The incentive structure of our present health care system is fundamentally flawed, and the legislation signed by President Obama will exacerbate the problem. It will increase what we spend on health care, or lead to rationing, or both. Perhaps most important, it will undermine the self-reliance and character of the American people.
The only prudent response to Obamacare is to repeal it, and then move on to real reform. Fortunately, a simple, market-based, incremental, bottom-up approach to reforming our health care system is possible. Unfortunately, nobody in Congress has yet proposed it. Someone should. A bill of less than 100 pages would suffice to address the three big problems: surging cost, uncertainty about maintaining insurance coverage, and the uninsured.
Bending the cost curve—for real
President Obama claims we’re “bending the cost curve,” but it is hard to see how medical costs will be reduced with a massive new entitlement, a few minor pilot programs, and future cuts in Medicare at which Congress will surely balk when the time comes.
The only way in which Obamacare, or a revision of it, will be able to control costs is through some kind of rationing. Nobody likes rationing, but one cannot avoid it if one believes that ultimately people should not have to pay for their health care. For those who think people can and should take care of their own necessities, however, there is a better way of getting control of costs. Instead of establishing a bureaucracy above consumers and/or producers to dictate what they may consume and/or produce, we should strengthen the link between consumers and the cost of what they consume.
The rational way to control health care costs can be summarized in one phrase: Level the playing field. If all health care expenditures are put on a level playing field with regard to taxation, the market will naturally begin to control costs, as it does in other sectors of our economy.
Health care differs from other products Americans consume, including necessities like food and shelter, in the degree to which consumers are shielded from paying for what they consume. It does not take peculiar insight into human psychology to suspect that people are more careful about the cost of what they consume when they pay for it themselves.
Of course people often cannot pay for health care they need. Likewise, people often cannot pay for a new house if the one in which they live burns down. That is why we have insurance. Health insurance, however, works in a peculiar way, unlike any other form of insurance. Instead of protecting us when we face potentially catastrophic costs, health insurance policies usually cover most or all health care costs. They do not simply insure against catastrophe, but also pay routine expenses which we could easily anticipate and budget for. It is as if we filed a claim on our homeowner’s insurance every time we needed to paint a room, or even change a light bulb.
This approach creates huge administrative costs—not just in money but also in time, the hours and hours consumers and especially providers spend in dealing with insurance companies. (If you think this situation is bad now, wait until the government is your insurer!) Moreover, and perhaps more important, shielding the consumer from the cost of what he consumes means that people shop less intelligently and frugally than they could.
My family of four paid $5,063 in health care costs in 2008. That includes everything: dental, prescription drugs, yoga classes (for lower back pain), and our health insurance policy, which was $2,380 for the year. Our policy has a very high deductible ($10,000), so for the most part we pay our costs out of pocket. We approach insurance as insurance—protection against catastrophe—not as an expensive and bureaucratic middleman whom we hire to pay our bills. This encourages us to consume carefully. My wife and I try to avoid unnecessary procedures and visits to the doctor. We shop around and choose our providers, and they are happy to serve us, since we pay what they ask and they don’t have to haggle with our insurance company. All four of us are in good health, and my own quality of life is enhanced by confronting very little health care-related paperwork.