical services to a minimum. As explained in Chapter 15, the evil genius of third-party payment is that it encourages consumption and drives up costs by making medical services cheap for patients at the point of sale.
The public officials, insurers, and health care providers who benefit from all this spending defend third-party payment arrangements by arguing that health care is too complicated and too expensive for consumers to manage on their own, and by contending that people who are directly responsible for health care costs will use medical services less often than they should. Better that government bureaucrats spend tax dollars and that private insurers spend premium dollars, they argue, than that consumers pay for medical services themselves. They don’t want consumers to consider the possibility that market mechanisms might remediate excessive costs and complications as successfully in health care as they have in other sectors. This is to be expected. Widespread reliance on third-party payment arrangements benefits insurers and health care providers, so they want nothing to interfere with it.
Advocates of tax breaks for dollars spent on medical services and insurance claim to be doing consumers favors too. They want us to believe that they are making medical treatments and insurance coverage more affordable, when they are actually making both more expensive by stimulating demand and by encouraging people to rely on insurance more often and more heavily than they should. The deduction from the federal income tax that applies to interest on home mortgages drives up home prices by encouraging people to buy instead of renting and by encouraging buyers to pay more. That’s why realtors, whose income depends on home sales, are this tax break’s biggest fans. Likewise, insurers and health care providers love tax exemptions for insurance and medical treatments. By encouraging consumption, these tax breaks bring hundreds of billions of dollars to their doors.
This modern faith in pervasive third-party payment—one might even call it a fetish or an obsession—reached its apotheosis in Obamacare, the goal of which was to provide almost everyone with coverage for almost everything. Elderly people would have Medicare. Poor people would have Medicaid. And everyone else would have private insurance, provided by employers or bought on exchanges, with expansive coverage mandates and substantial subsidies and penalties deployed to encourage compliance. If the goal was to maximize spending, Obamacare made perfect sense. One thing we know for certain about comprehensive health insurance coverage and political control of the health care economy is that both add massively to costs.
Those of us who believe that American health care should be better and cheaper think that Obamacare was crazy. To fix the myriad problems with our health care system—including excessive cost and consumption, quality problems, and the loss of an estimated $1 trillion a year to fraud, waste, and abuse—we need to identify their root causes and address them. An abundance of evidence, including everything from peer-reviewed academic studies of the impact of Medicare and tax breaks on costs to news reports about surprise bills, retail outlets, and frauds, makes it clear that the politicized third-party payment system is the main culprit. Instead of expanding the reach of that system, as Obamacare did, we should face facts and start paying for health care the same way we pay for everything else. When hundreds of millions of people spend their own money on health care, they will behave differently, and health care providers will too. Consumers will look for services that offer better value for the dollar, and doctors, hospitals, drug companies, and other medical outlets will try to provide them. Prices will fall and both the availability and the quality of medical treatments will improve.
Many health care providers won’t like this new world in which they must compete for business. They benefit from existing arrangements, which pay them whatever they ask and send them more dollars year after year. We should stop indulging them, and we should stop listening to their apologists and lobbyists too. Markets do a good job of supplying food, clothing, housing, transportation, and other essentials. They can help us meet our needs for medical treatments.
One of the most wonderful things about markets is that they automatically reward sellers who treat consumers well and automatically punish those who don’t. Both the carrot and the stick are important. For American health care to improve, providers that deliver high-quality services at reasonable prices must be rewarded and inferior providers must fail. There must be turnover and opportunities for new entrants. A near-death experience made the American automobile industry more efficient and pro-consumer, and decades later, innovators like Tesla are still forcing existing manufacturers to do better by deploying new technologies and business models. If and when the businesses that operate in the American health care sector are subjected to intense competition, they will respond the same way. And if they don’t, they will fall by the wayside and new businesses will emerge that will offer Americans cheaper and better health care.
Change won’t come easily. Old-line health care companies have rigged the game in their favor. They benefit from a guaranteed flow of dollars and massive subsidies. They control market entry. And they have convinced the American public that they should not have to operate like other businesses. They possess great political power too and will use it to ruthlessly stifle competition. That’s why the changes that are needed won’t be imposed from above. If they occur at all, it will be in response to the demands of self-paying consumers who use their dollars to support innovative providers and break local cartels.
We are optimistic because the army of self-paying consumers is bound to grow and will become more influential over time. Unless Congress raises taxes significantly or inflates the deficit massively, Medicare, Medicaid, and Obamacare will all have to change. All will have to shift increasing fractions of the cost of health care to their beneficiaries, as may smaller programs like the VHA. As rising costs drive up premiums, deductibles, and copays, private insurance will seem like less of a bargain too. Millions of consumers will react to these changes by looking for a better alternative. If it is allowed to do so, the retail sector will give them what they want—better medical treatments at less cost—and draw business away from traditional providers. As new purchasing patterns and norms develop and as public support for old-style financing arrangements wanes, traditional providers will adapt or fail. Either way, pressure from below will make American health care better and less expensive.
What roles will private insurance and government agencies play in a system based primarily on first-party payment? The former will help people deal with catastrophes, and the latter will provide financial support to people who are too poor to meet their needs. But, by and large, both insurers and public agencies will get out of the business of buying health care for consumers. In the new, retail-dominated health care marketplace, consumers will be in the driver’s seat and there will be no good reason for insurers or government bureaucrats to displace them.
As a nation, we currently spend 18 percent of GDP on health care. If given full control of their dollars, few American households would voluntarily spend that large a fraction of their gross income on health care. The government and private payers should stop dragging us in a direction we do not want to go.
The First Rule of Holes is that, when you find yourself in one, stop digging. Americans are in an enormous hole, but we are still digging. Our system functions as though it is expensive by design. It moves dollars into the medical sector as quickly as the Treasury can print them. But, instead of recognizing that excessive reliance on third-party payment arrangements and political control of the health care economy are the main drivers of spiraling costs and mediocre quality, we keep demanding more of both. To make American health care better and cheaper, consumers should use their own money to purchase medical treatments directly—the same way they buy everything else.