Lexington, KY - The economics news is persistently gloomy, and debates continue about various financial market rescue packages and economic stimulus spending. In the midst of all this, the administration and Congress seem to be pushing ahead with major reform of the health care sector. Indeed, Congress has begun to consider a health care bill that is reflective of Obama campaign proposals.
An intent of most health care initiatives is to increase coverage and reduce costs. Unfortunately, many of these plans morph into government provided health insurance and/or care, leading to a health care version of the tragedy of the commons and all the regrettable things that come with it. In this case, the tragedy of the commons arises from people treating zero-priced (or under-priced), government-provided healthcare as free, leading to overuse, higher costs, and the ultimately limitations on our own personal healthcare decisions.
There is no need to go down this road. We have many problems with the health care system in the United States, but many aspects work quite well. Let's ask why certain things work well and where and why the problems emerge. We fix the latter without breaking the former. Many proposed reforms would eventually move us to a system that does the converse.
Health care works pretty well for people who have good, steady jobs. These jobs have a reasonable variety of health insurance plans to choose from and, within those plans, there are choices of providers to utilize. People can select among plans, physicians, and treatments that suit them best. Having a significant measure of choice is an important reason why it does work well for this group and is another way of saying that there is competition for their health care business. The problems with our healthcare system primarily are that it is quite expensive, is prone to overuse, and there are many who lack coverage.
How can we deepen the salubrious effects of competition and choice and extend them more broadly to a wider group of the population? An obvious place to start is to reduce impediments to competition that already exist. There are many that have been created by government that government has the powers to eliminate. For example, many states in the U.S. severely limit the ability of physician assistants and nurse practitioners to treat patients, despite the fact that many, many medical treatments do not require the services of an MD. "Certificate of Need" laws that are present in many areas require new hospitals, or those expanding into new services, demonstrate for a government body that the new services are needed. These certificates are often difficult to obtain and are frequently opposed by existing area hospitals. State laws commonly place restrictions on health insurance companies, requiring them to offer features in plans that customers may not want and making it difficult to bargain effectively with health care providers.
Each of these has the effect of reducing competition, thereby limiting choice, raising prices, and making it more difficult for people to obtain good health care. Further, the favored tax treatment of employer-provided health insurance over individually-purchased plans adds greatly to this set of problems. The favored tax treatment has shifted the market for health insurance toward employers and away from catering to individuals. It has induced employer-provided plans to have overly generous coverage since it is tax free. And tying health insurance to employers makes no sense and causes many problems when people lose a job. This tax distortion, and the resulting negative effects, can be eliminated by treating employer and individual plans the same; either (1) allow tax-free individual plans or, (2) lower income tax rates while covering employer plans.
We would go a long way to improving our healthcare system simply by removing the above described impediments to competition, choice, and broader health insurance coverage. No new government expenditure programs or taxes are required, yet we would achieve lower costs and prices and, by making the health care less expensive and more accessible to individuals, coverage would rise. Coverage can be extended further to groups deemed too poor to buy it on their own with the provision of health insurance vouchers to those individuals. The voucher would enable the purchase of a basic health insurance plan, which the individual would shop for among the private-sector insurance plans available, and could add his/her own money to in order to upgrade. This is the health insurance equivalent of the food stamps program.
Unfortunately, policy proposals we hear about almost invariably call for less reliance on the private sector, more government spending, and less individual choice and control over health care. The clearest example of this is universal, single-payer health care plans. Here, taxes are collected to pay for healthcare, then provided free by government or government-sponsored providers. And this is where the tragedy of the commons plays out. Individuals, in their use of healthcare providers, act as it if is free. But, of course, the provision of doctors, nurses, hospitals, equipment, and the myriad of other things that go into producing health care are not free. Thus, very quickly, this type of system runs out of money. The first step to deal with this is to raise taxes. When that no longer works, government agencies "control costs" by limiting the availability of treatments and options. So that angioplasty procedure, knee replacement, cancer treatment, or epidural may simply be unavailable to you when you need it. Indeed, this is the experience of Great Britain and I don't think it's one we wish to emulate.
Other proposals are not as extreme, but can easily lead in the same direction. For example, the plan Massachusetts has adopted, which is similar in many respects to the one before Congress, enables access to a government healthcare plan, but it is well underpriced. As a result, it has attracted many more users than anticipated. It's already running short of money and there apparently is talk of limiting availabilities of treatments.
We surely don't need to move in this direction. We can retain the access and choice for those that currently have it and extend it to others by removing impediments to a vibrant, competitive market for health care and health insurance.
John Garen is department chair and Gatton Endowed Professor of Economics at the University of Kentucky.