An Opening for Market-Based Health Reform

U.S. health spending continues to escalate rapidly despite repeated promises by elected leaders to impose a solution. Those failures, focused mainly on more regulation, have created an opportunity for market advocates to make their case for an alternative strategy. They should seize it.

More discipline in health care should be among the nation’s top domestic priorities. After years of rapid cost escalation, the U.S. spends the most on medical services among advanced economies. In 2021, the OECD estimates that the U.S. devoted 17.8 percent of its GDP to health expenditures, which was nearly 40 percent more than the next highest-spending G-7 country (Germany).

Directing more scarce resources to health might be justified if it delivered better results, but multiple credible studies suggest about 25 percent of the total U.S. bill is wasted on services of little or no value to patients. Further, facilities and clinicians often charge inflated prices for their services because there is no reward for offering lower prices and no penalty for charging more than their competitors. The expensive insurance and health system bureaucracy sitting atop this superstructure also provides no clear value for consumers.

Fixing these problems is vital for a strong economy. For years, rising premiums for job-based health insurance have suppressed the wage gains of many households. The federal government’s debt burden is also growing at an alarming rate, with rising expenses for Medicare and Medicaid a main culprit. Slowing health spending escalation would go a long way toward solving both problems.

There are two competing perspectives on what to do. One camp favors ever-stricter regulation, especially on pricing. On the other side are proponents of market incentives, vigorous competition, and consumer choice. The market option is poised for renewed consideration because multiple government-centric schemes have lost credibility.

The Affordable Care Act: The ACA, enacted in 2010, was sold partly as a brake on cost escalation. It handed the government new powers to test alternative payment models (APMs) in Medicare and the broader insurance system. Those experiments, now in place for over a decade, have delivered modest returns and have been no match for the vast, and revenue-hungry, network of facilities and clinician practices wanting to proceed with business as usual. National Health Expenditures were 17.2 percent of GDP in 2010, 6 percent below what they were in 2021.

The Public Option. President Biden believes a voluntary public option, modeled on Medicare, will control costs by expanding price limits on service payments. In the states testing the concept, including Washington, take-up has been lagging, and there is no prospect of transformative savings. A major impediment is the unsurprising reluctance of hospitals and doctors to volunteer cuts in their incomes.

The U.K.’s National Health Service (NHS): The NHS has been held up as a model public insurance plan, but its current crisis is too severe for even advocates to dismiss. The U.K. government, not the private sector, has run the NHS without interference for three-quarters of a century and is fully accountable for its performance. Recent estimates indicate that restricted access to care is contributing to 300 to 500 premature deaths per week.

Public agencies struggle to control costs without harming patients because they lack the required expertise to engineer higher productivity in medical care settings. Instead, to hit financial targets, they resort to spending caps or price controls. In the U.K., the government sets the NHS’s annual budget. In the U.S., the federal government and the states cap the prices Medicare and Medicaid will pay for services. The combination of budget cutting and stagnant productivity leads to waiting lists and inferior care.

Critics of markets want to say the U.S.’s problem is a “laissez-faire” mentality, but what exists today is not a free market. Rather, it is a complex interplay between government regulations and subsidies, and private institutions.

Market reforms hold more potential than stricter regulations to deliver sustainable savings because they rely on voluntary cost cutting by those who are in the best position to re-engineer the care process to be more efficient without harming quality. What they need is financial motivation.

Policymakers can unlock market discipline by stressing two concepts.

Standardization. Insurance coverage and medical services are too complex to expect consumers to know what is or is not required for better health. For apples-to-apples pricing (and premium) comparisons, consumers need standardized offerings. In insurance, that means eliminating confusing and unimportant differences in coverage. Similarly, when shopping directly for medical care, which is possible in about one-third of all patient-provider encounters, consumers need “all-in” pricing for a full medical intervention, such as common surgeries. With standardization, pricing differences will reflect only the relative efficiency of those providing the services or insurance coverage.

Consumer Incentives. Consumers also need incentives to economize. For insurance, that means letting them keep 100 percent of the savings when they opt for more efficient coverage. Likewise, with medical care, patients should benefit fully when selecting lower-priced service providers.

Implementing a market-based reform will not be easy, as it will require changing Medicare, employer coverage, insurance regulations, and price transparency protocols. The scale of the political challenge attracts few takers.

That’s understandable, but the ground is shifting. It is more apparent than ever before that reliance on full government control to discipline medical care spending carries risk. The time is right to promote a structured market as the surest route to a sustainable balance of cost-cutting and quality health care.

James C. Capretta is a senior fellow at the American Enterprise Institute and the author of US Health Policy and Market Reforms: An Introduction, published by AEI Press in 2022.