Thursday, December 28, 2006

Thank You John Goodman

Health care costs now accounts for 16% of the economy and is growing rapidly. While there are many causes the solution is simple: subject health care to free market forces. For all intent purposes health insurance (in its current incarnation) has taken away price signals that coordinate consumer behavior. This is because small co-pays take away the need for price shopping. Price has becomes irrelevant.

Imagine the price a can of soda would be if consumers based their decision on, either real or perceived need and brand. Soda insurers would merely attempt to find ways to restrict consumption such as restricting certain vendors and limiting the number of sodas covered but would have no instrument to control price. Since consumers have no need to price shop, producers have no need to compete with prices. Their only economic drive would be to improve quality so consumers prefer their product which only forces them not to be much worse than the competition and suppress entry of new competitors. A can of soda, under such a scenario, would probably be $10, or more.

This example probably sounds silly but there is no other insurance market that provides the consumer access to a product. Insurance is meant to prevent the consumer from loss or harm. So why must insurance cover every doctors visit and prescription instead of just hospital visits or necessary surgeries which actually prevent loss or harm? Changing the definition of health insurance from a stop-loss preventive measure to something that covers every single product or service that can be remotely connected to “health care” is the cause of millions of Americans being without any insurance. Employers have an incentive to pay for coverage that will bring their employees back to work but not to pay for tissues and aspirin. Less people covered means even higher prices because hospitals must charge more to recoup the losses they incur from uninsured patients not paying their bills.

The solution? Higher premiums, which force the health care consumer to price shop, health savings accounts which allow people to save, tax free, for when they need the money most, and complete coverage for catastrophic events. A good article in the Post today describes the fight Economist John Goodman has been waging for a well over a decade. Amazingly, the Post reports that consumers don’t like paying higher prices for visits to the doctor (investigative reporting at its best). The first consumers enrolled in such plans will pay more because it will take time for market forces to readjust the prices there is no doubt that prices will come down.

The second part of this equation, reigning in out of control litigation, I’ll leave for another time.

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