Want to Help the Poor? Promote a Free Market in Health Care

Recently I had the pleasure of speaking with John C. Goodman, author of the new book Priceless: Curing the Healthcare Crisis.  Goodman is a giant in the healthcare policy field.  The “Father of Health Savings Accounts,” he has been named by Modern Healthcare as one of four people who have most influenced the modern health care system.  The solutions he proposes for America’s ailing healthcare system are radical — and they run in the opposite direction of the Obama administration’s Affordable Care Act.

If you want to help the poor, he suggests, the best approach is to restore free-market pricing mechanisms into the market for medical care and health insurance.  It’s a fascinating interview with the Paul Ryan of health care policy, and I hope you take a look at the book from the Independent Institute.

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What’s the premise of the book?

The title is a double entendre. On the one hand, your health care is priceless. But on the other hand, the health care system has no real price. The thesis of the book is that the suppression of the natural price system has had negative effects in two markets — for medical care and for health insurance. In the market for health care, we have bought into the same notion as other countries, that the way you make health care accessible is to make it free at the point of delivery. What we forget, when we do that, is that if you suppress prices, then all of the non-price barriers to care become increasingly important.

What kind of non-price barriers? 

How long does it take you on the telephone to get an appointment to see a doctor? How many days do you have to wait? How long does it take to get from your home to a doctor’s office, and how long do you have to wait after you arrive? Those are all non-price barriers to care, and there’s plenty of evidence that those barriers are more important than the fee the doctor charges, even for low income people.

In the United States, we — just like the Canadians and the British and people all over Europe — primarily pay for care with time and not money. And paying with time turns out to be a very wasteful and inefficient way to pay for care.

Aren’t there some people, however, who have little of money and lots of time, and would prefer to wait in order to receive cheaper care? 

There are 50 million Americans with foodstamps, who can buy any product you and I buy, and pay the same price. When they get to the checkout counter, they combine their foodstamps with cash and pay the market price — and you never hear it said that poor people can’t get access to supermarkets. They may have to get on a bus and go some blocks away, but food markets don’t refuse people with foodstamps.

Now, fifty million people, mainly the same people, are also on medicaid. And what’s the biggest problem you have there? Finding a doctor who will see you. Because we make it illegal for people on medicaid to add to the govenrment payment rate and pay the market price for care.

There are about 1300 walk-in clinics in this country, and the ones in CVS are called Minute Clinic. As the name implies, they know that your time is valuable as well as your money. They provide very high quality care for a reasonable price. In Dallas, Texas, if you have an ear ache or a sore throat, the charge is about $75. Medicaid will only pay half that. So none of the minute clinics accept Medicaid patients. We make it illegal for the poor person to add to the medicaid rate and pay the market price. So a medicard patient has to go to a hospital or an emergency room and wait hours to get basic primary care. It certainly isn’t delivered in a minute.

If we just allowed low-income people to obtain health care in the same way we allow them to obtain food, we would make health care immediately accessible to millions of people.

So, the solution you propose something is a kind of voucher that counts for a certain amount of money, and people can pay money on top of that, so that the poor can afford health care and yet the prices are determined by market conditions?

Bear in mind, these are all services outside the third-party payment system. The Minute Clinics cater to people who are paying out of pocket. They didn’t arise for people walking around with insurance. So wherever third-party insurance is not the way people pay, you usually do find markets in health care. RX.com, for example, started the first mail-order pharmacy. So wherever we find real markets, we certainly ought to let low income people pay for care in the way they pay for food. They should be able to take whatever Medicaid pays and add to it, paying market prices.

I think the bottom line point is that, in completely suppressing the market for medical care, we’re not helping people who are poor.  We’re just making them pay in a different way.

That’s government assistance. What about purchasing health insurance? How ought that to work? 

I’d like to have health insurance work in the way casualty insurance works. You buy insurance for rare and expensive events, but the patient remains the buyer of care. Your homeowners insurance policy doesn’t tell the home repairman how to repair your roof. The auto insurance collision company doesn’t tell the auto repair shop how to repair your car. You buy insurance as real insurance. But after an accident has occurred, you can repair your car or not, get a roof or not. Those are decisions the consumer makes on his own.

In healthcare, though, the insurer is the buyer of care, so the insurer ends up telling the doctors what to do.

If it weren’t for so much government regulation, we would have health insurance that looks like casualty insurance. If you need a knee replacement, the insurance company would pay a sum of money that would afford a knee replacement at a high-quality, low-cost hospital. But you and your doctor may want to go to a different hospital that costs more. You’d be free to do that, so you would just pay the additional cost.

So the insurance company would fix its payment rate, and if you wanted something different, you’d be free to do that. That would be completely different from the way we do it today — but normal in the market for homeowners insurance.

Are there any states or other countries already moving in this direction?

Not really in the states, but if you look internationally you’ll find interesting things. Singapore has a system of Medi-Save accounts, where people are required to save six percent of their salary in a health account. They then become buyers of care. In South Africa, under Mandela, they deregulated the insurance market, so everything we have in the United States was able to compete in South Africa on a level playing field in the 1990s, but by the time the decade was over, health savings account plans were the predominant form of insurance in the private sector in South Africa.

Switzerland is a country that you never hear mentioned, which is sort of strange since it’s the most egalitarian health care system in the whole world. The reason you don’t often hear it mentioned is that it’s predominantly a compulsory private insurance system. Individuals own their own insurance, but it’s portable. And Switzerland relies much more on markets than other European countries.

India is sort of interesting. There isn’t much insurance in India at all, so the hospitals compete based on price and quality the way entities would compete in other markets. And India is part of the international market for what’s called medical tourism. People from all over the world come to India, as well as Thailand and Singapore, to hospitals that are competing for patients. They get packaged prices. They know in advance what they’re going to pay. So you have price competition and quality competition. These India hospitals will post at their website their mortality rate, their admission rate, infection rate, then customers can compare those rates to what happens at Mayo or the Cleveland Clinic, so they really are competing on quality.

Is there anything else you want readers to know about your book?

The main point is that in health care we have completely suppressed the marketplace, so much that no one sees a real price for anything in the health care system proper. No patient, no doctor, no employee or employer. As a result, we all have perverse incentives. On the buyer side, our incentives are to over-consume, and often to consume the wrong kinds of services. On the supplier side, the incentive is to over-provide. Obamacare, in an attempt to control costs, will create incentives for the suppliers to under-provide. The way out of this is to allow real prices to allocate resources, so that people face good incentives instead of perverse incentives.

It’s not that we need more money, we just need to liberate poor people to have access to real health care markets, and instead of government-provided Medicaid they can use those same dollars to purchase private insurance.

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John C. Goodman is Research Fellow at the Independent Institute, President of the National Center for Policy Analysis, and author of the new book, Priceless: Curing the Healthcare Crisis.

 

About Timothy Dalrymple

Timothy Dalrymple was raised in non-denominational evangelical congregations in California. The son and grandson of ministers, as a young boy he spent far too many hours each night staring at the ceiling and pondering the afterlife.
 
In all his work he seeks a better understanding of why people do, and do not, come to faith, and researches and teaches in religion and science, faith and reason, theology and philosophy, the origins of atheism, Christology, and the religious transformations of suffering

  • Jeremy Forbing

    I don’t buy Mr. Goodman’s argument that government regulation is the reason why insurance companies have so much control over how we receive care. It seems more rational that it is the opposite, and that growing entanglement between health insurance and care providers has emerged as an attempt to seek continually increasing profits that the government spend decades doing nothing about. Despite the heart-felt beliefs of many, the magical powers of the Free Market Fairy Godmother to naturally achieve the greatest of all possible economic worlds for all participants have not been proven, and in fact economic collapses throughout history argue against them. I see no reason why the healthcare industry would be different.

    • http://www.independent.org/ David Theroux

      Jeremy, Dr. Goodman carefully examines the effects of health insurance regulation in depth in his new book, “Priceless: Curing the Healthcare Crisis” (http://www.independent.org/priceless/). He shows that most all such regulation has resulted from insurance industry sources and as with virtually all regulation, the regulators wittingly or unwittingly serve the regulated by restricting competition and driving up prices in a form of neo-mercantilism. This lesson has been shown by many other economists and historians for decades and another superb book that reveals regulation as a force for cartelization is “Beyond Politics; The Roots of Government Failure,” by Randy T. Simmons: http://www.independent.org/store/book.asp?id=93.

  • John Haas

    The RUC (The Relative Value Update Committee of the AMA) sets prices of medical procedures. (They say they’re “advisory” but 95% of their advice is accepted).

    That’s why you never see commercials for hospitals that say, “We’ll cure you for less!” That kind of competiton–the kind that drives providers of goods and services tofind more efficient and cheaper ways to do so–is the beneficial side of the free market from a consumer standpoint.

    And, for whatever reasons (some have a more cynical take than others), the market can’t operate that way when it comes to medical care.

    Having insurance companies be able to compete with each other to pay for services that generally cost the same wherever you go might have some marginal effect on the cost of health-care insurance, but it’s not letting the free market reign.

  • http://intothehills.org Kullervo

    I think it is important to understand that a free market is not necessarily the same thing as an unregulated market. The government is not the only source of the inefficiencies in markets that can lead to opportunism (which I mean in the way economists and game theorists use) and non-optimal results. Consequently, from a rational economic standpoint, the function of government regulation should be to remove and/or minimize inefficiencies, i.e., to make markets “freer.”

  • Jeremy Forbing

    So in this case, am I understanding that according to Goodman’s book, the insurance industry has created unfair conditions for itself in the pursuit of profits, using government influence as part of its means of doing so? And if so, will the “insurance exchanges” created by the Affordable Care Act help with this?

    • Timothy Dalrymple

      I guess you’ll have to buy the book! :-)

      • Jeremy Forbing

        I am not much of a believer in the “invisible hand”, mostly because it requires an economy of rational actors, but I can certainly concede that the way in which healthcare providers have insulated themselves against market forces is bad for everyone except the insurance companies. I do not think that insulation comes from government regulation, and I was originally responding to the (perceived) implication that it did. I will say that if we did just hand out vouchers, without further reforms, those vouchers would have to be huge.

        • Paul Fronapfel, M.D.

          Jeremy…it is not the providers that have ’caused’ this situation. The problems are government regulation and the fact that insurers, not patients, are the payors/customers. Read the darn book before spewing any more ridiculous uneducated liberal rhetoric.

  • Tom

    Amen! Thank you for writing this. I attended meeting recently where our local AMA representative for our State stated almost the exact same thing. The poor and downtrodden. need help and relief, not bigger and more burdensome government

  • http://lyfebank.com Leon from Redding Ca

    Want to help the working-poor? Allow part-time employers or spouse employers to contribute to single account for healthcare. Even migrant workers can participate. There is a way to do it.

  • Rupaul

    It should be STRONGLY noted that there is NO market in the research for medical technique: doctors freely share their (surgical, internal, etc.) techniques with other doctors. If the market worked so well, they would charging whatever the market would bear for other brain surgeons (for example) to learn what to do avoid lesions in the occipital lobe, etc.

    This is not as Out of Thread as it might seem: our medical system functions (worldwide) works as well as it does just because most of it behind the scenes is NOT capitalist at all, instead functioning on the freely shared model of scientific research. (Much of the capital-intensive research is government funded as well, though certainly not all of it.)

    I nearly stopped reading when I got to the quote about the poor not being denied food markets. Gah. This person obviously has never lived in ghetto neighborhoods. Does he think Whole Foods has a branch in ghetto Philly? Or a Trader Joe? Is he not aware (does he choose to be unaware?) of how poor nutrition is among US poor?

  • Rupaul

    There’s a basic and obvious fallacy in the “time for money” exchange argument: if I have to wait (say) 6 months for a procedure, I’m free to do other stuff with those 6 months. I’m not sitting in a doctor’s waiting room for all that time. If on the other hand the procedure costs money (money I may not have, of course), I cannot do anything else with that money.

    • Timothy Dalrymple

      It’s not a simple equation, to be sure. But if I have to wait six months for a procedure, I may not be able to work during that period, or I may have to spend a lot of money to deal with the side effects, or take prescription drugs during that time, etc. And then, if I have to drive a long way and wait a long time to see a doctor during an actual appointment, then that’s more time I have to take off work, more money I have to pay for gas and childcare, etc…So, while I agree it’s not a simple equation, Goodman does have a point.

  • Rupaul

    That these are exceptional, not the usual, circumstance for most individuals under universal health care systems vitiates Goodman’s point. It’s as though I said “All swans are black”; you point out that most of them are white, but that there a very few black ones, so I have a point. It would be a friendly thing to tell me :) but I would be wrong, and my belief would be useless to someone looking for swans.

    Anecdata: a while back now a friend from Calgary had a very long wait for a surgery there, largely because the (right wing) provincial government (now in charge of the whole country, alas) was starving the provincial health care system. I have UK friends and haven’t heard any scary stories about long waits from them, though I have to admit I haven’t brought the subject up (though they were angry about the NHS being dismantled by the Tories and LibDems last time I talked, so I think they might have said something if they didn’t like the NHS).

    In any case Goodman doesn’t go anywhere near the non-market dynamics that actually make our system not fall completely apart (medical research, the US Gov’t paying for all the medical student residency programs, nonmarket behavior by doctors; don’t remember him mentioning free ER care either though that is pretty obvious so it might be something I overlooked in his article.)

    • Timothy Dalrymple

      I’m not sure they’re as exceptional as you think. But I suspect you’d find more detail if you checked out the book, for what it’s worth. And I suspect he does address some of the things you mention in the final paragraph in his book.


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