Healthcare and the Free Market

Lately it has been asserted by many politicians, pundits, and political spectators that the problems with the health care system in the United States are ills caused by and related to a “free market” in health care. However, the health care system that the United States has today is far from anything that resembles a “free market.” There are several examples that illustrate this.

As it stands today, the United States has the third highest public spending on health related expenses per capita in the world. Hidden in this statistic is the fact government insurance programs (Medicare, Medicaid) cover about 27% of the population. Add to this the fact that government spending on 27% of the population account for around 45% of total health spending in the United States. The point is that this is a large amount of money that the government is injecting into the health care market, which ultimately alters the dynamic of the market.

The government also directly involves itself in the health care market by encouraging certain behaviors. In particular, current federal policy treats employer funded health benefits as tax-exempt. Such policies encourage employers to shift a disproportionate amount of employee salaries toward health care insurance benefits, which incentivizes often wasteful insurance plans. Incentivizing a system of health insurance, supplied by employers, tends to create more problems in the market than it fixes.

People often do not spend the money of others as well as they do their own. For example, how do you think your own grocery shopping habits would change if you paid a flat, monthly rate for your groceries no matter what you bought? Would you care to compare the cost effectiveness and opportunity costs associated with different items? If you pay the same monthly rate either way, wouldn’t it seem silly to choose the store brand chocolate syrup over your preferred brand just because it’s two dollars cheaper? What will it matter, right? It’s just two dollars.

These problems are also evident in government incentivized, employer supplied health insurance. These problems tend to promote a distortion in the price system.

Does this mean that all insurance is bad? Of course not. Insurance is necessary to cover catastrophic and unlikely events. Much like people do not buy plans to cover routine everyday purchases like groceries, gasoline, clothing, oil changes, most people would not buy health insurance to cover routine doctor visits if they had a viable alternative.

That alternative is health savings accounts (HSA). If we had a truly free market in health care provision, without government spending or incentivizing, it would be one where people planned to pay for their own routine care, and took out insurance policies just to mitigate potential catastrophes. What I'm advocating, in essence, is the idea of most people should open savings accounts and save money for just routine, mundane doctor visits. These health savings accounts would be paired with high deductible health insurance which would only cover catastrophic illnesses like cancer or other possibly expensive diseases. The idea of high deductible catastrophic insurance mixed with HSAs is, essentially, just like the Whole Foods model promoted by Whole Foods CEO John Mackey. It's also similar to the model in Singapore, where the government deducts payroll income and automatically deposits it into employees' personal HSAs.

Whole Foods employees, by and large, are very happy with their health care coverage, and Singapore currently has the lowest infant mortality rate in the world, and one of the highest life expectancies of any nation.

Wherever HSAs matched with catastrophic insurance plans, have been embraced, they have brought down costs and improved health care quality. In order to see such results, the U.S. government should stop incentivizing bad behavior by emphasizing employer provided, health benefits, and then work to further remove itself from the health care market wherever and whenever possible. The market cannot begin to correct the health care crisis until it is free from government intervention.