Book Review: Making a Case for Market Forces in Health Care

Published February 1, 2006

Healthy, Wealthy and Wise: Five Steps to a Better Health Care System
by John F. Cogan, Glenn Hubbard, and Daniel P. Kessler
American Enterprise Institute and Hoover Institution at Stanford University, 2005 ISBN 0844771783

Healthy, Wealthy and Wise: Five Steps to a Better Health Care System calls the United States the “envy of the world in innovation.” It also states our health care system needs improvement.

The authors–John F. Cogan and Daniel P. Kessler of Stanford University’s Hoover Institution, and R. Glenn Hubbard, a visiting scholar of the American Enterprise Institute–estimate five specific free-market reforms, and a subtle sixth reform, will produce the following improvements: reduced resources spent on unproductive care; 6 to 20 million more people insured; and a total reduction in health care spending of 8.9 percent, or $61 billion a year.

Tax Bias Reform Necessary

The authors begin by addressing U.S. tax policy. They do not disparage employer-provided insurance, but they do condemn the current tax bias encouraging it. Tax deductions, they assert, should also apply to individual insurance and out-of-pocket payments.

The current tax bias, they note, encourages people to overuse medical services, as low co-payments and low deductibles entice patients to demand more health care than they need. The book recommends an expansion of health savings accounts (HSAs, which are tax-deductible and allow individuals to purchase health insurance on their own), high co-payments, and high deductibles.

The authors note, “While our proposal to make out-of-pocket medical expenses tax-deductible offers important benefits for many low- and middle-income working families, it does not help families that pay little or no income tax.” Therefore, they recommend poor people receive tax credits to cover 25 percent of their health care expenses, enabling more low-income consumers to purchase their own insurance with the money saved.

The authors debunk one common criticism of individually based, free-market reform: that out-of-pocket payments rob individuals who have persistently high health care expenditures. Most people, the authors note, rarely have long-lasting, high health care expenses. Those who do, or the chronically ill, can be subsidized directly, the authors say.

Competing Insurance Reforms

Inconsistent with the authors’ free-market tenor, however, is their proposal for a federally controlled market for health insurance.

Although they acknowledge state regulations impede the spread of cost-effective health insurance, the authors fail to explain how federal regulations would be less burdensome. Surely federal legislators, once given this power, would succumb to the desire to over-regulate.

A superior solution is already working through Congress: Congressman John Shadegg’s (R-AZ) Healthcare Choice Act, which would enable consumers to purchase health insurance across state lines. That would enable consumers to avoid burdensome mandates in their home state and would motivate state regulators to compete against each other. The last major action on the bill was in July 2005, when it was reported out of committee after some small amendments.

Information Provision

If people are to make prudent decisions about health care, they need to be informed about the quality and expense of their care. The book recommends the U.S. Department of Health and Human Services and National Institutes of Health issue grants for the collection of data on mortality and health insurance claims from individual states or Medicare and Medicaid programs. This information would create a publicly funded but privately produced portfolio of report cards containing public health data.

This recommendation may well be unnecessary, however, since the private sector is already responsible for producing ample health information.

Similarly dubious is the authors’ recommendation of an effort, led by the U.S. Department of Health and Human Services and Surgeon General, to “identify the most costly and prevalent illnesses whose generally accepted best practices are not universally followed, post these illnesses with their respective guidelines on the Internet, and undertake a public-service campaign to increase patient and physician compliance.”

Ample health information already exists. U.S. News & World Report, for example, produces an annual ranking of hospitals and health plans. Once the government gives more health dollars back to the people, entrepreneurial and trustworthy intermediaries can be expected to provide plenty of health information.

Ambivalent Toward Market Forces

The authors approve of competition, but they rely too much on the heavy hand of the federal government to create it. They oppose hospital mergers, which they say create market power and reduce competition. Instead of using the force of government to prevent these mergers, a better idea would be to look at repealing government regulations, such as Certificates of Need, that inhibit hospital competition.

Furthermore, the authors assert doctors and hospitals should not be allowed to refuse patients with certain health plans. Forcing hospitals to accept everyone, however, is not a free-market approach. In fact, many hospitals’ problems are caused by the government-imposed obligation to provide “free” emergency care with no consideration for the true cost of these services.

More positively, the authors oppose the existing challenges to becoming a practicing physician, suggesting the process is too stringently controlled by the Accreditation Council for Graduate Medical Education.

Malpractice Liability Reform Essential

Healthy, Wealthy and Wise offers recommendations for controlling malpractice liability, which currently causes providers to overcharge patients for fruitless medical services. They urge that non-economic damages be capped in medical liability suits. Included in their proposals is legislation that would protect health care organizations that report medical errors, thus reducing medical mistakes.

The authors also support policy reform for alternatives to court, such as alternative dispute resolution (ADR). ADR appears to be an economical, fair alternative for resolving patient/provider disputes, but its use is not common because state laws and current jurisprudence don’t recognize ADR decisions. It would have been helpful if the authors included further details on this comparatively unfamiliar reform.

Nonprofits Target of Reform

Less emphatically, the authors propose a sixth reform that is not included in the title and not underscored like the others in the text: revocation or limitation of the current tax preference for nonprofits. “We propose that the U.S. Department of Treasury and Department of Health and Human Services study whether current government policy governing the tax exemption for not-for-profit health care institutions is in the public interest.”

The authors suggest exempting not-for-profit organizations is not effective at treating the poor, and that it protects nonprofits from competition from for-profits. The authors say most studies have found little difference in the community benefits provided by for-profit versus nonprofit hospitals, and that prices and costs of care, while they do vary, are not so different between the two after all.

The authors correctly note innovation is the product of incentives, incentives drive markets, and markets allocate resources efficiently. Most of their recommendations would dramatically reduce spending on health care. They appropriately quote Milton Friedman: “Nobody spends somebody else’s money as wisely as he spends his own.”

Diana Ernst ([email protected]) is a fellow in health care studies at the Pacific Research Institute.