Friday, August 24, 2012

How to Replace Obamacare

Stephen Moore
Conservatives should articulate a vision for Patient Power.

A COMMON LIBERAL REFRAIN is that conservatives have no real health care agenda of their own— other than, of course, opposing Obamacare. For instance, in the midst of debate over the president’s signature health “reform” bill, one progressive Florida congressman famously told the House that the GOP’s plan was for sick Americans to “die quickly.”

Baloney. Conservatives could probably stand to put more emphasis on the latter part of “repeal and replace,” but the fact is that many free-market health care reforms enjoy broad consensus on the right.

Peter Ferrara
The Supreme Court is expected to rule on the constitutionality of Obamacare in late June—after this magazine hits the press. But while the court’s decision could be explosive politically, it will not change the need for conservatives to articulate a strong alternative to state-centered health care. The answer is patient power.

EXPLODING HEALTH CARE COSTS in America stem ultimately from what is known as the thirdparty payment problem—that is to say, the great majority of health costs are not paid by the patients themselves. There is almost always some third party, whether it be an insurance company, an HMO, or the government, footing the bills. Indeed, in 2008, 84 percent of health expenses were paid for by private health insurance or government programs such as Medicare, Medicaid, or CHIP.

Consequently, the consumer has no incentive to control costs. To put it in formal economic terms, the consumer has an incentive to spend until the marginal benefit of additional spending is zero. For instance, if a $1,000 procedure costs you nothing, it’s worth doing—at least in economic terms—for just $1 Of benefit. In an efficient market, consumers spend until the marginal benefit is equal to the marginal cost. That $1,000 procedure should only really be worth it for $1,001 of benefit.

In more colloquial terms, the problem is that consumers have an incentive to spend on health care until it hurts, and they have no incentive to shop around. Even worse, doctors and specialists not only have no incentive to control costs, but they actually have a direct financial interest in spending more. Health care providers have no incentive to compete on price, so they compete primarily on quality and secondarily on convenience.

That explains why the American health care system produces far and away the highest quality care in the world: The rewards go to he who creates the best new innovations and most effective new treatments. It also explains why new technology— which drives down costs in every other field—actually increases costs in medicine.

The only solution is to unite the decision over what health care services to purchase with the economic responsibility to pay for them, so costs can be weighed against benefits. And there are only two ways to do that: either the third-party payer (the government or insurance company) is given the power to decide what treatments the patient is allowed to consume, or the patient is given market incentives to consider the full costs of his health care.

Obamacare (and most foreign systems like Britain’s National Health Service) effectively impose the first alternative. With 159 new bureaucracies, boards, agencies, commissions, and programs to govern American health care, plus the individual and employer mandates that require specific health insurance policies, Obamacare could be rightly Labeled “government-centered health care.” The government takes primary responsibility for paying health expenses. The government takes primary responsibility for deciding what health care services its citizens are allowed to consume. The government, then, decides whether each individual’s health care is worth the price. This is why the concept of the government “death panel” expresses a fundamental truth about Obamacare.

WHAT AMERICA NEEDS NOW is the opposite, a patient-centered alternative that maximizes consumer power, choice, and control over health care and its financing. The intellectual godfather of this approach is John Goodman, president of the National Center for Policy Analysis (NCPA) in Dallas and author of the 1991 book Patient Power published by the Cato Institute.

Central to this concept are Health Savings Accounts (HSAs), which were first proposed in 1981. HSAs include an insurance policy with a high annual deductible, in the range of $2,000 to $6,000 (the higher the better). Such high deductibles reduce the cost of the insurance so much that the savings would mostly cover the deductible in the first year. The HSA funds earn interest tax-free and roll over year after year. After one healthy year with few or no medical expenses, the patient has enough money in the account to cover all expenses below the deductible.

This transforms the incentives of third-party payment. For all but the most catastrophic health expenses, the patient is essentially using his own money. Whatever he doesn’t spend he can keep for later health expenses or for retirement. The patient, then, will try to avoid unnecessary care and will look for the best prices for routine visits or services.

In turn, since patients are then concerned about controlling costs, doctors, hospitals, and other health providers compete not just to maximize quality, but also to lower prices, as in all normal markets. (This competition will become more intense and effective the more widespread HSAs become.) These incentives would flow all the way through to the developers of new technologies, who would compete to develop technologies that both improve quality and reduce costs.

Federal legislation providing for HSAs was adopted by the Republican congressional majorities in the 1990s and has improved over the years. These HSAs have been proven to cut the growth in health spending by as much as 50 percent. Participation in HSAs and similar high-deductible plans has soared in recent years and may now exceed HMO enrollment.

PATIENT POWER REFORMS replacing Obamacare would expand HSAs throughout the health care system. Workers should be allowed the freedom to choose them in place of employer-provided coverage, the poor to choose them for their Medicaid coverage, and seniors to choose them for Medicare.

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