What does a free market healthcare system look like?

Excerpts from an article entitled The Economics of US Healthcare at Mises.org.

US healthcare is no longer affordable for the average American. Healthcare is a scarce economic resource. Like all scarce resources, the production, distribution, and consumption of healthcare is best left to the free market. Any solution to healthcare must make healthcare more affordable.

The solution requires four basic changes. The four changes are simply the elements of a truly free market in healthcare as opposed to the convoluted system of cartels in place now.

1. Limit insurance to insurable conditions and eliminate all regulatory barriers to the provision of health insurance

Health insurance is a contentious topic, especially among healthcare providers. The healthcare profession tends to view insurers as the enemy. One cause of this contentious relationship is that healthcare providers provide healthcare to their patients, but the providers receive their payment from the insurance companies. Medicare is largely responsible for this change. Patients have come to expect that they will receive everything and that the insurer will pay for it. If patients were responsible for their payment and patients negotiated with insurers for reimbursement, patients would be far more selective about what care they received.

The concept of preexisting conditions is also a point of contention within the healthcare industry. On the surface, it does not seem fair that someone pays their premium for many years, then, after developing a life-threatening condition, they are denied further insurance.

Yet the concept of preexisting conditions is necessary for insurance companies to remain solvent. Nobody would expect an insurer to sell a term life insurance policy to a corpse. Nobody would expect an insurer to sell a homeowner’s policy to somebody whose home was already destroyed by a tornado. Health insurance is no different.

A free-market insurance industry would be allowed to sell policies against the treatment of leukemia. This treatment is catastrophically expensive, but because the condition is very rare, large numbers of people can pool their risk and make the premiums very inexpensive. No insurer is going to sell a policy against leukemia to somebody who has leukemia for the same premium as it would sell it to the general population. Any attempt by government to force insurers to cover preexisting conditions is a socialization of cost rather than an insurance.

Many disease conditions require therapy for long periods of time. Anyone who purchases insurance for the next year becomes vulnerable to losing insurability after the policy expires. The solution is to have insurance policies for many years or life. With a condition such as leukemia, there is no reason that insurers could not and would not offer policies covering people for their entire lives as long as they had no signs of leukemia at the time they enroll. The main reason we do not have health-insurance policies for life is that insurers are forced by government to cover conditions that are not insurable, such as the example of screening colonoscopies I gave earlier. The costs required to cover these uninsurable conditions for life make the policies so expensive that nobody will purchase them.

Rare conditions can be insured cheaply, but common conditions necessarily become more expensive to insure. At some prevalence, it becomes foolish to cover a condition via insurance rather than paying for it out of pocket when it arises. Uninsurable conditions such as the screening colonoscopy have to be paid for by the beneficiary. Any other payment scheme is a socialization of cost.

2. Eliminate the barriers to the production and delivery of healthcare, including licensing restrictions

Doctors and nurses are both cartels. It should come as no surprise that these cartels are resistant to competition. As with all cartels, barriers to entry increase over time, reducing competition. And as with all cartels, barriers to competition are disguised as assurances of quality. Quality is subjective; different consumers have different priorities. Licensing requirements are attempts to objectify what is purely subjective.

Standards used as points of information, on the other hand, are objective and can be used by consumers to determine their choice of provider. A truly free market in healthcare would have no licensing requirements, and assurances of quality would be handled via ratings agencies or certification boards. Decisions about which quality standards were important would be determined by consumers rather than providers.

Would anyone be able to set himself up to perform open-heart surgery? No! Open-heart surgery is a complicated procedure requiring many skilled people working together and a huge capital outlay for facilities. Neither the anesthesiologists, nor the technicians, nor the nurses, nor the hospitals are going to work with a quack heart surgeon; they have no desire to share liability with the quack.

Many doctors have the misconception that without licensure there would be no standards. Hospitals have credentialing processes. It is very likely that the process of credentialing would have little or no change in a free market. Hospitals would demand letters of reference and would continue to inquire where a heart surgeon received training.

Healthcare is not a single entity. There is a continuum of services with a continuum of expertise. The market is best suited to match expertise with complexity of service. Consumers would demand considerable expertise of heart surgeons. They would not likely demand the same expertise for the treatment of a sore throat. Certification of expertise would remain an important source of information, but consumers would decide what value to attach to any certificate, rather than certificates barring entry into any given service. Certifiers, including the educational institutions that grant degrees, would either be attentive to consumer demands or lose their prestige.

A free-market healthcare system would develop tiers of care. The lowest tier would provide services for the most common ailments. For example, one might see an alcove in Walmart where one could have blood pressure checked and routine blood tests performed. People would pay for these services out of pocket, and intense competition among providers would keep price down. The use of physician assistants and nurse practitioners to deliver primary care is a step in that direction.

A bone-marrow-transplant team would serve a much larger community. Teams would compete on the basis of quality of service. Consumers would purchase insurance against the need for a bone-marrow transplant. The insurers would set standards of quality for teams they would work with. Any attempt by insurers to compromise quality for cost on such a high-end service would likely lose insurance customers because the effect on premiums would be small. Cost would not be limitless, however. The market would determine the optimal price of quality rather than some government committee.

What about quacks? There will always be quacks selling snake oil. Licensure simply guarantees that the quacks are licensed quacks, which are arguably more dangerous. A market would develop information about providers. Just as consumers consult websites for product information before purchasing a car or a computer, they would consult analogous sites for information on physicians in their area.

What about snake oil? If a consumer wanted to try snake oil, they would be free to do so without a licensing agency standing in their way. Sometimes the official “experts” are quacks. For example, in the 1960s the medical establishment was going to wipe tuberculosis off the face of the earth by treating everyone with a positive skin test for TB with the drug INH. The experiment had to be stopped, however, when too many people died of liver failure.

Sometimes it is not clear what is snake oil and what is good medicine. There are many controversies today about nutrition, vaccines, and cholesterol. The market is the most efficient way of resolving these controversies, as long as people have access to information. Experts should be free to give advice and warnings, but consumers should be free to accept or reject the advice of experts.

Cartel privileges do not come without strings attached. The regulatory burdens on healthcare providers are the prices paid for privilege. Providers are being told what questions they must ask, how they must record the answers, what tests must be ordered, and what treatments must be prescribed. Pay-for-performance standards are being developed for hospital length of stay. If patients typically require four days of hospitalization to recover from pneumonia, then HHS will wave a magic wand and decree that hospital stays longer than three days constitute waste, fraud, and abuse. Patient therapy will be decreed the same way fuel-economy standards were imposed on American automobile manufacturers. That did not turn out too well for the American auto manufacturer.

Regulatory burdens plague American business in general and US healthcare in particular. There are so many regulations that no provider can possibly be aware of them all. Lawyers and consultants must be hired to advise what the law actually means. The complicated nature of the regulatory environment is intentional. When the law is so complicated that nobody understands its boundaries, then government agencies can terrorize every provider about compliance with the law.

3. Eliminate the barriers to the production and delivery of medicines and medical technology, including patents

Intellectual property (IP) has important implications for the cost and availability of pharmaceuticals and medical devices. Medicine tablets and pacemakers are both things that require property rights. Only one person can use a medicine tablet or pacemaker at a time, so property rights allow the owner to decide use and avoid conflicts with other people who would like to use the items.

Ideas, on the other hand, are not exclusive. My use of an idea, whether the idea represents a molecule or a gadget, cannot possibly impair the use of the same idea by another person or many other persons at the same time. Ideas do not require property rights to avoid conflicts. Patents serve only to grant monopoly privileges, thereby raising costs and decreasing innovation.

A common defense of pharmaceutical patents is that people would not invest such enormous amounts of capital to have drugs approved by the FDA without monopoly privileges and the extra profit they confer. The problem here, however, is the FDA and its barriers to production rather than the absence of monopolistic intellectual property rights. Inventors would have enormous advantages of first use of any idea. The retention of that advantage would require the development of brand loyalty. In a world without the FDA and patents, inventors would have to demonstrate safety and efficacy to the public, rather than government agencies dictating which drugs are to be used in which situations. Drug costs would be dictated by consumer demand rather than arbitrary decisions made by Medicare Part D. Competition would lower drug costs and improve delivery systems.

The United States has a peculiar combination of patents and cartels to ensure that pharmaceuticals are outrageously expensive. Drug companies are granted monopoly privileges over the supply of pharmaceuticals, and doctors are granted monopoly privileges over the distribution of pharmaceuticals.

Patients should be able to purchase whatever medications — including narcotics — they wish to use without the permission of a doctor. Patients would continue to seek advice from doctors about how best to treat their signs and symptoms of disease. Doctors would continue to diagnose ailments and make recommendations about how to treat them. Patients would be free to accept or reject that advice. Consider a patient with high blood pressure. The doctor prescribes lisinopril. The patient accepts the advice, he buys the medication, and his blood pressure falls to normal levels. After 20 years of taking lisinopril, why should the patient require a doctor’s permission to continue taking the medication?

Pharmaceuticals are much cheaper in Canada where US patent laws are not obeyed. Pharmaceuticals are much cheaper in India where a prescription from a physician is not required. The usual claims and concerns about patient safety are not validated by the experiences in Canada and India.

Doctors and nurses in the United States are caught in the middle of the war on drugs. Our lives are made miserable by preventing people from obtaining medications like Lortab. Pain cannot be objectively measured, so healthcare workers are forced to decide if patients are in pain or seeking euphoric effects. There are situations, such as the inpatient care of patients with sickle-cell anemia, where this conflict interferes with the proper care of the patient. Doctors should sell advice rather than dictate what medicines people take for their problems.

4. Eliminate the socialization of healthcare costs and the subsidies for being sick.

A subsidy is a government price control where members of a group pay less than the market cost for an item or service. All subsidies lead to a desire by those outside the privileged group to be included in the group. All subsidies lead to demand for the item being higher than it otherwise would be, and that always leads to prices being higher than they otherwise would be. Subsidies for illness are no exception. As a physician, I am asked to do more than diagnose illness and recommend therapies. I am asked to write letters excluding patients from jury duty. I am asked to write letters excusing patients from paying their electric bill on time. I am asked to sign applications for privileged parking spaces. I am asked to certify eligibility for scooters.

Prices are signals to producers and consumers on which behaviors would be profitable to change. Prices are set by voluntary exchange, which is the free market. Without voluntary exchange there are no prices, and without prices neither producers nor consumers know what to do. Subsidies interfere with the price mechanism. People will always demand more of something when they are spending some other person’s money.

Read the entire article, The Economics of US Healthcare by Gilbert G. Berdine, M.D.


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