Health Care in the U.S.: Fortress or Frontier?

This is a follow up on Chris Medrano’s last blog in which he argued for repealing Obamacare.

The battle over health care isn’t about Republicans versus Democrats. According to economist Robert Graboyes, it’s really about two competing mindsets: the fortress and the frontier.

The fortress mindset is the current way of doing things. As the name implies, it’s all about safety. Its approach to fixing problems is with whack-a-mole regulations. Oftentimes, these regulations create perverse incentives, which lead to a cycle of more problems and more regulations to solve them. The result is a conglomerate of rules to keep insurers, hospitals, drug manufacturers, doctors, and patients safe from harm and competing interests. The Affordable Care Act (ACA), also known as Obamacare, is just the most recent parapet in the structure.

The alternative to the fortress is the frontier mindset. It sees health care as a land to be explored. The frontier mindset envisions a world where entrepreneurs are unleashed to meet the ever-changing and diverse needs of patients. This openness would allow for a more dynamic, personalized health care system where patients are served in efficient ways.

A frontier approach aspires for quality health care to be within reach of every American, just as cellphones and computers went from luxury goods to almost universally accessible.

What’s Holding Us Back?

Unfortunately, our current system suffers from a fortress mentality, which prevents innovation and efficiency. Antiquated practices have been codified and put us on an unsustainable path. Take, for example, employer-provided health insurance.

Have you ever asked yourself why employers often pay for health care, but not other necessities like food or housing?

In his seminal work Priceless: Curing The HealthCare Crisis John Goodman recounts how employer-provided health care came about. During World War II, the federal government imposed a maximum wage (yes, you read that right) on the private sector. Its purpose was to allow the government to bypass their competition for labor so that people would work for the military or in another capacity supporting the war. As a result, private companies began to offer to pay for health insurance in order to survive.

Eventually, the practice became widespread and employer-provided health insurance was given special tax treatment. Thus, almost half of people today receive their health coverage from their employer.

But that’s not all. The reality is, most americans don’t actually pay for their own health care. According to Kaiser Family Foundation, 85% of Americans get their health care from their employer, Medicaid, or Medicare, or another public program. The individual market, or non-group, is only 7% of the population. The remaining 9% are uninsured.

Therein lies the central problem with our healthcare system according to Goodman. No real market exists because patients aren’t making decisions for themselves. Instead, the industry is controlled by third parties. These include federal/state governments, insurance companies, and employers.

This also explains why there was never an Amazon.com for health care. If we had a market, it wouldn’t be that difficult to set it up. Healthcare.gov was actually supposed to be a an Amazon-like market where people could compare prices for plans. But it didn’t exist before because, unlike every other market, there was never a demand from consumers. The only stakeholders that matter are the institutions, not millions of individuals in need of health care.

To be clear, we shouldn’t storm the castle and completely overthrow these institutions. Millions of people depend on them. Nonetheless, we need to consider ways to put decision-making back in patients’ hands and introduce competition and choice to make health care truly affordable.

Replacing the ACA: Give Health Care Back to the People

Currently, Republicans want to scrap the ACA and take a step towards patient-centered reforms. This is an amazing opportunity for our health care system.

While there is certainly disagreement over how this transition should take place, I just want to list a sampling of reforms experts have proposed which would lead our health care system in a more market-centered direction.

  • Expand Health Savings Accounts (HSA’s) and get rid of the preferential tax treatment for employer-provided health insurance. HSA’s are basically pre-tax accounts where people can save money to buy insurance or pay for care out of pocket. And because they are owned by the patient, they can move with people from job to job and even get passed on to their kids. Currently, there are stringent regulations on how much employers can put into these accounts, or which insurance plans they can be used with. But they provide the best alternative to the employer-provider model and ought to be liberalized.
  • For the problem of pre-existing conditions, Congress should allow states to create high-risk pools. I know, this is a far from perfect solution. The main problem with risk pools is their high costs, but this is fixable if other reforms are put in place for the whole health system. The problem with the ACA’s rule saying insurance companies cannot reject those with pre-existing conditions is that it creates the incentive for people to wait until they are sick to get covered.
  • On the supply side, the artificial control of medical residencies needs to be loosened. Currently, the United States is facing a shortage of Doctors. This is in part due to the fact that medical licensing boards have strict control over who can and can’t be a doctor. As Milton Friedman noted, it’s much easier for a medical providers to raise prices if they have less competition. This barrier also stunts innovative practices. For example, Pascal-Emmanuel Gobry writes that “artificial intelligence…is already better than doctors at providing diagnosis” but is restricted because “to provide some of the services…is illegal if you don’t have “M.D.” after your name.”
  • The Federal Drug Administration (FDA) needs to be fundamentally reformed. Nathan Nascimento writes in Forbes that “only 19% of drugs will successfully navigate the three major stages of FDA approval and testing. Some drugs fail because they were not safe; others because the process can be exorbitantly expensive.” He further elaborates, “Tufts University estimated it cost $2.6 billion to get a new drug successfully tested and into the market.” These tremendous costs are imposed because the FDA has moved away from its proper role of determining whether a drug is safe and effective. According to Dr. Joseph Gulfo, the FDA now approves new drugs and treatments “based on long-term health outcomes—a practice that dissuades development and increases the complexity, cost and duration of clinical trials.” There is a strong argument that this should change. Furthermore, the FDA’s regulatory control also protects pharmaceutical companies and makes it harder for new competition to enter the market.

By enacting patient-centered reforms like these and many others, Congress can help make health care more affordable and improve the environment for innovation.

Making Today’s Brain Surgery Look Like Yesterday’s Blood-letting.

Innovation is a scary concept because it’s not guaranteed. We don’t know what we don’t know. But what we do know is that under a free market, innovation and increased quality of life are the norms. Whether it was the infusion of market reforms by Deng Xiaoping in China, or the way West Germany far outpaced East Germany in economic development, perhaps we take for granted just how much Adam Smith’s spontaneous order and harmony of interests have benefited humanity.

We must find ways to use the same forces of choice and competition to create a better environment for everyone. I’m optimistic that if Congress boldly seeks to advance a frontier way of thinking, we can do real good for millions of Americans and increase our quality of life.  

Chris Medrano

 

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