Competition, Choice Are Prescription for Health Care Reform

Published August 5, 2009

President Barack Obama is right when he says the U.S. health care system needs reform. Although this country provides the finest care in the world, our health care system has serious problems. It costs too much, too many people lack health insurance, and quality can be uneven.

The president and his supporters in Congress would have you believe the only choice is between their plan—which amounts to a government takeover of the health care system—and the broken status quo. That is a falsehood.

But supporters of the free market have been remiss in positing viable alternatives. So, what exactly would a free-market approach to reform look like? Quite simply, it relies on those time-tested building blocks of marketplace efficiency: competition and choice.

Personal, Portable Insurance

There are two key components to any free-market health care reform. First, we need to move away from a system dominated by employer-provided health insurance and instead make health insurance personal and portable, controlled by the individual rather than government or an employer.

Employment-based insurance hides much of the true cost of health care. It also limits consumer choice, because employers get the final say over what type of insurance a worker will receive. This means people who don’t receive insurance through work are put at a significant and costly disadvantage. And, of course, it means that if you lose your job, you are likely to end up uninsured.

Tax Reform Needed

Changing from employer-provided to individually purchased insurance requires changing the tax treatment of health insurance.

The current system excludes the value of employer-provided insurance from a worker’s taxable income. However, workers purchasing health insurance on their own must do so with after-tax dollars. This provides a significant financial reward for those who have employer-provided insurance. That should be reversed.

For tax purposes, employer-provided insurance should be treated as taxable income. To offset the increased tax, workers should receive a standard deduction (or in some plans, a tax credit) for the purchase of health insurance, regardless of whether they receive it through their job or purchase it on their own.

Mandates Skyrocket Prices

The other part of effective health care reform involves increasing competition among insurers as well as health providers. Current regulations establish monopolies and cartels in both industries. Because different states have very different regulations and mandates, costs can vary widely depending on where you live.

New Jersey, for example, requires insurers to cover a wide range of procedures and types of care not everybody wants or needs, such as in vitro fertilization, contraceptives, and chiropodists. Those mandated benefits aren’t cheap. The cost of a standard health insurance policy for a healthy 25-year-old man averages $5,580 in the Garden State. A standard policy in Kentucky, which has far fewer mandates, would cost him only $960 per year.

Unfortunately, consumers are held prisoner by their states’ regulatory regimes. It is illegal for that hypothetical New Jersey resident to buy the cheaper health insurance available in Kentucky.

If consumers were free to purchase insurance in other states, they could in effect “purchase” the regulations of that other state. A consumer in New Jersey could avoid the state’s regulatory costs and choose, say, Kentucky, if that state’s regulations aligned more closely with his or her preferences.

With millions of American consumers balancing costs and risks, states would be forced to evaluate whether their regulations offered true value or simply reflected the influence of special interests.

Provider Competition Necessary

We also need to encourage greater competition among providers. Nurse practitioners, physician assistants, and other non-physician practitioners should have far greater freedom to treat patients. We also should encourage innovations in delivery, such as medical clinics in retail outlets.

The choice facing us now is not between Obama’s plan for health care micromanaged by the government or doing nothing. Instead it is a choice between government control, regulation, and rationing on one hand, and free markets, choice, and competition on the other.

That is the real health care debate.

Michael Tanner ([email protected]) is a senior fellow at the Cato Institute. An earlier version of this article appeared in the Los Angeles Times. Reprinted with permission.