Free the Health Insurance Market

The failure of Republicans to “repeal and replace” ObamaCare with a pro-liberty alternative, as disappointing as that is for those of us who want to see health care move in the direction of freer markets rather than more government controls, at least offers a good opportunity to reconsider some fundamentals about health insurance. Then hopefully we can get it right next time.

How did we get here? ObamaCare did not turn a free market into a regulated market. Rather, it tweaked an existing system of intensive government controls. Indeed, the federal government, with some help from the states, severely disrupted the market in health insurance over a span of decades. So establishing a free market in health insurance is hardly as simple as merely repealing ObamaCare.

ObamaCare made things worse in some ways. In addition to expanding direct premium subsidies, it expanded wealth transfers hidden in premiums, turning insurance even more into a (sometimes regressive) social welfare program. It also devastated the individual insurance market, shoving many people into less-desirable plans or (as with my family) into employer-provided insurance. (John Goodman offers details.) What happened to my family is ironic given that even many supporters of ObamaCare acknowledge that it was a huge mistake for government ever to prod employers to provide health insurance.

A major problem is that today’s “insurance” largely functions as prepaid health care. People expect to use their health insurance, not only for expensive emergencies, but for routine doctor visits and minor expenses such as birth control pills. How did that come about?

Government did two main things to promote the use of insurance (so-called) as prepaid health care. First, by offering tax incentives to employers to provide health insurance, government promoted lavish and expensive “insurance” that covers routine care. Second, by mandating various benefits, government forced insurers to cover many things that are low-cost and easily anticipated. (Paul Hsieh and Lin Zinser provide details.) Government has outlawed insurance that functions only as insurance.

Treating insurance as prepaid health care is a major driver of skyrocketing costs. Nearly every health procedure, no matter how simple or routine, gets buried in mounds of expensive paperwork. The vast time that doctors and their staff spend filling out insurance forms is time that they do not spend treating patients. Meanwhile, insurance companies grow far larger and more complex to deal with the massive volume of claims.

Even worse, when insurers process the bills and help pay them, patients have little incentive to spend health dollars wisely, and health care providers have every incentive to charge as much as they can get away with.

Imagine what would happen if we bought food the way we typically buy health care (an analogy others including Robert Zubrin have used). We’d each pay a monthly food “premium” of a set amount, then walk into the grocery store and pay nothing or a small “copayment” for the food in our cart. Perhaps we’d have to pay a deductible first—except of course for “essential” food.” Naturally, none of the prices would be listed; insurers and grocers would work out rates behind the scenes. Shoppers and grocers would have every incentive to run up prices, not contain them. Eventually we’d see calls for government to step in to “manage” food prices, which would lead to direct or indirect government rationing of food.

Today’s health “insurance” also functions to transfer wealth from some people to others. Part of what insurance mandates do is force people who do not need certain services to pay higher rates to fund others’ use of those services. For example, by forcing people who do not need birth control to buy insurance that covers birth control, government jacks up their premiums to pay for other people’s birth control. And of course the main purpose of ObamaCare’s mandate and rate controls is to force young and healthy people to buy high-cost “insurance” to subsidize others’ health care.

To move toward a free market in health insurance, Congress must remove existing controls that mandate insurance and dictate its terms and costs. Then insurers would be free to put together policies that they judge would attract users and remain economically viable, and individuals would be free to buy policies that best fit their needs.

What about people with preexisting conditions? Government controls largely are responsible for locking people out of sensible long-term insurance contracts, thereby creating most of the problems with preexisting conditions. By pushing insurance through employers (whom people often leave), requiring insurers to accept all comers, and subjecting insurers to ever-changing regulatory burdens, government made most long-term insurance contracts practically impossible. Insurers cannot sensibly offer such policies, and individuals have no incentive to seek them. So dumping existing government controls of insurance, absent other action, would leave many individuals now with preexisting conditions in the lurch. New companies would appeal to people with few health costs, leaving plans with high costs to either raise rates or go out of business.

A transition program seems reasonable, then. Government could “grandfather in” everyone with diagnosed preexisting conditions and offer government coverage only for those conditions. These patients would be subsidized, but directly via the federal budget rather than indirectly via manipulated insurance premiums. We shouldn’t underestimate the difficulty of this transition; I expect many people would suddenly come up with a diagnosed “preexisting condition” prior to the cut-off date. And there would be strong political pressures to expand the transition program and make it permanent. But at least with the right political backing this would be a true transition program that would naturally end.

Everyone else would be on their own as of the cut-off date under this plan. They’d be free to buy lower-cost, long-duration plans that covered only emergencies (which is what I’d want) or any other product that an insurer voluntarily offered in the market.

And if someone declined to purchase insurance, they’d be at risk of losing their assets or going bankrupt in the event of a medical catastrophe. That would be a very strong incentive to get health insurance—just as the possibility of my house burning down is a very strong incentive for me to get house insurance.

Part of any sensible reform is to equalize the tax incentives for private insurance versus employer-provided insurance. One popular idea is to allow people to purchase private health insurance out of a tax-favored Health Savings Account. That at least would put individual insurance on equal footing with employer-provided insurance. Or, to cut out the tax-induced behavior modifications, overall taxes could be lowered and the employer tax break for insurance cut off at a specific time, say five years hence. That would provide enough time for companies and individuals to make the appropriate changes.

A free market for health insurance, of course, would not solve the problem of people who are too poor or too irresponsible to purchase insurance. (But remember that basic policies would be much less expensive.)

It would be less-bad to address that problem with direct subsidies than with controls over insurance. But, if we take seriously people’s rights to control their own resources, we should leave the matter to private charity. Charity clinics, charity services or discounts by health care providers that normally charge fees, and direct charitable contributions could help the poor get care. I predict that, in the context of a free market in health care and health insurance, voluntary charity would not only adequately but robustly help the poor with medical needs. Americans already tend to be very charitable in such matters; for example consider the support they give to Shriners and Children’s hospitals.

Regardless, the plight of the poor should not be used as an excuse to destroy the market in health insurance for everyone else.

ObamaCare took a bad, unfree system of health “insurance” and made it worse and even less free. Hopefully Republicans can still keep their promises to repeal ObamaCare and replace it with a plan that frees people to consensually buy and sell insurance that manages their risks without draining their bank accounts or binding them to their current jobs.

We’ve tried statism in health insurance for decades and it has failed. Now let’s try liberty.

Image: Ari Armstrong


What a Solution Would Look Like

Thank you for an excellent article! You did a great job of pointing out the essential problems with our current situation, identifying the fact that we purchase “pre-paid health care” and can no longer have long term policies. I especially appreciated your addressing how pre-existing conditions could be handled in the process of moving to freedom in health care. Thanks for showing what a solution could look like!

—Hannah Krening
March 30, 2017