Published December 20, 2013
Through overly restrictive policies, Medicare, Medicaid, and tax subsidies, the federal government has dominated the operation of the U.S. health care system for the past half-century. It is mainly federal policies that are responsible for driving up costs and making health insurance unaffordable for so many Americans. The argument over the future of U.S. health care is essentially an argument over how best to allocate scarce resources in this large and important sector of the national economy. Many economists believe that health care is inherently different from other industries and cannot operate in a traditional marketplace. They argue that governmental regulation, however unsatisfactorily administered, is better than allowing a dysfunctional marketplace to misallocate resources and create inequities. They are wrong. Two health policy analysts explain why the market can not only work in health care but can also provide substantial benefits to the American consumer.
The United States does not have a private-sector health insurance system, let alone a functioning competitive market for insurance or health services. In fact, the federal government has been the dominant force in American health care for decades, long before the recent massive expansion of the government’s role in the 2010 Patient Protection and Affordable Care Act (PPACA). Through overly restrictive policies, Medicare, Medicaid, and tax subsidies, the federal government has dominated the operation of the U.S. health care system for the past half-century. It is primarily federal policies that are responsible for driving up costs and making health insurance unaffordable for so many Americans.
The argument over the future of U.S. health care is essentially an argument over how to best allocate scarce resources in this large and important sector of the national economy. Proponents of centralized government control of health care are fond of saying that reliance on a private-sector approach in the U.S. has been tried and failed. According to their arguments, most Americans are enrolled in private insurance, costs are high, and the insurance is insecure. They claim that the private marketplace is therefore to blame for many of the problems prevalent in U.S. health care.
The major flaw in such arguments is that the United States is not a competitive market and never really has been. It is therefore incorrect to look at the broad performance of the largely uncompetitive American health care system and make judgments about whether a competitive health system would work well or not.
Assessing the value of competition in health care thus requires taking a more indirect approach to searching for evidence, most especially by looking at more isolated instances when consumers have been presented with cost-conscious choices in health care. The findings from this kind of examination can then be supplemented with reviews of what has happened when other previously overregulated industries were deregulated as well as with careful critiques of the theoretical arguments that suggest that health care is fundamentally ill-suited to a competitive marketplace. From this kind of an assessment, a clear picture emerges—a competitive marketplace would not only work well in health care but would also bring great benefits to the American consumer.
Read the entire paper online here or in pdf format here.
James C. Capretta is a Senior Fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.
Kevin D. Dayaratna is Research Programmer and Policy Analyst in the Center for Data Analysis at The Heritage Foundation.