HEALTH CARE is often touted as yet another sign of American exceptionalism. While the Canadians and the British provide "universal" care through government-run systems, it is said, the U.S. depends on free markets. In reality, the American health-care market has been heavily distorted by public policies. As the late Milton Friedman observed, "Most payments to physicians or hospitals or other caregivers for medical care are made not by the patient but by a third party--an insurance company or employer or governmental body." Whatever its many faults, the U.S. system does not suffer from an over-reliance on free markets.

To be sure, it is more market-friendly than the health regimes in Canada and Britain. But the U.S. also maintains a variety of federal and state programs-such as Medicare, Medicaid, and the State Children's Health Insurance Program (S-Chip)-to insure the elderly, the poor, lower-income children, and others. So the question is not whether Washington should introduce government management of health care, but whether it should expand government management of health care.

Traditionally, conservatives have advertised American health care as "the best in the world," and compared it favorably to Canadian- and European-style "socialized medicine." But over the past two decades, as Americans grew increasingly anxious about the cost and availability of care and insurance, Democrats proclaimed a national "crisis" and responded with sweeping reform plans. Republicans tended to deny there was a crisis, while appearing relatively comfortable with the status quo.

Recently, this has begun to change. A small but growing number of Congressional Republicans are pushing fervently for market-based reforms, led by Jim McCrery, Paul Ryan, and John Shadegg in the House, and by Richard Burr, Tom Coburn, and Jim DeMint in the Senate. "The skyrocketing cost of health insurance is the biggest domestic crisis facing most Americans today," Ryan said in 2005. "It affects our jobs, our economy, and our families' way of life. We have to get a handle on this problem."

Free-market reform starts with one overarching goal: ending the unfair tax treatment of private health insurance. While businesses enjoy a tax break for providing health insurance to their employees, individuals do not get such a benefit for buying their own insurance. Consequently, Americans generally look to their employers for coverage. But in an employer-based system, losing your job means losing your insurance, and even switching jobs can mean temporarily going without coverage.

The third-party payment system also makes it more difficult for workers to secure optimal coverage. And it encourages them to rely on employer-provided insurance for routine medical expenses, which can lead to an overuse of care. The net result is to drive up health-care costs and severely disadvantage those Americans who are either unemployed or who do not receive insurance through their jobs, including many who are self-employed or who work for small businesses.

"The greatest source of health-care inflation is the third-party payment system," Ryan told me. But how to fix it? In his 2007 State of the Union Address, President Bush proposed "a standard tax deduction for health insurance that will be like the standard tax deduction for dependents." Some Republicans disagree with the tax-deduction formula, and instead prefer a tax credit.

Either way, eliminating the tax bias against individually owned insurance would significantly alter the U.S. health-care market and would help depress costs. So would allowing consumers to purchase insurance policies across state lines. (One reason health insurance is so much more expensive in states like New York and New Jersey is because of onerous state mandates. A national marketplace would promote genuine competition.) GOP reformers are also pursuing market-based changes to Medicare and Medicaid and the expansion of Health Savings Accounts.

Such ideas have spilled into the 2008 Republican presidential race, with Rudy Giuliani, Mitt Romney, and John McCain laying out bold proposals to revamp the health-care system. Each candidate's proposal is different, but the general thrust is toward free markets and consumer-driven care. As McCain has put it, "Nothing short of a complete reform of the culture of our health system and the way we pay for it will suffice."

Of course, Republicans still have a stark credibility deficit. In a New York Times/CBS News poll conducted this past February, 62 percent of respondents said that, between the two parties, the Democrats were "more likely to improve the health-care system." Only 19 percent said the Republicans. In the same poll, 90 percent said the system either requires "fundamental changes" (54 percent) or needs to be completely rebuilt (36 percent). Nearly two-thirds (64 percent) agreed that "the federal government should guarantee health insurance for all Americans."

So Democrats have undeniable momentum. The public supports them on S-Chip and distrusts the Republicans. Hillary Clinton, Barack Obama, and John Edwards have outlined ambitious blueprints for boosting government management and regulation of health care. And even though Giuliani, Romney, and McCain have embraced some watershed free-market reforms, the leading GOP presidential candidates seem more interested in bickering over their partisan credentials than they do in discussing the specifics of health insurance.

But as the Democrats grow bolder, Republicans are beginning to realize that merely whacking the piƱata of "HillaryCare" won't be enough. They need to present an alternative vision. Judging by the policy stirrings on Capitol Hill, and by the Giuliani, Romney, and McCain reform plans, Republicans may finally have one--even if their 2008 frontrunners would rather talk about something else.

Duncan Currie is managing editor of The American.

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