The future of free-market healthcare

By Douglas Holtz-Eakin and Avik Roy
February 20, 2013

Over nearly a century, progressives have pressed for a national, single-payer healthcare system. When it comes to health reform, what have conservatives stood for?

For far too long, conservatives have failed to coalesce around a long-term vision of what a free-market healthcare system should look like. Republican attention to healthcare, in turn, has only arisen sporadically, in response to Democratic initiatives.

Obamacare is the logical byproduct of this conservative policy neglect. President Barack Obama’s re-election was a strategic victory for his signature healthcare law. Once the bulk of the program begins to be implemented in 2014 — especially its trillions of dollars in new health-insurance subsidies — it will become politically impossible to repeal. And as the baby boomers retire and Obamacare is fully operational, government health spending will reach unsustainable levels.

The great irony of Obama’s triumph, however, is that it can pave the way for Republicans to adopt a comprehensive, market-oriented healthcare agenda.  The market-oriented prescription drug program in Medicare has controlled the growth of government health spending. Similarly, conservatives can use Obamacare’s important concession to the private sector — its establishment of subsidized insurance marketplaces — as a vehicle for broader entitlement reforms.

While most Americans view their healthcare system as “free-market,” Switzerland actually has the most market-oriented healthcare system in the West. It translates into universal coverage and low entitlement costs. Swiss government entities spent about 3.5 percent of gross domestic product on healthcare in 2010, compared to 8.5 percent in the United States. That’s a difference of more than $5 trillion over 10 years: real money, especially relative to our $16 trillion debt.

There is no “public option” in Switzerland. Instead, citizens qualify for means-tested, sliding-scale subsidies and choose among a variety of regulated, private-sector insurance products. The Swiss have the freedom to choose their own doctors, as Americans do, and access to the latest medical technologies. They also have short waiting times for appointments.

Both Representative Paul Ryan’s “premium support” proposal for Medicare and Obamacare’s exchanges are modeled on the Swiss system. If premium support is a dastardly right-wing plot, despite its origins in Democratic circles, applying Obamacare’s exchanges to Medicare is even more so. After all, Obamacare’s subsidies only apply to those with incomes below four times the federal poverty level: $60,520 for a family of two. By contrast, Medicare subsidies apply to every American over age 65.

Shifting Medicare to the exchanges would save trillions of taxpayer dollars in future entitlement spending. After all, why should middle-class taxpayers be forced to pay for Warren Buffett’s health insurance?

There is, indeed, a way to use health-insurance exchanges to both reform our healthcare entitlements and reduce premiums for those with private insurance. This transition could take four steps.

The first is to replace or reform Obamacare’s exchanges, which are larded with costly mandates and regulations. These drive up the price of insurance, while limiting insurers’ ability to come up with more innovative, cost-efficient products.

“Community rating,” for example, will dramatically increase premiums for young people, a counterproductive approach when one considers that most uninsured Americans are in their 20s and 30s. States should build free-market exchanges with affordable health plans — as Utah has done — and demonstrate their superiority to Obamacare’s costlier approach.

Second, Republicans in Congress should put the size, scale and growth of Obamacare’s insurance subsidies on the table in all current and future budget talks. The subsidies should end at 300 percent of the federal poverty level, as they do in Massachusetts, instead of 400 percent. And they should not grow at a faster rate than the economy, as they are now designed to do.

Third, we should use the insurance exchanges in the service of Medicare reform. Instead of bothering with complex legislation, Congress should raise the eligibility age for traditional Medicare by three months each year — for the foreseeable future. Retirees will then gradually migrate into the exchanges’ premium-support systems.

Medicaid-eligible seniors should also be offered exchange-based coverage, to improve the quality and coordination of their care.

Fourth is to gradually shift the remainder of Medicaid’s low-income enrollees into the exchanges. Today, Medicaid recipients face a strong disincentive to seek work, because entry-level jobs can force them to give up their health coverage in exchange for modestly higher income. The exchanges would allow these workers to climb up the income ladder while maintaining their insurance.

The end result would be a fiscally sustainable, fully reformed set of entitlement and insurance programs that place American families in charge of their own health dollars. In other words, everything that conservatives have always wanted. And we’d have Obama, in part, to thank.

EDITORS’ NOTE: This piece provoked a wide-ranging web discussion, including arguments from The New York Times’ Paul Krugman on his The Conscience of a Liberal blog, Andrew Sullivan in The DishJosh Barro for Bloomberg View’s The Ticker, Matt Yglesias on Slate’s Moneybox, Aaron Carroll on The Washington Monthly and Walter Russel Mead on his Via Media blog, 

Holtz-Eakin and Roy wrote an extensive response to these rebuttals and you can find it here.

 

PHOTO (Top): Medical supplies in a pediatrician’s office in Encinitas, California July 30, 2009. REUTERS/Mike Blake

PHOTO (Insert): Representative Paul Ryan (R-Wis.) during a hearing on Capitol Hill in Washington June 1, 2012. REUTERS/Kevin Lamarque

31 comments

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Back in 2009 Krugman was arguing in favor of Obamacare because it was like a successful system already in existence — the Swiss system!

http://www.nytimes.com/2009/08/17/opinio n/17krugman.html?_r=0

Posted by jack512 | Report as abusive

OneOfTheSheep, and anyone else really interested in this topic. Just wanted to give you people a heads up on a movie that’s coming out soon about our healthcare system. It’s called Escape Fire: The Fight to Rescue American Healthcare. Here’s a trailer: http://www.upworthy.com/the-one-totally- stupid-thing-that-will-decide-the-fate-o f-our-entire-economy?c=cp2
It should dispel any myths still being clung to about our healthcare system being basically sound. It’s important to understand, whether you approve of Obamacare or not, that the Republicans have been fighting to retain our current healthcare system as if the nation’s future depended on it. Actually, the opposite is true. Our nation’s future is in peril if we don’t fix our healthcare system. And the Republicans know this.

Posted by flashrooster | Report as abusive

Anonymous, you ignoramus. The bulk of drug research funding is shouldered by the Taxpayer! NIH alone accounts for something like 40% of drugs research. Then add all the basic science research that is paid for by all the public universities, not just in America (but chiefly). Then try again to explain why drug companies should be allowed to charge monopoly pricing on “new patents” which is really just one innovation, after stealing dozens of innovations from the public sector, and putting their own logo on it. Another hypocritical example of socialism for the rich, externalizing the risks on the public. Shameful.

Posted by Benny27 | Report as abusive

However disastrous Obamacare is, isn’t, or may become has yet to be seen. Though, fundamentally it marks a dramatic departure from a broad economic model that has persisted well for some 200+ years; and that despite our various democratic regimes. The model of course is that of capitalism. Healthcare has always stood out as more vulnerable to swing into govt. control, but always held a “stake in the ground”; a pillar of laissez-faire or market competition. It was indeed a large piece of the pie, which defined us for so long as a free market society.
Well… no more. Crushed under the weight of a new electorate, fortified in numbers, with a new errrr old way of thinking, conservative America has had to yield. As this article points out we have likely swung on this issue to the point of no return, with O’s second term landmark win. In truth, the GOP is likely the unsaid author of this monster, having offered up no substantial reform proposals leading up to this point (or 2008). That said, we will have to play the cards we’ve been dealt now. As the article states, with this event will come new opportunities for reform (e.g., Paul Ryan’s “premium support” proposal for Medicare and Obamacare’s exchanges modeled on the Swiss healthcare system). The GOP must seize such opportunities and demonstrate leadership on this issue going forward, or America will be over-run by the ever growing welfare state and it’s spurious agenda.

Posted by rgnocks | Report as abusive

@flashrooster,

If you read what I said reasonable care you should have figured out that we essentially agree that our present “system” is both inadequate and unresponsive. I don’t trust movies to be reliably factual. Perhaps this is the best current online synopsis of the problem:

http://healthland.time.com/2013/02/20/bi tter-pill-why-medical-bills-are-killing- us/print/

That said, Anonymous makes some good points no serious person should dismiss, although I think (along with you?) that the conclusion suggested (continuing the status quo) is inappropriate to any reasonable “system” of modern day health care.

Posted by OneOfTheSheep | Report as abusive

@ Benny 27 for his or her Feb 22, 2013 7:25 pm post responding to mine of Feb 21, 2013 11:48 pm posted as from “Anonymous”

Thanks for your erudite comments. However, may I be so bold as to point out a few facts as well?

First, I hope that your criticism’s focus on drug research in relation to my remarks indicates that you otherwise agree with my concern about Congress dictating the earnings that doctors and surgeons should be allowed to make. That’s an aspect of central economic planning that I hope remains discredited with the fall of the Soviet Union. We don’t need a healthcare commissar let alone 535 healthcare commissars in Congress dictating to doctors and other healthcare professionals what their fees and salaries will be.

Second, no doubt you picked on what you perceive as the soft spot in my opinion that warned of the unintended consequences that will result from the government’s ham handed intervention into the healthcare market. You attack my remarks by claiming that drug research and its costs are largely subsidized and little or no credit should be given to private capital in the form of retained profits being risked in new drug research.

My perspective differs from yours in that I do not place a lot of reliance on sources that are on a mission to justify driving our healthcare system towards socialized medicine. Rather, I chose to rely on unbiased sources, like the Congressional Budget Office.

The CBO had published some time ago a rather succinct report on drug research in this country. It’s worth a read for you and hopefully may cause you to at least begin to question the authenticity of your own sources on this topic. Hopefully you will not conclude the CBO is peopled by ignoramuses in having dispelled your populist myth.

There are two different types of research involved: Basic research and applied research. The government focuses on the former, and in doing so stimulates private investment in the latter. The government’s involvement, however, is not a whole substitute for applied research, does not guarantee that applied research by private capital will be successful or that it is without significant risks. The pharmaceutical industry spends more on R & D relative to its revenue than almost any other industry. So says the CBO in its report. Indeed, it spends more than 5 times the average of US industries generally on R & D.

The CBO report includes the study published around 2000 that found it cost on average $800 million in applied research to bring a new molecular entity out into the market place as a new drug. The FTC supposedly attempted to duplicate the result of that study, and found substantially similar average research durations and timelines. That is also recounted by the CBO at pages 20 and 21 of its report.

http://www.cbo.gov/sites/default/files/c bofiles/ftpdocs/76xx/doc7615/10-02-drugr -d.pdf

The problem is accounting. Like software companies, pharmaceutical companies have tremendous upfront costs that are expensed immediately, but then when a drug is successfully brought to market, its marginal cost does not reflect that initial investment that was expensed earlier. So people focus on the relatively low marginal cost to produce dosages of new medicines, and love to depreciate the role of private R & D investment in bringing new drugs to the market place.

Read business news articles, and you will see that the price of drug company stocks are fairly volatile depending on the outcome of clinical trials for new drugs, or FDA approval of a new drug. The market recognizes the risks as being real and quite significant to the prospects of a drug company’s profitability.

Sorry, but you get only what you pay for. If there is one economic principle that stands out above all others, it is this: There is no free lunch. And the other important principle to remember is this: Central economic planning is not a viable substitute for markets.

I remain, Mr. Benny27, your obedient servant and admirer of your profound knowledge of all things affecting the economics of healthcare.

Posted by Anonymous | Report as abusive

Dear One of the Sheep:

I believe we can learn from the Swiss when it comes to healthcare. But note this. The Swiss realize healthcare has to be rationed. The demand is inelastic (we all want it when we need it), but it is simply not realistic to think that any government can afford to give every one of its citizens the keys to a Cadillac healthcare program or policy allowing them to spend with hardly any limits. Chevy’s yes. And that’s what the Swiss do. For the Swiss, if you want more than a Chevy, then it’s you who have to be able to afford more and pay for it above a basic subsidized plan or policy.

The American egalitarian penchant causes too many policy makers and wonks to espouse the notion that everyone is to have just as much as they want or need when it comes to healthcare. That is completely unrealistic. It doesn’t happen in single payer countries, and it doesn’t happen in Switzerland either. But Obamacare represents the one size Cadillac for everyone fits best way of thinking.

Posted by Anonymous | Report as abusive

@Flashrooster and some others have made most of the points that need to be made. But here are some odds and ends.

@jack512 says, with an apparent sense of gotcha!

Back in 2009 Krugman was arguing in favor of Obamacare because it was like a successful system already in existence — the Swiss system!

http://www.nytimes.com/2009/08/17/opinio n/17krugman.html?_r=0
Posted by jack512 | Report as abusive

Um, you don’t know, Jack. Try reading “below the fold” in that 2009 post:

“So where does Obamacare fit into all this? Basically, it’s a plan to Swissify America, using regulation and subsidies to ensure universal coverage.

“If we were starting from scratch we probably wouldn’t have chosen this route. True “socialized medicine” would undoubtedly cost less, and a straightforward extension of Medicare-type coverage to all Americans would probably be cheaper than a Swiss-style system. That’s why I and others believe that a true public option competing with private insurers is extremely important: otherwise, rising costs could all too easily undermine the whole effort.

“But a Swiss-style system of universal coverage would be a vast improvement on what we have now. And we already know that such systems work.

“So we can do this. At this point, all that stands in the way of universal health care in America are the greed of the medical-industrial complex, the lies of the right-wing propaganda machine, and the gullibility of voters who believe those lies.”

Hardly an unqualified endorsement of the Swiss system,Jack, and totally consistent with what Krugman was arguing in response to Roy and Holtz-Eakin. Krugman was simply accepting in 2009 the political reality that Obama was not about to get single payer through Congress — and Max Baucus. Not that the Swiss system was some sort of model of perfection.

But on to some more serious nonsense — and sophistry.

Roy and Holtz-Eakin say:

“The Swiss have the freedom to choose their own doctors, as Americans do, and access to the latest medical technologies. They also have short waiting times for appointments.”

The dog whistle here is that the Kenyan Socialist wants to take away your freedom to choose your own doctor, and make you wait forever for appointments.

But guess what? The French — a system with which I and my wife have had a fair amount of first hand experience, and not just for cuts and scrapes — have all of the above listed benefits that Roy and Holtz-Eakin tout for the Swiss in their basically monopsonist system at the primary level, with something like the Swiss system built on top as supplemental insurance. The French pay less for them than the Swiss, have comparable or better outcomes, and, by the way, reflecting these basic facts, finished #1 in the WHO Report comparing and ranking all of the health care systems in the world, and with a very sophisticated and scientifically valid methodology:

http://www.who.int/whr/2000/en/whr00_en. pdf

The Swiss ranked #20, below most other Western European countries. And the U.S., of course, finished #37.

Hey, we’re #37!

http://www.youtube.com/watch?v=yVgOl3cET b4

By the way, it is the Republicans who are basically proposing to force Medicaid patients into HMOs where they won’t be “free” to choose their own doctors, not to mention the HMO structure of many of those Republican supported — and less efficient — Medicare Advantage plans.

Roy and Holtz-Eakin say:

“The first is to replace or reform Obamacare’s exchanges, which are larded with costly mandates and regulations. These drive up the price of insurance, while limiting insurers’ ability to come up with more innovative, cost-efficient products.”

Where to begin?

First, here is the link that R/H refer us to in order to support the sophistical “larded with costly mandates and regulations … [that] drive up the cost of insurance.”

http://tinyurl.com/a94w4ma

When you look at this document you discover that it’s basically challenging the concept of community rating, which R/H do elsewhere in this article. In other words, the private insurer’s dream: get rid of community rating so the insurance company can sell policies only to healthy people and dump the sick off on the government — i.e., the taxpayers.

And despite the drive-by mendacity of what R/H say, the question as to whether Obamacare will, with its mandates and regulations, drive up insurance costs system wide — in a context where we don’t accept as acceptable public policy fobbing off the uninsurable and the poor on the government — was answered by the CBO in scoring Obamacare.

The answer was:

Obamacare would reduce costs over what they would otherwise be, not raise them. The fact that R/H are essentially giving three cheers for free riders is either foolish or knavish, probably a bit of both, so let’s call it knoolish.

By the way, snap quiz. What was the single most important driver of the establishment of Romneycare in Massachusetts?

Time’s up.

It was the scramble by the Governor and the Legislature to maintain $350 million or so in Federal Government subsidies for its uninsured population which was being treated in the most expensive way possible, i.e., for “free” in Emergency Rooms.

The Feds were balking at continuing to subsidize Massachusetts’ growing uninsured treatment reimbursement pool and told them the money would go away unless they cleaned up their act with a more rational and cost effective system.

Presto! With the assistance of the Heritage Foundation and Jonathan Gruber, Massachusetts came up with community rated and mandate driven Romneycare.

So R/E are simply engaging in Fox News style memism when they take swipes at mandates and regulated insurance markets.

By the way, the Swiss market has mandates, and is very heavy with “expensive” regulation. Apparently the Swiss don’t trust the private sector to let their consciences be their guide in providing insurance coverage to the Swiss.

Which brings me to the final bit of disingenuousness in the R/H article that I will mention. Though this hardly exhausts the intellectual smarminess evidenced there.

“[L]imiting insurers’ ability to come up with more innovative, cost-efficient products.”

Translation:

Limiting insurers’ ability to come up with products that cherry pick the population for the most healthy people and offer them high-deductible, lower cost policies that will work just fine — as long as they “decide” to only catch colds and get jock itch.

No heart attacks allowed.

Or, if you do make a “bad choice” to have a heart attack, at that point you can go to the Federal Government and ask them to please cover your expenses because the “innovative” product you have from CIGNA doesn’t quite do the trick.

And if you also made the wrong “choice” to catch a chronic disease, yeah, the Feds may be able to help you out as well.

I mean, guys, we’re in this for the money. Why would we ever want to subject ourselves to adverse selection — unless the sick guy was Warren Buffet or Shel Adelson?

A final, final thought.

The nonsense from supposed professional economists like Holtz-Eakin and Roy — though Roy is not a professional economist; he’s a flak for investing in health care businesses — and the rest of the Republican menagerie that promotes the concept of consumer driven cost control in insurance is beyond depressing from an intellectual point of view.

Kenneth Arrow dispatched this nonsensical thinking 50 years ago in his seminal article, “Uncertainty and the Welfare Economics of Medical Care.”

http://tinyurl.com/alaamxz

The argument in this article has never been refuted. It has, instead, become the bedrock of academic health economics.

I have yet to see one of these Republican-minded health care pundits cite it, let alone provide a critique of its basic premise, namely, that the idea of health care being treated, from an economic point of view, as something functioning according to the laws of so-called free markets is LOL wrongheaded.

But “wrongheaded” sometimes seems to be the principal qualification for being a Republican pundit on health care.

Posted by billyblog | Report as abusive

Since the much-touted part of Obamacare that covers those with pre-existing conditions has already run out of funding and thousands still left without care, what does that say about the remainder of the program?

Doesn’t look good from here.

Posted by AZreb | Report as abusive

What no one seems to really get is that our system, as it currently stands, is not and does not work like a “free market” system. There is little cost transparency, there is virtually no competitiveness for price or quality (though there may be a semblance of that at the top and the bottom of the health care system there may be some), customers don’t shop either price or quality, providers don’t give customers any choice, customers are told WHAT to buy, WHEN to buy, WHERE to buy and HOW to buy by their physicians and the system is a positive feedback loop. How is that ever going to be “free market”…you all know the answer and continuing to promote that it is like a free market is either ignorant or disingenuous…i think i know which!!

Posted by KCJLR | Report as abusive