Real Competition Is the Cure for Health care

Health care costs are climbing, quality is spotty, and patients don’t get the information they need to evaluate either. No one seems to have the solution. That is why we need market competition more than ever. Not the mealy-mouthed substitutes bandied about by most health policy wonks. We need something that none of us has ever seen - real competition in a free health care market.

We need it because competition is a tool for finding solutions. As Nobel laureate Friedrich Hayek explained, “Competition must be seen as a process in which people acquire and communicate knowledge,” including innovative ideas for improving quality and reducing costs. In a free and open market, economic competition casts a wide net for the best ideas and puts them to work.

Where real market competition can be found in health care, it drives quality upward and prices downward. Laser eye surgery and cosmetic surgery are both competitive markets; in each, producers provide the information patients need, quality has improved, and inflation-adjusted prices have fallen.

It even works in acute care. In a growing trend, foreign hospitals are competing against hospitals in advanced countries that suffer under high prices or long waits for treatment. Just one example: North Carolinian Howard Staab had no health insurance when his doctor told him he needed open-heart surgery. Durham Regional Hospital said the procedure would cost $200,000. Instead, Staab flew to New Delhi, where a former NYU med school professor performed the operation for less than $10,000.

These are exceptions rather than the rule because we have disabled market competition throughout the health care sector. Government tax, spending, and regulatory policies limit the pool of competitors, restrict consumers’ freedom to choose, and discourage consumers from shopping for value. The result is too little competition, too little choice, and too little attention paid to costs and quality.

Fortunately, where we have begun to restore those necessary conditions, market competition is starting to show results. In January 2004, Congress made tax-preferred health savings accounts (HSAs) available to those under age 65. HSAs encourage patients to weigh the costs and benefits of routine care, because HSA holders own the money in their account (which receives the same tax treatment as employment-based coverage).

Now that consumers care more about costs, producers are starting to provide price information. This month, Aetna announced it will publish the payment rates it negotiates with doctors and hospitals in order to help its customers make the best use of their dollars. The move will spur other carriers to do the same. The Consumer-Driven Market Report quoted a “leading national employee benefits advisor” as saying, “Imagine how many people in a Blues plan or United will want to see those prices, but they have to join Aetna to see them.” Competition among providers - to provide price transparency, lower prices, and better quality - is soon to follow.

HSAs could do even more to promote competition if not for rules that limit their reach and make them unappealing to many consumers. HSAs currently require a high-deductible health plan, even though most workers are accustomed to lower deductibles. And though HSAs expand choice and encourage shopping for value when purchasing routine care, they do neither when it comes to purchasing coverage or expensive care.

Expanding HSAs can solve these problems. As Karen Davis of the Commonwealth Fund recommends, the insurance requirement for HSAs should be relaxed to allow coverage with lower deductibles and more flexible benefit designs. Better yet, eliminating that requirement would further expand coverage choices and spur competition among insurers.

Next, workers should be allowed to take the entire value of their health benefits as a cash deposit into their HSA, and to use HSA funds to purchase coverage from any source. That would dramatically increase coverage choices and encourage workers to make prudent decisions about the coverage they purchase.

Fixing all the obstacles to market competition in health care would require many more column inches than the typical opinion piece. But “large HSAs” would be a good first step toward making medical care of ever-increasing quality available to an ever-increasing number of consumers.

Michael F. Cannon is director of health policy studies at the nonpartisan Cato Institute. He is coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It (September, 2005.)