Proponents of government-run health care sometimes frame the reform debate as a choice between universal coverage and a “free market” that leaves many people without needed medical services. This is a misleading depiction of the options. It is possible to provide universal coverage with privately-administered insurance plans, as demonstrated by Switzerland.
The central unanswered question in the U.S. health system is how to discipline costs. The choice is between reliance on regulatory controls put in place by the federal government or injection of stronger financial incentives for consumers into the markets for medical services and insurance.
Stating that cost control is the primary issue needing the attention of policymakers is not meant to imply that U.S. political leaders have already taken care of the nation’s entire uninsured problem. They plainly have not done so. Although the Affordable Care Act did lead to a substantial increase in insurance enrollment, there are still gaps in insurance that need to be filled. In particular, the 2.5 million people with incomes below the federal poverty line who live in states that did not expand Medicaid need better coverage options than they have today. But fixing that and other deficient insurance arrangements does not require adoption of a fully government-run health system. A market-oriented framework could also close coverage gaps.
Currently, the U.S. has a mixed public-private system with pricing controls applied to payments made by public insurance, and markets that function poorly because they are hobbled by misaligned incentives, some of which are caused by government policy. The result is widespread inefficiency. Credible estimates put the amount of wasted spending at about one-third of total costs. Many voters are frustrated with this profligate status quo, which has persisted for years.
The Democratic Party would answer the cost control question by giving the federal government more authority to impose system-wide regulations on pricing for medical services and prescription drugs. In Sen. Bernie Sanders’ Medicare for All plan, Medicare’s regulated payment systems for hospitals, doctors, and others would apply to all claims filed by providers of medical services, at least initially. Today, private insurance payments are well above the rates paid by Medicare. The public option plan released by Sen. Michael Bennet, who, like Sen. Sanders is a candidate for president, relies on Medicare’s regulated payments to control costs too.
The GOP position is less clear. Many congressional Republicans and officials in the Trump administration say they want consumer choice and competition, not regulations, to impose discipline on health spending, but they are tepid in supporting policies that would promote a functioning market for medical services and health insurance.
To be fair, the GOP has the tougher assignment. Markets cannot work without cost-conscious consumers, but Americans are in no mood for more exposure to medical expenses. They are exasperated with high premiums and deductibles. They tend to view proposals that would have them take on more financial responsibility for their choices as plots to shift expenses onto to them and away from the government or employers.
This perception is misguided (though it is admittedly powerful in the political arena). A well-functioning market would lower costs for consumers, not raise them. Markets work when sufficient numbers of price-sensitive consumers take their business to suppliers who offer the best value, measured by the quality of what they provide relative to the prices that they charge. In competitive markets, suppliers of products and services must constantly improve their productivity in order to lower their prices and attract market share. All consumers benefit, including those who are not particularly attentive to price comparisons, when suppliers compete to offer the best value possible.
Markets can work in health care, but not without guardrails that only the federal government has the power to put in place. The medical services market is different from other sectors and malfunctions when not properly regulated. Consumers are dependent on the professional advice of their physicians, and widespread enrollment in insurance brings moral hazard into play. With insurance, consumers use more services than they otherwise would because they are paying for care at below-market prices.
The government can correct for these tendencies with careful regulation that allows consumers to see their options clearly and gives them incentives to pursue high value instead of high costs.
First, the federal government can help patients become autonomous consumers of medical services by simplifying the process of price comparisons. The market today is opaque, with pricing that is impossible for the average consumer to compare across providers. The federal government could help consumers by creating a list of standardized services for which pricing must be provided by all relevant facilities and clinicians. The prices attached to each item on the standardized list would cover exactly the same set of services needed to address the patients’ needs, and thus allow for apples-to-apples price comparisons. In addition, insurers should be required to make “referenced-based” payments for those services when provided out-of-network at the average of the rates they have negotiated with their preferred providers. These steps would allow consumers to become active shoppers for many medical services that can be purchased in discrete packages in non-emergency situations.
Second, the government should move toward defined contribution payments for subsidized insurance coverage instead of open-ended payments. In particular, in Medicare and in job-based insurance, plan enrollees should get a fixed level of support toward insurance enrollment that is not tied to the overall costs of the plans they select. In Medicare, this means a “premium support” model. In job-based coverage, the federal tax break for employer-paid premiums should be capped to encourage firms to provide fixed levels of support at the maximum tax-preferred level.
These reforms would encourage consumers to select high-value, low-cost insurance plans because they would pay for 100 percent of the added costs when they select plans with premiums above the fixed level of support from the government or their employers. Conversely, they would get to keep 100 percent of the savings when they selected plans with premiums below the defined contribution payments they receive.
Premium support works to control costs because it encourages insurance plans to become more effective in their management of care expenses. Plan enrollees seek out lower premium plans, which forces insurers to find ways to better control costs. Health plans that rely on clinical data and evidence to continually refine their care delivery processes can provide the full range of medical services to their patients at substantially lower costs than unmanaged fee-for-service insurance. Premium support would allow these plans to flourish and proliferate.
The Congressional Budget Office (CBO) estimates that premium support in Medicare would lower costs for the federal government and program beneficiaries. Under a scenario in which the federal government’s contribution is pegged to average costs in each market, the agency estimates total combined spending by the government and Medicare beneficiaries would fall relative to current law by about 7 percent in 2024. The beneficiaries would spend 5 percent less on out-of-pocket medical expenses, while the federal government’s costs would drop by 8 percent. These cost reductions would occur without any new federal regulations on prices charged by providers of medical services.
The many candidates competing for the Democratic nomination for president are basically unanimous in their support of greater government control over health costs, mainly through the imposition of price controls. The alternative to that vision is a careful intervention to support a functioning marketplace, which would then allow entrepreneurs to transform how medical care is delivered to patients through innovation and higher productivity. Harnessing market incentives would sidestep the risks of lower quality care that would come with using price controls to limit overall health spending.
Many voters want a solution to rising costs that does not hand all control to an unresponsive federal bureaucracy. They could be persuaded to try a uniquely American solution, one that regulates the market in a way that allows it to function and deliver better results. Time is running short, however, for trying this approach, as proponents of a fully governmental solution are gaining momentum and making plans to implement their agenda when they next have the opportunity to do so.
James C. Capretta is a RealClearPolicy Contributor and a resident fellow at the American Enterprise Institute.