Why Health Care Needs More of the Free Market, Not Less

For health care reform advocates, the COVID-19 crisis has shown the best and worst of the American system. We’ve seen how cutting red tape accelerates the availability of treatments, such as the easing of longstanding restrictions on telemedicine. And we have the challenges of the Federal Drug Administration approval process as millions waited longer than they should have for COVID home test kits.

Innovation is critical for keeping the cost of current health care treatments low and paving the way for the new treatments. As Harvard Business School professor Regina Herzlinger put it, “Choice supports competition, competition fuels innovation, and innovation is the only way to make things better and cheaper.” That’s why government policies need to encourage innovation, not stifle it.

Indeed, the more health care can resemble a competitive marketplace – rather than the maze of red tape and perverse incentives it has become – the better off we will be. 

When we talk about innovation in health care, we typically think of new inventions or new drugs. About two-thirds of all new medicines are developed in the United States specifically because our free-market health care system tends to reward innovation, without which incentives those drugs don’t get made. However, an innovation mindset must include ways to reform and improve our entire health care delivery system. 

The de facto argument in America’s national health care debate is on health insurance and getting the most people covered. The third-party payer system has fueled the outrageous rise in health care costs in the last 50 years, specifically since Uncle Sam got involved. This distorted focus has caused an endless debate over which third party picks up the check – government and private insurers split the bill in half at this point – but both have created massive distortions, moral hazards, worse care, and higher costs. 

This model has also irrevocably damaged the relationship between the patient and providers: a patient is not the hospital’s customer, the patient is its product. The insurance company is the customer. The better focus is on people’s health not their health insurance. With your car, your insurance is only there for emergencies. You don’t call Geico when you need new tires, and new tires are affordable. 

Under a better model, health insurance for most individuals would work like a 401K –where people own an account and take it with them as they changed jobs. Some employers could provide insurance directly, others could make a cash contribution. Some were doing exactly that before Obamacare, providing tax-free funds employees could use to buy their health insurance. 

When individuals – instead of bureaucracies – control their health-care dollars, they end up spending less while staying healthier, according to research from Dr. John C. Goodman.

Those patients who use health savings accounts (HSAs) tend to shop more conservatively without sacrificing quality of care. Indeed, patients who manage their money tend to manage their own care. HSAs have also been shown to bring down the cost of expensive surgery in a field test in California. 

Technological advancements bring costs down too. Telemedicine has allowed providers to save time and money in how they deliver care. A net gain from the coronavirus was that it forced the government to relax its restrictions and regulations on telemedicine, temporarily at first and permanently with luck. 

Regrettably, people making money from the current dysfunction want inertia, not innovation. The COVID pandemic forced some very valuable changes through, but more work must be done. The federal government needs to get out of the way where it is causing problems, stay out of the way where the red tape has already been cut, and maintain the rule of law for intellectual property protections that allow so many new medicines to come to be. 

The amazing advances in health care in the last 100 years have come because of American innovation. The advances of the next 100 depend on how well we can protect our innovative system from needless, wasteful, and harmful bureaucratic interference.