Basic Economic Thinking Would Fix the Broken US Health Care System

Published November 11, 2016

In the realm of public policy, a bit of economic thinking can go a long way. Obamacare is seemingly grinding to a half as a result of being fundamentally at odds with basic economic principles. Today, real, acting human beings are much less the object of economics than are complex mathematical models, abstracted away from reality and setting aside the most central ideas of traditional political economy. And that’s unfortunate, because economics as the study of human beings, their wants, and their means of acquiring them has much to teach about health care policy in general and the failures of Obamacare in particular.

At the outset, it is important to note the U.S. health care system is nothing even remotely resembling a free market. The health care industry in America is an extremely heavily regulated, monopoly system, the result of decades of harmful, anti-competitive public policy. If costs are a problem, then they are so just as a matter of course, for politicians have long preferred policies that both subsidize demand and erect huge barriers to market entry. Both wings of America’s political class seem committed to ignoring free-market proposals that actually address these seemingly intractable cost problems.

Policymakers simply have never absorbed the most elementary lessons of economics: They persist in the belief that for certain goods and services monopolies advantage consumers; their high revenues allowing them to serve indigent populations at reduced rates. Obamacare is predicated on this deeply flawed idea. As health care policy expert Christopher M. Pope once explained, through the Affordable Care Act, politicians have “sanction[ed] monopolistic hospital markets in the hope that dominant providers will use higher revenues to cross-subsidize indigent and emergency care.”

As is now glaringly obvious, this idea isn’t panning out. Premiums around the country are set to rise precipitously in the year to come, with an average increase of 22 percent—a conservative estimate from the Department of Health and Human Services. Oklahoma, for example, is confronted with crippling premium increases averaging 76 percent. Drastic price hikes are the health insurance industry’s effort to squeeze a profit out of a market transformed by Obamacare’s prohibitions, which in fact abolish health insurance as we know it rather than expanding access to it. It is, as it turns out, quite difficult to remain solvent and to make money selling insurance if you’re forbidden from engaging in the kinds of perfectly legitimate and ethical practices that define the sale of insurance as a business, such as the ability to undertake individualized risk assessments and to price accordingly and the right to decline to offer policies to those who are already very sick.

The influx of sick patients took its toll on the system; claims increased dramatically, the outcome expected by anyone with an appreciation of the basic insights of economic thinking. Profitability predictably suffered, with insufficient enrollment from younger and healthier people. And this is even after accounting for the help of considerable subsidies to the insurers through the government’s reinsurance program, which delivered about $8 billion to insurance companies in 2014 alone (equal to about 20 percent of premiums paid that year).

Burdened with heavy losses (Aetna, for example, has lost north of $430 million since 2014), insurers must decide whether proceeding is a viable business option. According to the Kaiser Family Foundation’s Cynthia Cox, at least 23 companies plan to leave the market. And that figure is much higher—around 66, according to Cox—if measured on a state-by-state basis, as some companies, for instance, UnitedHealthcare and Aetna, are planning to leave multiple states.

This new reality of enfeebled competition is likely to endure, with market power further consolidated in the largest insurance firms. As the Mercatus Center’s Brian Blase writes, “[I]n 2017, the weighted average number of carriers participating in each county will be 2.9—a nearly 50% decline from 5.7 average carriers participating in each county in 2015.” Where health care reformers should have aimed at cultivating competition, liberalizing and deregulating both insurers and providers, they instead reduced the market to the few mega-firms able to survive the onerous new rules.

The insurance model for providing health care has always been problematic, afflicted with basic incentives problems. Because the consumer of medical services, prescription drugs, tests, and devices is not the payer, he has powerful incentives to over-consume these goods and services, insulated from ordinary concerns about price. Quite rationally, the consumer seeks to get as much as he can out of his premium payments. Obamacare has aggravated this old problem by preventing insurance from fulfilling its defining role of protecting the policyholder from events that may not ever come to pass and pricing risk using all available information. Health insurance has become something very different, entitling its beneficiary to an almost unlimited menu of services, now in a market that tells insurers they cannot consider an applicant’s health status. Each additional layer of rules further attenuates the price signal, thereby scrambling or obscuring the important information it contains.

For genuinely making health care more affordable, which assumedly implies a serious reduction in health care costs, one could hardly imagine a worse system, one more ill-fitted to its stated goal. The goal of affordable health care is not something that can be brought about by fiat, wished into existence by politicians eager to prove to voters that they took action—some action, however incoherent. Politicians have a knack for neglecting to consider even the faintest possibility that their pet legislative endeavors might have unintended consequences, sure of their ability to alter basic laws of economics and human action. One need not account for incentives in an imagined world where the state is not a mere group of individuals, but a worker of miracles.

The disastrous failure of the Affordable Care Act to perform as its proponents expected is damning to anti-competitive market intervention and manipulation in general. Only a free market in which providers actively compete on quality and price can pull the U.S. health care system out of the status quo’s fetid morass of monopoly. This means allowing competition across state (and even national) lines, encouraging experimentation, and scrapping outmoded regulations based on mistaken economic assumptions. The truest populist challenge to the state-corporate nexus of politicians and special interests is the free market. It’s time we gave it a try.

[Originally Published at RealClearHealth]