– September 29, 2017

In 2015, the United States spent 17.8 percent of its GDP on health care, far greater than any other developed country. Perhaps even more staggeringly, that percentage has doubled since 1980. This is due in large part to our awkward hybrid of private and public health care systems. Earlier this week, Jose Nino wrote about some of the virtues of a free market health care system. While there is no substitute for free markets to truly contain costs, many factors complicate the debate. Free market advocates are fond of refuting the idea that health care is different than other goods and services, but in political practice if not economic theory, I think they’re wrong. Many people hold ideals about health care that change the parameters of the debate. To engage in substantive debate, free market advocates would do better to recognize rather than dismiss those ideals.

Our health care system has two related problems that put intense upward pressure on the amount we spend: overconsumption, and a lack of competition among providers. It’s helpful to look first at car insurance, an industry where these problems either don’t exist or are far less severe.

Let’s consider a simplified car-insurance scheme where drivers pay a premium and zero out of pocket for specific repairs. Because the price of repairs is zero, people will opt to make any repair that has some benefit. But there is a clear point when the benefit of repairs drops to zero — when the cost of repairs exceeds the value of the car. At this point, the insurer can simply compensate the driver for the value of the car. Even in a world with no price competition among auto mechanics, there is still an upper limit to the amount we would spend maintaining our cars.

Competition further disciplines the amount we spend on car repair. The car-insurance industry is regulated, but remains far freer than health insurance. People are free to choose among competing insurance plans. Insurers can charge more to cover more expensive cars, and discriminate based on individuals’ accident histories. This competition puts downward pressure on the prices insurers are willing to pay for mechanics, incentivizing mechanics to compete on price.

Now consider health insurance. It is impossible for the insurer to make the patient whole by buying them a new life. Without such a cap, and facing a price of zero, people will consume as much health care as they can until they hit the limits of current technology or their quality of life drops to a certain point (i.e., they can’t be treated or don’t want to be treated).

Through most of history, health care spending didn’t overly burden society, because we simply weren’t that good at health care. The advent and continued advancement of modern medicine is no doubt a great thing, but as long as scientists are finding new cures rather than focusing on cutting costs of current procedures, that upper limit on what we can spend will continue to rise.

Now consider a free market for health care and insurance. Insurers could offer as many plans as people want, covering varying amounts and types of care for higher or lower premiums. Some consumers might choose to pay out of pocket. Both consumers and insurers would more fully bear the cost of care, incentivizing providers to compete on price. And people would have to make decisions on care based on what they were willing or able to spend, curtailing overconsumption.

Overconsumption and lack of competition are not addressed in a single-payer government-run system. The only cap on consumption is the refusal to pay, with the government simply assuming the role as the villain currently played by insurance companies. And the government dictating prices for care or directing patients to specific doctors would cause big problems in the system. As Friedrich Hayek famously explained, prices and free competition are the only way the many individuals in a complex society can accurately communicate their wants and needs.

A free market approach addresses the two problems we’ve discussed, but here’s where I take my economist hat off. Such a system inevitably involves decisions and outcomes regarding life and death that many people find abhorrent. We have enough trouble making decisions about when to stop care for ourselves or loved ones based on quality of life alone. The pain is only magnified when financial considerations play a larger role in those decisions. And then there’s the issue of who receives care. Even in a free market system, poor people can and should be subsidized, whether privately or through taxation, and with sufficient help might well receive better care than from any other system. But wealthier people would buy more and better care than poorer people could afford, and, all else equal, live longer lives. These are cold calculations that, though they also exist in our system today, many people find tragic.

Free market advocates sometimes dismiss these views as well-intentioned but incorrect. However, they reflect values deeply held by many people who won’t disregard them when faced with even the best economic argument. That’s why health care is different: cultural, emotional, and likely biological factors shape how we view life and death, and those factors will inevitably affect the debate. One can believe free market reform would reduce a great burden on our country, while also recognizing the hard choices it would bring to the surface.

Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research focuses on two main areas: policy and technology. On the policy side, Gulker looks at how issues like poverty and access to education can be addressed with voluntary, decentralized approaches that don’t interfere with free markets. On technology, Gulker is interested in emerging fields like blockchain and cryptocurrencies, competitive issues raised by tech giants such as Facebook and Google, and the sharing economy. Gulker frequently appears at conferences, on podcasts, and on television. Gulker holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.
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