A Blueprint for Real Health Care and Financing Reform

The American political scene has been in turmoil over the past few months as the Democrat-controlled Congress addresses health care. The system, in general, has some very real problems that go unaddressed amid the din of reformers’ voices. Rather than address these, and propose alternatives to the Democrats’ plan, many Republicans have introduced the specter of American politics – charges of “socialism”.

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Democrats in particular have bristled at the term, arguing that they are not “nationalizing” health care, but are simply providing a “government-run public option”. But socialism means more than government owning an industry outright. Socialism is a politico-economic system in which costs – and decision-making – are spread across society. The current “reforms” socialize costs and economic decisions, and the proper term for that is socialism. The least that “reformers” can do is have the intellectual integrity to call it as it is. But whatever the merits or demerits of their prolific labels, Republicans on the whole have not been anywhere near as vocal in promoting a positive agenda – that is, assessing the real problems in the health care system and offering a solution.

The first step is to recognize that many of the problems in our health care system have nothing to do with the federal government. In fact, the Congress has no constitutional authority to legislate anything related to health care. The sources of many of our health care system’s problems are at the state level: state legislators and insurance commissioners have imposed controls harassing insurers, health co-ops, charities, group practitioners, and doctors. If real reform is the objective, state government is where the lion’s share of the work is. If health care becomes a federal issue, the only practical effects will be that the federal government becomes more involved in local issues, reducing the responsiveness of the medical system, increasing administrative costs, and diminishing individual freedom.

Medicine is one of the only professions without transparency in billing; medical providers do not list the prices for their services before consumers buy them, so consumers do not have the necessary information to make proper choices. Improving visibility would ensure that people’s decisions to buy health care reflect economic realities.

One of the greatest improvements that could be made in insurance, as bad as it sounds, is to allow insurance companies to discriminate. Government requires that insurance companies use “community pricing”, which means that individuals must pay the same for insurance regardless of their risk categories. Age, gender, ethnicity, hobbies, employments, drug use, diet, exercise, and many other factors influence which health problems a person is likely to have, but insurance companies’ discrimination between these real health factors is legally forbidden. Young individuals with healthy lifestyles thus have artificially high insurance costs. This prices many of them out of the insurance market, leaving them uninsured and so further increases the price for others. As far as insurance markets are concerned, discrimination is a good thing. Insurance is a financial instrument for spreading unpredictable, catastrophic loss. If someone is known to be high risk, it makes no sense to pool them with low risk individuals because prices will not reflect costs, and the market will not function effectively. When insurance markets are free to discriminate among real risk categories, prices for each group more accurately reflect their real economic costs, and prices, on the average, fall.

Because the elderly and unhealthy are effectively subsidized by community pricing, they benefit greatly when this policy is a universal requirement. The core of the “individual mandate” to buy health insurance is not “individual responsibility” for each individual’s costs, but is an attempt to force those who are disadvantaged by community pricing to subsidize those who benefit, regardless of the real costs for either group, and with flagrant disregard to the consequences, both personal and economic, of such an action.

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Licensing laws in insurance have prevented doctors from using innovative, low-cost payment plans for medical services to the poor. They have also prevented extremely effective Christian community groups from formalizing their pooling of medical expenses under a contract; thereby denying them market presence and reducing their efficiency and service. Doing away with these laws would create an environment in which insurers, doctors, co-ops, and charities can devise new, efficient services and introduce more competition in the insurance industry.

Medical licensing has also contributed greatly to the expense of medical care. By forbidding anyone other than a licensed provider from giving medical care, the government and the American Medical Association together restrict the number of doctors, reducing supply and driving up prices. It also leads to “gold plating” of medical care, where doctors must be present to diagnose and treat ailments, even when a nurse, technician, or pharmacist is perfectly competent to judge and implement the appropriate treatment. This does more than cause consumers to spend money needlessly: it also consumes more of the doctor’s time, resulting in lower quality and greater costs to those who need the doctor’s attention most. Perhaps the worst effect is when there is no doctor present at all, where paramedics or technicians might have been present to give aid, but were not due to licensing laws that impeded their training or employment. There is no way to calculate this hidden cost. Removing medical licensing laws would instantly increase medical supply and reduce costs in both wealth and human life.

Of course, safety in medicine is valuable. Instead of paternalistic licensing laws that presume consumers are incompetent to choose their medical providers, we could just as well have certification – a government or private organization (such as a university) verifying that a prospective doctor had the skills necessary to his work. Citizens would be able to base their judgments accordingly, rather than being preemptively prohibited from choosing a doctor without the right piece of paper.

Eliminating minimum benefits packages would do a great deal to improve the health care system. Every state has laws requiring insurance companies to cover certain expenses in all their plans, from chiropractors to in vitro fertilization to alcohol and drug rehabilitation. Sometimes these laws also require that the insurance have a low-deductible to reduce out of pocket expenses (but increase premiums). These laws are sold to the public under the guise of giving people some degree of security. But the same people must pay for that security, whether they consider it worth it or not. Pre-natal care and rehabilitation are of no use to a single teetotaler, and requiring him to pay for it will only drive up the cost, either reducing his standard of life or driving him out of the insurance market altogether. Eliminating these minimum benefits packages would allow individuals to purchase only the coverage they want.

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Once states have removed their counterproductive insurance regulations, there will be far fewer barriers to interstate trade, which is limited due to the number and variety of state regulations. If these regulations are both minimized and standardized, over 1,000 insurance providers will be able to expand their markets to the entire nation, breaking apart local monopolies and bringing competition to urban areas, which are currently dominated by a select handful of insurers. The federal government can do its part to abolish existing federal limitations on interstate financial services such as insurance.

The federal government can also improve health care through our international trade relations. Although businesses in the United States are the primary innovators in medical technology and pharmaceuticals, we pay the highest prices, in part, because other countries impose price controls. However, price controls do not actually lower costs; they are simply efforts to avoid paying them. American consumers must pay artificially high costs to pay for development of new drugs, while foreigners pay little more than the cost of manufacture. Allowing drug reimportation from these countries will effectively import their price controls, but only to the extent that pharmaceutical companies choose to sell to such countries. This will pressure pharmaceutical companies to reject other countries’ controls, making foreigners responsible for the real cost of drugs if they wish to benefit from the advances of American medicine. Such a move would greatly increase economic freedom around the globe while lowering our medical expenses.

The next step for both state and federal governments is to end tax exemptions for fringe benefits. This system was originally the product of World War II’s price controls, which forbade paying workers more than a certain amount. To circumvent the price controls, companies gave their employees fringe benefits like health care, which tax laws do not consider income. These benefits are income, however, just not income that employees have control over. This lack of control, combined with the employer’s standardization of health insurance plans, significantly reduces efficiency – people don’t get the insurance they want and are willing to pay for, they get the insurance they’re given. Furthermore, employer provision of health insurance leads to the disastrous situation in which a worker simultaneously loses his job and health coverage, ensuring that an ailing worker’s layoff will mean financial catastrophe. It also means that people go without coverage for the duration of their unemployment, so that an ailment that develops during the unemployment becomes a “pre-existing condition” that insurance companies will refuse to cover. By simultaneously reducing the personal tax rate and removing these exemptions, employers would drop their insurance plans while raising workers’ wages, allowing them to enjoy the same standard of living while obtaining their insurance independently of their employers. Since consumers, not their employers, would be buying the insurance, they would be able to select a plan that better meets their individual needs, giving them the opportunity to buy more or less coverage as they see fit. And it would increase the portability of insurance, so consumers would be able to take their insurance with them even if they move or change jobs, so consumers would never need to go without coverage.

Drug costs could be easily reduced by reducing the scope of the FDA, whose benefits have not justified its costs. One of the proudest achievements of the FDA was the blocking of thalidomide, which was marketed as a remedy for morning sickness in Europe and caused terrible birth defects. The ban, combined with the disaster in Europe, was taken as evidence that the FDA was doing its job well, but for every thalidomide, there are many legitimate, effective drugs that have been kept off the market or abandoned, and many diseases that have long gone ignored, their cures never researched in the first place. Even the “harmful” drugs currently banned by the FDA are not necessarily bad. Thalidomide has uses that extended beyond morning sickness: since it prevents angiogenesis – blood vessel formation – it can arrest the growth of some cancers. It can also be used as a remedy for skin conditions, including leprosy, and diseases such as macular degeneration.

The FDA adds hundreds of millions of dollars and about a ten year delay to the marketing of new drugs. The expense means the drugs that are researched are ones which are intended for huge segments of the population, and even if a drug is exceptionally effective for other diseases, it is abandoned simply because the number of people it reaches is minimal. The cost of the FDA is far more than the billions lost in the approval process – it includes the very real cost in human lives from the reduced research efforts of pharmaceutical companies and the death toll of terminally ill patients that could have benefited from experimental drugs that were blocked from the general public during their development phase. An overhaul of the FDA’s regulations, including limiting its power to keep drugs off the market, would stimulate research efforts, providing consumers with more effective medicines for a greater number of diseases, make many drugs available for immediate use, and drastically reduce the cost of medicine.

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Opponents of this will point out that unscrupulous companies will put harmful drugs on the market and advertise them as beneficial; this is fraud, and can be prosecuted as such, rather than creating an arbitrary regulation that pushes out beneficial drugs at the same time.

One of the more overlooked issues is the corporate income tax. One of its consequences is that charities must devote considerable time and expense to demonstrate their nonprofitable, secular, charitable nature to the IRS. Some charities undoubtedly find the expense to be greater than they value assisting others, and are thus artificially barred from their charitable activities. Those that do still exist become less efficient in providing charity because some of their wealth and effort is devoted to satisfying the IRS rather than fulfilling their mission. As far as real corporations are concerned, the corporate income tax is one of the most economically damaging taxes around, especially considering its low revenue. This tax is passed on to consumers, increasing medical costs by a substantial margin. Removing the corporate income tax would end some anti-charity policy bias and significantly reduce insurance, pharmaceutical, and practitioner costs.

Finally, Medicare and Medicaid should be phased out due to the sheer number and proportion of problems. Proponents point to the fact that Medicare and other socialized health care systems are more efficient by virtue of the fact that they do not seek profits and have lower administration costs. But since they do not seek profits and have their losses subsidized, they have no incentive to be efficient or control costs. Benefits are administered on a fee-for-service basis and has no ability to deny low value, inefficient services. Nor is their administration really less costly. Their claims are computerized and automatically approved without human oversight, lowering nominal costs but giving rise to rampant fraud: unscrupulous individuals can easily charge to Medicare with little possibility of detection. A former fraud investigator in New York estimated fraud for the state was about 40% of all charges. This cost greatly exceeds any potential benefit of reduced administrative costs. Furthermore, Medicare draws almost $200 billion annually from the general fund, indicating that premiums and Medicare-specific taxes are insufficient to cover its expenses. If a cost is paid through taxes, it has not decreased; it is simply hidden from consumers. The economic damage stemming from Medicare taxes, supplementary taxes, borrowing, and the administration of taxes, is often ignored in considering Medicare’s economic footprint. Studies show that the “deadweight loss” of Medicare – the extent to which Medicare hurts our economy – amounts to about one third of every dollar spent on the program. Medicare and Medicaid chronically undercompensate physicians, leaving them to refuse to serve the elderly or to shift their costs to the privately insured, driving the expense of private insurance up and availability down.

Still, proponents of the system claim that it is an astounding success, as measured by the number of elderly who are enrolled in it. This conveniently omits discussion of the relative costs involved, and of the fact that under current law, the elderly must enroll in Medicare or lose their Social Security benefits. This is an injustice on a titanic scale: the elderly are to be taxed over 14% of their entire life’s income for literally no benefit, unless they restrict their choice of medical care and impose a greater tax burden on younger generations. If the elderly are forced into Medicare, the number of elderly enrolled is meaningless.

If a gradual abolition of Medicare and Medicaid proves to be politically unfeasible, at the very least Congress could enable the elderly to opt out and authorize administrative reforms that would add oversight and reduce fraud.

The effect of these reforms will be to have prices reflect economic realities, extending coverage and reducing average costs. Consumers would have greater freedom of contract, giving them a more portable, flexible, and efficient insurance. They would also benefit from increased supply of medical professionals, technology, and pharmaceuticals. Most importantly, these proposals recognize every person’s inalienable right to his own life, which is more than can be said of current reform efforts.

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