In a Free Market, Insurance Wouldn’t Make Sense for Most Health Care

Q: The free market is fine for providing TVs and jeans, but how would it work with health care? Look at how many people were uninsured before the Affordable Care Act made it illegal for the insurance companies to deny people coverage. Isn't this evidence that a free market is insufficient for health care?

A: It’s true that the delivery of health care had serious problems circa 2008, when Barack Obama was elected. But that dysfunction wasn’t the fault of the free market. There were various waves of massive government intervention in this arena going back at least to the 1930s. If we agree that the (relatively) free market gives us high quality consumer products, maybe we should try the free market in health care.

Ironically, one of the main problems with our current approach is that Americans tend to conflate health care with health insurance. Those are obviously different things.

Q: Prices in medical care have skyrocketed. How are average people expected to afford to pay their medical bills out of pocket? Obviously they cant. That’s why people were so desperate to obtain insurance coverage before the ACA gave them some legal guarantees.

A: Yes, it is true that “the system” wasn’t working just before the ACA (and it’s not working very well after the ACA, either, even with “universal coverage.”) But as in medicine, here too we have to correctly diagnose the problem before we can fix it.

It’s simply not true that all forms of “health care,” broadly defined, have the type of shocking price rises that we associate with the field. For example, laser eye surgery has a pattern of quality and price that seems more like TVs and computers than it does like medical procedures. Writing in late 2004, economist Alex Tabarrok explained:

Laser eye surgery has the highest patient satisfaction ratings of any surgery [and] has fallen in price. In 1998 the average price of laser eye surgery was about $2200 per eye. Today the average price is $1350...

Why the price decline in this market and not others? Could it have something to do with the fact that laser eye surgery is not covered by insurance, not covered by Medicaid or Medicare, and not heavily regulated? Laser eye surgery is one of the few health procedures sold in a free market with price advertising, competition and consumer driven purchases.

As of this writing, the latest estimates put the 2017 price of LASIK (Laser Assisted In Situ Keratomileusis) surgery at just under $2100 per eye. So notice that means over almost twenty years, the actual dollar price slightly fell, for a procedure that garners very high patient satisfaction rates and aims to provide better vision than corrective lenses. Furthermore, when we adjust for general consumer price inflation, the “real” price of laser eye surgery has fallen about 35 percent since 1998. We see a similar pattern of rising quality and affordable prices with cosmetic procedures and other “elective” forms of health care that typical insurance plans don’t cover.

In contrast, the rule in the United States since World War II has been for medical prices to rise much more rapidly than the general consumer prices, as this chart indicates:

Source: St. Louis Federal Reserve(FRED)

The price of health care has exploded because it’s getting squeezed by both sides: government regulations restrict the supply of health care, but third-party payment (in the form of the government and insurance companies) also boost the demand.

Q: But surely there is a role for health insurance to pay large medical bills. We have insurance for other things—car accidents, house fires, and sudden death. Why are you so negative when it comes to health insurance?

A: Yes there is indeed a role for insurance in the market for health care. But it should function as genuine insurance, to cover rare and catastrophic scenarios. For example, you don’t use your car insurance to pay for oil changes or new air filters; instead, you have auto insurance in case you get into a wreck. Likewise, you wouldn’t dream of applying for a fire insurance policy on a house that was currently burning to the ground.

But with health insurance, people do expect their policies to at least partially cover “routine maintenance” such as “well visits,” prescription medications even for conditions that existed beforehand, and even eyeglasses and contact lenses.

In a genuinely free market, health insurance would cover rare outcomes. So long as the government dropped its mandates, regulations, and subsidies in the entire medical sector, prices in health care would tumble as quality improves. This would make routine care affordable, so that regular households wouldn’t need health insurance coverage except in rare instances.

One of the fundamental problems with the existing system of health care in the United States is that the provider-customer link between doctors and patients has been severed. In terms of the finances, doctors and hospitals right now work for the government and health insurance companies, where getting paid is more a matter of following the right protocols rather than competing for the patronage of cost-conscious patients.

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