Policy Documents

June 2007: Understanding Government’s Role in Health Care

Joseph Bast –
June 1, 2007

How health care is financed and delivered is one of the hottest public policy topics of our time, and also one of the most confusing. Here are some suggestions on how to sort through the issues.

A Simple Insight

Debates about health care veer from the price and availability of private health insurance to the wisdom and efficiency of government health care programs (Medicaid and Medicare), to issues specific to prescription drugs (such as whether to allow drugs to be imported from other countries) and problems (such as lawsuit abuse) that affect all businesses.

You’d have to be a genius to understand the ins and outs of all these matters, and you’d probably have to give up your day job to stay on top of the latest developments.

I have found one simple insight helps make sense of even the most convoluted aspects of health care policy. It is that health care services can be financed and delivered in one of two ways: voluntarily by people contracting with one another to buy what they want, or coercively and bureaucratically by governments.

Most people rely on markets for some health care services and government force for others, without thinking too hard about the choice. I think that’s a mistake. Choosing freedom consistently brings order to the debate and is our best hope for attaining a fair and efficient health care system.

Is Health Care a Right?

The notion that people have a right to health care is held explicitly by those who want to expand government’s role in providing health care services, and implicitly by many other people who are uncertain but feel government might be able to help some people, some of the time. Either way, it is a mistaken notion.

We all grew up being told we should be in favor of “rights,” but few of us ever learned the difference between positive and negative rights. A right is a claim to be treated in a certain way by others, which places an obligation on others to act in certain ways. Negative rights--such as the rights to “life, liberty, and the pursuit of happiness” proclaimed in the Declaration of Independence--are rights to be free from interference and coercion by others. They generally do not contradict the exercise of the same freedom rights of others.

Positive rights--such as a claim to free or subsidized health care--are very different. They are claims to the service, involuntary if necessary, of others. Positive rights bring with them the risk of contradicting the freedom rights of others.

A “right to health care” does not appear in the U.S. Constitution or its Bill of Rights, or in any state constitution, or in the writings of the Founding Fathers or the British intellectual tradition they drew their inspiration from. This was not an oversight. Such a right would be profoundly at odds with the American devotion to individual freedom and personal responsibility. We shouldn’t welcome this stranger into our political house disguised as compassion for the poor or ill.

Health Care Markets

Health care services are delivered by markets, as are countless other goods and services. Even with current policies and regulations that distort the market for health care, we find normal economic forces working in the same manner they do in other markets. For example, price controls in Medicaid programs are causing a shortage of doctors willing to treat Medicaid patients.

Prices are falling and competition among providers is intense for the least-regulated medical services, such as Lasik eye surgery and cosmetic surgery. Many experiments and other studies have found people respond to higher deductibles and other cost-sharing arrangements by reducing discretionary spending and unnecessary visits to emergency rooms. This cost-effective market behavior should be encouraged.

One sometimes hears the claim that health care is too important to be left to the market. Nonsense! Health care is too important to be left in the hands of government bureaucracies that are unaccountable and unreliable. We need greater reliance on markets and normal economic forces, not less, precisely because health care is so important to so many people.

The Need for Reform

Waste and inefficiency are easily identified in our hospitals, government programs, and private insurance markets. We see it in the number of people who lack health insurance, the lack of price transparency in much of the health care system, the high rate of medical mistakes in hospitals, and the massive income transfers--often from the poor and uninsured to the well-to-do and insured--that the current system generates.

A “good health care system” wouldn’t employ armies of gatekeepers to intrude in the relationship between doctors and patients, wouldn’t require lawsuits to ensure that victims of malpractice get adequate compensation or that incompetent providers lose their licenses, and wouldn’t ration access to life-saving drugs.

These are the real problems facing health care in America today. All can be traced to bad public policies that replaced competition with bureaucracy and freedom of choice with government coercion.

Start with this: There are 1,843 laws mandating that insurers cover specific providers, procedures, or benefits. These laws inflate the average cost of insurance by about 25 percent.

Another law that drives up insurance premiums, “guaranteed issue,” requires insurance companies to provide insurance to anyone who seeks it. This creates an incentive for people to wait until they are sick before buying insurance. That’s like being able to buy automobile insurance after you have an accident.

“Community rating” is a third type of insurance regulation that ought to be repealed. It requires insurers to charge similar rates to all members of a community regardless of age, lifestyle, health, or gender. Healthy people end up paying higher rates than they should, causing them to drop out of the insurance pool, which further drives up premiums.

Reduce Reliance on Third Parties

The government policies most responsible for the shortcomings of our health care system are those that reward reliance on insurance to pay for routine medical expenses.

Under current tax law, employers can deduct the cost of health insurance premiums from their employees’ pre-tax income, so one dollar of earned income buys one dollar of health insurance. People without employer-provided health insurance, and those with insurance but paying out-of-pocket for expenses below the deductible or for required copayments, typically must use after-tax dollars. This means one dollar of earned income may buy only 50 to 75 cents (depending on a person’s tax bracket) of health insurance or medical services.

The tax code is why many of us rely on our employers to choose and pay for our health insurance. Because we aren’t directly paying the bill, we have little financial incentive to shop for the best deal. Worse, we have no reason to limit our discretionary use of health services, creating a perverse economic incentive to consume without restraint.

Spending on health care would fall by approximately 30 percent, without negative effects on health, if more people chose high-deductible insurance and self-insured for small medical expenses by opening health savings accounts (HSAs). Health care providers would become more efficient if they had to compete for our health care dollars. A whole layer of bureaucracy in government agencies, health maintenance organizations (HMOs), and insurance companies could be eliminated.

Freedom Is the Answer

Reforms that require spending more taxpayer money or imposing more regulations on insurers or providers rely on coercion and bureaucracy instead of freedom and competition. We’ve tried them all, and we spend hundreds of billions of dollars each year trying to keep them afloat, despite their many and obvious flaws.

The reforms we need involve removing subsidies and regulations, fixing distortions in the tax code, and abolishing bureaucracies rather than creating new ones. To move forward to a healthier future, we need to return to the policies of the past, when health care services were delivered in a marketplace relatively free of government interference.

Joseph L. Bast (jbast@heartland.org) is president of The Heartland Institute.