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Health Care Needs a Dose of Competition

by Michael F. Cannon

This article appeared on cato.org on September 27, 2005.

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Hurricane Katrina has brought to the fore the strengths and weaknesses of America's health care delivery system. Millions of individual Americans, acting on their own initiative, rushed to meet the dire need Katrina created. Those efforts include providers rushing to assist in person, as well as charitable contributions made by those who never left home. In contrast, the response of government has been alarmingly slow and has even thwarted private efforts.

Why the discrepancy? Entrepreneurs and private charities often respond much faster than government because they are more agile and flexible. Just as important, they avoid wasting valuable resources, allowing help to go where it's needed the most.

These considerable advantages emerge from the fact that government must follow cumbersome rules, and that individuals are more careful with their own resources than with other people's. There is a lesson here for America's daily struggle with how to make health care more accessible.

In many sectors of the economy, market competition consistently improves quality while reducing costs. Health care is an exception, but not because competition cannot work. In fact, the recent rise in cash-paying patients traveling abroad for medical care shows that market competition makes even urgent, high-cost acute care more affordable.

Rather, health care is an exception because market competition is not allowed to work. Market competition requires three key elements: (1) a large pool of actual and potential producers with new ideas; (2) consumers who are free to choose different products; and (3) consumers who weigh the costs and benefits of those products. At every turn, government tax, spending, and regulatory policies thwart these necessary conditions of a free market.

To mention just one example, heavy government subsidies (through programs such as Medicare and Medicaid) and tax penalties (for workers who do not let an employer purchase their health care) discourage patients from weighing costs against benefits. As a result, Americans pay for more of their medical care through third parties (86 percent) than patients in 17 other advanced countries, including Canada.

Time and again, free markets have proven an effective framework for making products of ever-increasing quality available to an ever-increasing number of consumers. To make high-quality care available to more Americans, we need reform that will allow markets to work in health care. That should include:

• More flexible health savings accounts.
  Though promising, this new health insurance option is too restrictive. Congress should create large HSAs that are more flexible and give workers ownership of all their health care dollars and decisions.
• Injecting choice, competition, and ownership into Medicare.
  This federal program for the elderly engenders enormous waste and will soon impose a crushing tax burden unless we act soon. Congress should give seniors greater choice of health plans, and allow workers to save their Medicare taxes in personal accounts for their health care needs in retirement.
• Reforming Medicaid as Congress reformed welfare.
  This federal-state program for the poor creates the same harmful incentives as the welfare system Congress reformed in 1996. Those reforms should be applied to Medicaid.
• Health insurance deregulation.
  Costly state regulations make health insurance too expensive for many, and each state prohibits the purchase of coverage licensed in other states. Congress should tear down those barriers.
• Provider deregulation.
  Regulation of medical professionals (e.g., licensing, scope-of-practice, and telemedicine laws) and facilities (e.g., certificate-of-need laws) restrict the availability of medical care, particularly for the poor. Those laws should be relaxed.
• Competitive certification of medical technologies.
  Private markets already certify the effectiveness of secondary uses of drugs, and faster than the FDA does. That same process should be put to work for initial uses of drugs and medical devices.
• Letting patients and providers negotiate malpractice protections.
  Patients can choose different levels of malpractice protection by going abroad for care. They should be able to have the same choice at home.

Though not comprehensive, these reforms would go a long way toward improving the quality and convenience of medical services, while making care more accessible.

People are suffering in the wake of Katrina. But others suffer every day because our health care system is not what it should be. The gains are there to be had. We must build the will.