(This article was published with some revisions for size in The Free Press, an FSU campus circular. That version is available here.)
Lately it has been taken for granted by many politicians, pundits, and political spectators that the current health care ills faced by certain people or groups in the United States are ills caused by, and part and parcel to, a “free market” health care environment. Sound bytes about the fact that some 15% of individuals in the U.S. are without health insurance (a statistic that, despite claims to the contrary, has not really changed in the last twenty years, according to the U.S. Census Bureau), the fact that the U.S. has the highest health care costs per capita, or that costs have continued to increase, have been bantered around as proof that the free market has failed, and that that failure is an indication that the government must step in to provide where the market cannot.
But, could one really make the argument that what the United States has today is, or has had within any recent memory was, a “free market” for health care or related insurance? Supporting such a claim would be difficult at best.
As it stands today, according to the OECD, the United States has the third highest public spending on health related expenses per capita (just behind Iceland and Germany, and just ahead of France), despite the fact that almost all care is provided privately, and that government insurance programs only cover about 27% of the population. Add to that the fact that conservative estimates put government health expenditures around 45% of total health spending in the United States (take note, that’s 45% of spending ostensibly covering that 27% of the population).
Not only does the government directly involve itself in the market through spending, but it also encourages 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 all-encompassing insurance plans. How could that be a problem? More people will have more insurance, and that’s a good thing, isn’t it?
Not necessarily. Incentivizing a system of third party payers for a market tends to create more problems in that market than it fixes. Human beings 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. Now imagine how your habits would change if you only paid half of the monthly rate, and your employer or someone else paid the other half. What would happen if someone else paid the bill entirely?
In every instance where we see people being given an inorganic, disproportionate amount of spending power, we see a distortion of incentives, which in turn tends to promote a distortion in the price system.
When excess cash was pumped into the housing market due to government policies promoting home ownership and cheap credit, what sort of changes did we see in home prices?
Since the government got involved in the student lending business, what has happened to college tuition?
When your parents talked about “learning the value of a dollar,” this is what they were (perhaps unknowingly) referring to.
Does this mean that all insurance is bad? Of course not. Insurance is necessary to cover catastrophic events. You buy renter’s insurance in case your house gets robbed, you buy property insurance in case of a hurricane, and you buy auto owner’s insurance in case of an accident.
You do not tend to buy insurance policies for expected and routine purchases like groceries, gasoline, clothing, oil changes, etc. Why not? Because the risk of you going out and doing those things is extremely high (you’re almost certainly going to do those things on a routine basis). Insurance deals with mitigating low-to-medium risk possibilities, not certainties associated with living a modern life.
Certain things that we do today in the health care market are not things we would consider to be low-to-medium risk possibilities. Going to see a doctor several times a year, having a cold or sore throat treated, elective surgeries, or dentist’s visits are all activities for which we do not even think to discuss the idea of “if,” but “when.” How do we pay for our “when” activities in every other market? With our own money.
This would lead me to believe that if we had a free market in health care provision, it would be one where people pay for their own routine care, and take out insurance policies just to mitigate potential catastrophes. When I’m advocating a move to a more free health care market, what I’m advocating, in essence, is the idea of most people opening savings accounts and saving money just for this particular purpose (commonly known as HSAs, health savings accounts). This idea of high deductible insurance mixed with HSAs is, essentially, just like the Whole Foods model discussed by Whole Foods CEO John Mackey in a Wall Street Journal column in mid 2009. It’s also similar to the model in Singapore, where the government deducts payroll income and automatically deposits it into employees’ personal HSAs (this system is compulsory, a fact which I am not fond of, but it is useful for demonstrating the effectiveness of 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 incentives have allowed for their implementation, HSAs matched with catastrophic insurance plans have brought down costs and improved health care quality. In order to incentivize that sort of behavior in this country, the U.S. government should first stop incentivizing the bad behavior of putting too much emphasis on employer provided, all-encompassing health benefits, and then work to further remove itself from the health care market wherever and whenever possible (it is, itself, an incentives-distorting third party payer). The market cannot begin to correct the health care crisis until the system of incentives is free from arbitrary state distortion.
Health care and the free market
(This article was published with some revisions for size in The Free Press, an FSU campus circular. That version is available here.)
Lately it has been taken for granted by many politicians, pundits, and political spectators that the current health care ills faced by certain people or groups in the United States are ills caused by, and part and parcel to, a “free market” health care environment. Sound bytes about the fact that some 15% of individuals in the U.S. are without health insurance (a statistic that, despite claims to the contrary, has not really changed in the last twenty years, according to the U.S. Census Bureau), the fact that the U.S. has the highest health care costs per capita, or that costs have continued to increase, have been bantered around as proof that the free market has failed, and that that failure is an indication that the government must step in to provide where the market cannot.
But, could one really make the argument that what the United States has today is, or has had within any recent memory was, a “free market” for health care or related insurance? Supporting such a claim would be difficult at best.
As it stands today, according to the OECD, the United States has the third highest public spending on health related expenses per capita (just behind Iceland and Germany, and just ahead of France), despite the fact that almost all care is provided privately, and that government insurance programs only cover about 27% of the population. Add to that the fact that conservative estimates put government health expenditures around 45% of total health spending in the United States (take note, that’s 45% of spending ostensibly covering that 27% of the population).
Not only does the government directly involve itself in the market through spending, but it also encourages 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 all-encompassing insurance plans. How could that be a problem? More people will have more insurance, and that’s a good thing, isn’t it?
Not necessarily. Incentivizing a system of third party payers for a market tends to create more problems in that market than it fixes. Human beings 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. Now imagine how your habits would change if you only paid half of the monthly rate, and your employer or someone else paid the other half. What would happen if someone else paid the bill entirely?
In every instance where we see people being given an inorganic, disproportionate amount of spending power, we see a distortion of incentives, which in turn tends to promote a distortion in the price system.
When excess cash was pumped into the housing market due to government policies promoting home ownership and cheap credit, what sort of changes did we see in home prices?
Since the government got involved in the student lending business, what has happened to college tuition?
When your parents talked about “learning the value of a dollar,” this is what they were (perhaps unknowingly) referring to.
Does this mean that all insurance is bad? Of course not. Insurance is necessary to cover catastrophic events. You buy renter’s insurance in case your house gets robbed, you buy property insurance in case of a hurricane, and you buy auto owner’s insurance in case of an accident.
You do not tend to buy insurance policies for expected and routine purchases like groceries, gasoline, clothing, oil changes, etc. Why not? Because the risk of you going out and doing those things is extremely high (you’re almost certainly going to do those things on a routine basis). Insurance deals with mitigating low-to-medium risk possibilities, not certainties associated with living a modern life.
Certain things that we do today in the health care market are not things we would consider to be low-to-medium risk possibilities. Going to see a doctor several times a year, having a cold or sore throat treated, elective surgeries, or dentist’s visits are all activities for which we do not even think to discuss the idea of “if,” but “when.” How do we pay for our “when” activities in every other market? With our own money.
This would lead me to believe that if we had a free market in health care provision, it would be one where people pay for their own routine care, and take out insurance policies just to mitigate potential catastrophes. When I’m advocating a move to a more free health care market, what I’m advocating, in essence, is the idea of most people opening savings accounts and saving money just for this particular purpose (commonly known as HSAs, health savings accounts). This idea of high deductible insurance mixed with HSAs is, essentially, just like the Whole Foods model discussed by Whole Foods CEO John Mackey in a Wall Street Journal column in mid 2009. It’s also similar to the model in Singapore, where the government deducts payroll income and automatically deposits it into employees’ personal HSAs (this system is compulsory, a fact which I am not fond of, but it is useful for demonstrating the effectiveness of 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 incentives have allowed for their implementation, HSAs matched with catastrophic insurance plans have brought down costs and improved health care quality. In order to incentivize that sort of behavior in this country, the U.S. government should first stop incentivizing the bad behavior of putting too much emphasis on employer provided, all-encompassing health benefits, and then work to further remove itself from the health care market wherever and whenever possible (it is, itself, an incentives-distorting third party payer). The market cannot begin to correct the health care crisis until the system of incentives is free from arbitrary state distortion.