We can empower consumers and restore competition in health care

After a federal judge struck down the Affordable Care Act (ACA) as unconstitutional last week, President Trump called for Republicans and Democrats in the House to “pass a STRONG law that provides GREAT healthcare and protects pre-existing conditions.” Regardless of the legal case outcome, the president’s request makes sense.

The problems with ObamaCare are well-known. Individual insurance premiums more than doubled between 2013 and 2017. The individual insurance market has been ravaged, distressing the 6 million middle class Americans who chose to pay a penalty rather than enroll in ObamaCare-compliant insurance last year. The law has also been injurious to small businesses and their 11 million employees who still lack health insurance.

{mosads}The percentage of small enterprises that provide health insurance has dropped precipitously since ObamaCare’s enactment.  

However, as Sen. Lamar Alexander (R-Tenn.) recently suggested, Congress must address the underlying drivers of health care costs if we want to lower health care premiums. Even before last week’s court decision, Sen. Alexander—who chairs the Senate Health, Education, Labor, and Pensions Committee — had called upon health care experts to propose solutions that will stem the rise in overall health care costs.  

An excellent way for Congress to begin its journey toward healing American’s health-care system is by reading a new report from the Department of Health and Human Services entitled, “Reforming America’s Healthcare System Through Choice and Competition.”  The report lucidly explains the primary causes for what ails American health care: when markets function properly, consumers empowered by the freedom to make informed choices and driven by appropriate incentives will cause suppliers to drive down prices, improve quality and increase innovation. In other words, competition works.

Conversely, when government policies interfere with or fail to foster competition, prices rise, quality is reduced, and innovation falters. That is precisely what ObamaCare did. Post-ACA, Americans without employer-sponsored insurance have severely restricted choices. In 2018 over half of all counties had only a single insurer offering coverage via the exchanges. The system is plagued by extensive regulation and bureaucratic controls. Government-induced market failures are pervasive.

Insurance is most efficient and effective when used as protection against low-probability, high-cost events. Homeowners’ insurance is a safeguard against fires, lightning strikes and other natural disasters. It doesn’t pay for routine lawn care. Similarly, automobile insurance shields drivers from the consequences of serious car accidents but does not pay for oil changes or gasoline at the pump.

With health insurance, we have taken the opposite approach. Government policies have promoted an excessive reliance on third-party payment for routine, lower cost, non-emergent, “shoppable” services from doctors’ visits to joint replacements, which compose a majority of health-care spending. The system has eliminated incentives for patients to seek and obtain value for each dollar spent and has instead encouraged the purchase of low-value services and promoted overuse.

To compensate for the inherent flaws in this scheme, government has erected barriers to entry, implemented restrictive payment policies, unintentionally incentivized impenetrable pricing and fostered the creation of an expensive administrative infrastructure. These have further corrupted market forces and resulted in even higher prices, lower quality and less or misdirected innovation.

Contrast the preceding scenario with the examples of LASIK eye surgery, the inflation-adjusted prices of which declined by 25 percent between 1999 and 2011 while quality improved and cosmetic surgery, costs for which grew at less than half the rate of inflation between 1992 and 2012 although real, overall health-care prices more than doubled during this period. The critical difference? Patients typically pay for these services out-of-pocket with their own money. Restore individuals’ ownership of health spending, remove obstacles to competition and unnecessary regulations and as with other goods and services the rest will fall into place.

The solution is to transition to high deductible plans tied to tax-preferred personal health expenditure accounts. With health savings accounts (HSAs), to which employers and individuals can contribute, a person retains ownership of the money throughout her or his lifetime. The HSA functions as both a tax-exempt health payment fund and a tax deferred retirement supplement. Although financing sources would differ, this model and its principles could also be adapted for publicly funded programs.

Health-care costs in the United States continue to soar, cutting into workers’ take-home pay, hampering business competitiveness and unnecessarily diverting wealth into non-productive uses. This year the Medicare Trustees announced that the Part A Trust Fund, which pays for hospital, skilled nursing, hospice and home health care, will be insolvent in 2026.  Containing health-care costs is a national imperative. Restoring consumer choice and generating competitive markets for health-care services through consumer ownership of expenditures is the most effective way for us to begin on this path and to obtain optimal value for our health-care dollars.

Roger D. Klein, MD JD is a physician, attorney and an Expert on the Federalist Society Regulatory Transparency Project’s FDA and Health Working Group. He is a former advisor to the FDA, CMS, CDC and HHS. Klein graduated from Yale Law School and completed his postgraduate medical training at Yale Medical School.