– September 19, 2019
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In some circles, deregulation got a bad name due to the Panic of 2008. It shouldn’t have as the causes of the subprime mortgage crisis ran deep, but ultimately dumb bureaucratic incentives rather than partially deregulated markets precipitated the panic.

Deregulation of alcohol production showed what entrepreneurs can achieve, if only allowed the chance. So, too, did deregulation of the airline industry in 1978. Flying today sucks, but without those reforms, flying would still suck and coach seats would cost $1,000 or more on major domestic routes. And you would see a lot more out-of-state license plates on our already overcrowded interstates.

Why, then, does the federal government simply not deregulate health care and health insurance? This means to allow supply and demand much freer reign. Laws against fraud should remain in place, but no certificate-of-need (aptly abbreviated CON) laws (limitations on the number of hospital beds or doctors or other health care providers [HCPs]) or regulations restricting insurance innovation should be allowed to stand. The FDA should not be in the business of assessing drug efficacy, either, as markets almost certainly do a much better job.

I could go on, and on, and on, but thankfully do not have to because economist Sean Flynn makes many of the same points in The Cure That Works (2019), which shows how Singapore used largely American ideas to create the world’s most efficient (cheapest and best) health care system. Its measurable outcomes (various mortality and morbidity rates) are consistently near the top of the world charts, yet it spends less than 5 percent of its GDP on health care, less than any other developed nation. Murica, by contrast, spends more than any other nation on health care as a percentage of its GDP (18 percent!) and on average achieves middling results at best.

Flynn proves Singapore’s superior efficiency with econometric-style thinking minus all the numerical glitter. Singapore’s success, he shows, has little to do with an Asian diet, government subsidies, a small population, and so forth, and everything to do with the proper alignment of incentives. Singapore uses quotidian market forces to deliver effective health care to everyone, even the indigent poor, which it can afford to do because its system is so efficient.

Americans, by contrast, waste $2.4 trillion a year on unnecessary health care costs that could be put to other purposes. Huge gains, as Flynn shows through the use of real-world American examples, would come from three simple reforms: (1) posted prices for procedures; (2) Goodman-esque health savings accounts and high-deductible insurance; (3) age rather than community rating.

The first point should be obvious to anyone conversant with market principles. According to Goodman, many Americans do not even know if their service providers accept their insurance or not! When not, they get hit with huge unexpected bills. Almost nobody knows what an X-ray, MRI, or blood test will cost. America’s health care system today is about as far from a transparent market as one can get.

I would add, though, that in some instances it is impossible to post prices because nobody knows what the problem is. In those cases, I would suggest that HCPs not insist on payment if they prove unable to help their patients. Strictly speaking, it runs counter to the Hippocratic Oath for an HCP to charge a patient who the HCP has not aided medically because the HCP harms the patient by taking his or her money. Sure, HCPs put in time and effort, but that simply isn’t enough. We don’t expect to pay an auto mechanic who spends all day not fixing our car, do we?

Many doctors want “tort reform,” i.e., protection from being sued by patients for malpractice, and Flynn shows that “defensive” treatment — ordering all kinds of tests so doc can cover his or her keister — is hugely wasteful. Of course if doctors did not charge when they were unable to help a patient there would be no tort and hence no basis for a suit. Doctors need to have some skin in the game, too, and lose billable hours when they prove inadequate to the job. But according to one doctor, his colleagues are addicted to the standard “fee for service” model, even if the “service” doesn’t serve anyone but the HCPs themselves.

The second point would mean that Americans would start to care what health care prices are because it would be their own cash being spent, not the money of some faceless (and likely hated) insurer. Numerous studies show that 30 to 35 percent of health care costs go away when people have to spend their own money, and, most importantly, health care outcomes do not decline. In other words, Americans, due to the fact that someone else pays for their health care, waste a lot of resources on needless medical services. Interestingly, Flynn makes a good case that even preventive care is overplayed; much of it is wasteful, but a useful way for HCPs to drum up business.

The third point is also astute. Strictly speaking, we currently do not have true health insurance in this country because premiums are usually set by community rather than by risk, the number one component of which is age. My premium, for example, is a function of living in Sioux Falls and a percentage of my salary, not my age, weight, lifestyle, genetics, etc. Few of us have true insurance, but rather just access to a giant paperwork mill. Right now, Flynn says, it takes four paper pushers to process the insurance claims of one U.S. HCP. In Singapore, four HCPs can easily function with one admin.

Flynn does not cite the “House Scrubs” chapter in my Fubarnomics, which makes many of the same points but misses Singapore. I admit I dismissed it as an anomaly that owed its success to being a small, homogenous Asian country. But Flynn is right: the root cause of its success is in its incentives, in having consumer-patients pay for most of their own health care out-of-pocket and to save and insure to cover the rest. The best evidence comes from, of all places, a government-employee insurance scheme in Indiana. (There is interesting stuff going on in Montana too.)

Because Flynn missed Fubarnomics, he leaves off without addressing other problems likely to plague health care and insurance even if his three reforms occur. The two biggest are high-deductible insurers trying to get out of paying big bills, for cancer, coronaries, and the like, and the “one pill problem,” i.e., the lack of incentive to develop medicines, devices, or procedures that will heal people quickly and completely. It is more profitable, under the current system, to get them hooked on pills or C-PAP accessories.

In the American context, linking health and life insurance in participating policies issued by mutuals would help to mitigate both problems. Linking health and life insurance would of course increase the incentive of insurers to pay for expensive procedures because they would rather pay $100,000 for surgery than $1 million for life insurance. The linkage would also induce people nearing the end of life to decide between receiving expensive care of dubious value or leaving a bigger inheritance to loved ones. (Currently, most rationally opt for heroic late-life treatments because somebody else is paying some undetermined/undeterminable price for it.)

Mutuals are for-profit entities owned by their customers. Generally speaking, mutuals are much more nimble than governments and more innovative than nonprofits but less rapacious than joint-stock for-profits eager to make quarterly numbers. They worked wonders in life insurance and could in health insurance, too, if only unfettered.

Mutuals specialize in issuing participating policies, insurance contracts that promise to refund premiums if outcomes (health care expenses, mortality rates, investment earnings) prove better than expected. They often price premiums conservatively so they experience relatively low failure rates, but offer competitive net prices (initial premiums minus the refunds just described). Mutually Beneficial explains all, and adds in a crucial but often overlooked layer of private security, long-term “own occ” disability coverage.

Other people undoubtedly have other ideas, maybe better than mine. But we’ll never know what works best until we try, and we can’t try until health care and insurance are deregulated. So while we cannot turn back the clock and deregulate health care 40 years ago, we can do it now and start to pick up some of the over $2 trillion currently wasted annually.

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Robert E. Wright

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Robert E. Wright is the Nef Family Chair of Political Economy at Augustana University in Sioux Falls, South Dakota. He is the author of 18 books, including a new book on financial exclusion published by AIER.

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