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Thursday, July 26, 2012

Thoughts on Obamacare, Part III

Break the link between employment and insurance.

In the first two installments of this series (here and here), I argued that libertarians criticizing Obamacare needed to avoid coming across as defenders of the interventionist status quo and discussed a number of potential problems the Affordable Care Act might cause. In this third and final installment I want to explore more market-oriented alternatives to both Obamacare and the status quo. These are not, I should note, radical laissez-faire ideas, but rather reformist proposals that are best seen as revolutions at the margin.

The most important thing is to break the link between employment and health insurance and get that distortion out of the market. The tax-favored status of benefits like heath insurance should be ended, and individuals should purchase health insurance on their own, like other forms of insurance.

This would have two important effects. First, it would make insurance portable. If you changed jobs, you would neither lose nor have to change your insurance. Second, it would help deal with issue of preexisting condition. If you bought health insurance from a company at a young age, any conditions you developed later would not be “preexisting.” The problem arises today because we change insurance providers whenever we change jobs. Any changes made with individually bought insurance would be because the customer wanted a better deal.

Direct Shopping

Breaking this link has a further advantage: The person being insured would shop directly for the insurance package that met her needs. Now insurance is bought by the employer, who gives it to the employee as a form of compensation. Employees of a company all have to accept the package the company offers–with little to no room for tradeoffs. Making insurance a three-party exchange (four, if you count medical providers) weakens the market incentives for insurers to provide what the ultimate customer wants and prevents consumers from exercising any leverage to make them do so. The result is that many people have more insurance than they want and firms have no incentive to figure out creative plans for people in different circumstances.

We can improve competition and customer service in the health insurance industry by ending the barriers to interstate competition. As it stands now, most people are limited to companies writing policies in their own state. As a New Yorker, I cannot buy health insurance from a company in Ohio. Ending these barriers would open up the whole country to increased competition, driving down rates and improving service. Combined with the changes above, health insurance would become cheaper, better, and more finely tuned to customers’ needs.

With these changes the very nature of health insurance would change. What is called “health insurance” today is not really insurance at all, but more a program through which we prepay a third party for virtually all future medical costs, including routine elective services. True insurance would cover risks that could have significant financial consequences, such as a major disease requiring hospitalization. It would not pay for routine predictable medical expenses like checkups and screenings. Patients would cover those expenses themselves, just as they pay for oil changes and tires out of pocket while using their State Farm policies for damage from collisions.

Health Savings Accounts

Health Savings Accounts would make paying routine expenses easier, especially in conjunction with lower premium, high-deductible coverage for catastrophic events. Allowing people to put money aside tax-free for predictable medical expenses and policy deductibles would make real insurance more affordable. In this system patients would pay directly for much of their own care, encouraging cost-consciousness and prompting providers to compete for their business. Walk-in basic care outlets in places like Walmart signify a trend that is growing. Setting up a Health Saving Account should be made as simple as possible.

Four other reforms that would make care more affordable: 1) End medical licensing and allow nurses and other providers to perform the same duties as doctors; this would drive prices down and quality up. 2) Reform tort law to reduce frivolous malpractice suits that drive up costs; making losers all pay court fees would help too. 3) Means-test Medicare to drive down costs; the point is to help those who cannot afford care, not simply those who reach a certain age. 4) Turn Medicare and Medicaid into voucher programs to increase flexibility and patient control, with the result being lower expenses.

Together these would go a long way toward addressing some of the most common complaints about the status quo without creating the problems of the Affordable Care Act. They are a first step toward a freed market in health care.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.