To Lower Health Care Costs, Try Freedom
As Congress debates the American Health Care Act, its members should remember the benefits in cost and quality generated by the free market. What Americans need is not another complicated insurance scheme, but a return to health care that patients pay for themselves.
For the past several decades, government intervention has pushed Americans to pay for more of their medical expenses with insurance. The result is that medical costs rose 118 percent from 1992 to 2012.
Costs rise under an insurance system because patients have no incentive to price-shop. As Nobel laureate Vernon Smith explains, in our current system, party A (the service provider) tells party B (the customer) what they should buy. Party C (either the government or an insurance company) then pays for it.
This deprives patients of the incentive to price-compare, because they’re not directly paying for the services that party A recommends. But when consumers are encouraged to factor in cost, prices fall.
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In fact, this is exactly what has happened in areas of healthcare not dominated by insurance.
LASIK is an elective procedure that’s not covered by insurance; and over the past two decades, quality has risen as prices have fallen. In 1997, a precursor to LASIK surgery that involved the surgeon wielding a knife cost $8,000. In 2012, a safer laser-guided surgery cost only about $3,800. Prices halved in 15 years even as quality rose.
Cosmetic surgery is similarly not often covered by insurance. From 1992 to 2012, cosmetic surgery costs rose only 30 percent. Adjusted for inflation, costs actually fell.
Even traditional surgery is less expensive when patients bypass insurance. In the Wall Street Journal, Jeffrey Singer tells the story of a patient who decreased his out-of-pocket surgical costs from $20,000 to $3,000 by negotiating price with the hospital on his own instead of relying on insurance.
Putting patients in charge of their own healthcare encourages them to be price-conscious. When this happens, service providers have an incentive to compete on price, and competition produces downward price pressure.
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In a free market, one in which the law didn’t require that insurance cover everything from pregnancy to mental health, health insurance would primarily cover catastrophes. Elective procedures would be paid for by the patient, either in cash or with financing.
A free market in health care could also lower costs by incentivizing surgeries that reduce health care costs long term.
Bariatric surgery is a classic example: while weight loss surgery costs $14,000 to $23,000 on average, it often pays for itself in lower medical costs for patients. This is because obesity can cause expensive health conditions such as sleep apnea, high cholesterol, and heart conditions; the average cost of obesity is about $15,000 per year. Bariatric surgery, which helps 80 percent of patients to lose most of their unwanted weight and keep it off, can substantially reduce these problems. For instance, the duodenal switch helps 95 percent of patients to resolve their Type II diabetes.
To be clear, bariatric surgery is not right for everyone, and solutions like the Lap Band can cause substantial complications. However, for those for whom it is a good fit, surgery can reduce lifetime health care costs dramatically.
Unfortunately, our current highly regulated healthcare market drives up costs and prevents patients from receiving surgery. In a survey of primary care providers, 53 percent of respondents reported that their patients could not afford weight loss surgery. That’s one reason why, even though one-third of Americans are obese, less than 200,000 receive weight loss surgery each year.
Right now, 80 percent of patients rely on private insurance to pay for bariatric surgery, which inflates costs. Additionally, many insurance providers refuse to cover surgery, in part because the patient could have an expensive surgery under X insurer, and then switch to Y insurer afterward; Y would then reap the financial rewards of a less expensive customer. Critics may call this a market failure, but this situation would be uncommon in a true free market where people paid for their own costs and reaped the benefits themselves.
If we want to incentivize cost-saving surgeries, we should roll back the laws that give insurance an outsize influence in healthcare.
The United States health care system is one of the most regulated sectors of the economy, and was so even before Obamacare. This has, predictably, driven up costs. Instead of another complicated insurance scheme, let’s give freedom a try.