The Magazine

Healthy Trend

First, do no harm­—and then repeal Obamacare.

Sep 3, 2012, Vol. 17, No. 47 • By WILLIAM ANDERSON
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Thirteen years ago I co-authored a book that I thought could cut the Gordian knot of the health care dilemma. The dozens of copies sold proved insufficient to promote the needed revolutionary change. John C. Goodman has now written the book that can do the job. He presents as clear an answer as we are ever likely to see, along with examples from the real world. It’s now our job to make the case in a politically effective way.

Stethoscope and Apple

New thinking is necessary, and Goodman provides it. He argues that a free-market approach is essential; health care must be bought with money that most consumers have reason to see as their own. And while most people would respond to such a proposal with an incredulous roll of the eyes, this perception must change.

Many reject the notion that the free market is a morally sound mechanism for health care delivery. Strong strains of contemporary political thought refuse to accept limits imposed by economic reality. Some say that too many people are incompetent to make the right decisions. Ignoring demographic necessity, some assume that there is no natural limit to the endless escalation of borrowing. 

To see the results of this muddled thinking in operation, we need only look at our acceleration of national debt, the death spiral of states like California, and the feckless response of our politicians. In the real world, goods and services are evaluated in three dimensions: quality, cost, and availability. It is not possible to optimize all three at once. A free-market approach recognizes this and provides a compromise that most people can accept. Errors are self-correcting. A command, top-down approach for medical care, now assumed to be inevitable, does not meet this test. It depends on the wisdom and probity of self-styled experts. This is not a stable state, and it guarantees an endless turmoil of shortages and misallocated resources. 

Goodman’s wonderful volume considers both the theoretical and the practical. Economic principles, clearly stated, form the basis for discussion. Policy recommendations include strategic thinking and tactical objectives. Goodman tells us how it all can work, and what political decisions will be required. 

Essentially, a successful system must facilitate competition among providers of care, thus producing the price signals crucial to resource allocation. This means that people at large, not experts, must decide what a particular service is worth.

And the beginning of practical wisdom is to know that insurance is not a proper funding mechanism for wants and needs that are certain to occur. We wouldn’t want insurance coverage for food. A properly functioning system will accumulate money under individual control for routine care, while insurance will protect against unusual and expensive events. A safety net for the needy will complete the picture.

This requires a system of medical savings accounts, similar to individual IRAs, buttressed by insurance coverage for catastrophic events. Sums equal to current insurance premiums, prudently invested, would produce an ample pool of funding. These would accumulate tax-free, roll over yearly, could be used or saved as necessary, and could provide a health care legacy to be passed on to the individual’s heirs. Goodman tells us, in detail, how to make this happen. 

A cornerstone of his analysis is that incentives are more efficient than rules for channeling behavior toward optimal solutions. Yet, curiously, this perspective is controversial: Many prefer the authoritarian approach, assuming that incentives will not protect us from individual folly, and will not lead us where they intend us to go.

What Goodman offers is not merely a bundle of theory. Since 2005, Indiana has allowed state employees to opt for health savings accounts. These have proved to be both popular and cost-reducing; by 2010, 70 percent of state employees were choosing them. Indiana’s Medicaid program has also operated along these lines. Singapore, South Africa, and other countries Goodman cites have had similar successes.

The free-market approach is not without critics, some of whom have vested interests in the status quo. The massively powerful insurance lobby, for example, opposes such plans with vigor. Advocates of more expansive government disdain free-market reforms as unfair, unworkable, and biased against the disadvantaged. Rent-seekers find their potential sources of income to be limited. Opponents of federalism decry the competition among states for the best operational plans. Believers in top-down management view it all with alarm. 

The usual pandering to entitlement and envy will persist. Yet Goodman argues persuasively that a private-sector approach is the only solution for the long term. He is cautiously supportive of the budget perspective of vice presidential candidate Paul Ryan, recognizing its superiority to President Obama’s plans, while pointing out that a fully effective program will take years to be realized. The last chapters aim to help us understand the details of the new health care act and the priorities for repealing and replacing it. This is no easy task, given the arcane and opaque language of the law, but Goodman is a master of clarity.

Simply put, our country and the world are coming up against the natural limits of borrowing. In this situation, demography is destiny: We are reaching the end of an era of economic solutions through bigger government. Our deficits and accumulating debt, largely driven by health care costs, cannot continue. 

There are only two paths available. We can maintain a government entitlement approach and face rationing and price control by law, with inevitable delays and shortages, quality decline, and continued cost pressure. Or we can adopt rationing by price, controlled by the competition of providers and the choices of consumers, some of them subsidized by government, which allows for equilibrium of quality, availability, and cost. 

Once again, policy choices are driven by divergent worldviews. The vigorous pursuit of equality alone ultimately produces poverty, misery, and oppressive government. On the other hand, the vigorous pursuit of individual liberty produces a self-correcting system in which increasing equality can occur. John C. Goodman has charted the path.

William Anderson is a retired physician.