Markets Have Supply and Demand

At the Wall Street Journal Scott Atlas proposes some measures that might decrease the cost of healthcare:

Republicans have now failed twice to repeal and replace ObamaCare. But their whole focus has been wrong. The debate centered, like ObamaCare, on the number of people with health insurance. A more direct path to broadening access would be to reduce the cost of care. This means creating market conditions long proven to bring down prices while improving quality—empowering consumers to seek value, increasing the supply of care, and stimulating competition.

First, equip consumers to consider prices. Critics always claim this is unrealistic: Are you supposed to shop around from the back of the ambulance? But emergency care represents only 6% of health expenditures. For privately insured adults under 65, almost 60% of spending is on elective outpatient care. Likewise, nearly 60% of Medicaid money goes to outpatient care. For the top 1% of spenders—a group responsible for more than a quarter of all health expenditures—a full 45% is outpatient. Giving consumers an incentive to consider price when seeking such care would make a huge difference.

ObamaCare moved in the opposite direction, shielding consumers from having to care about prices. Its broad coverage requirements and misguided subsidies encouraged bloated insurance policies, furthering the misguided idea that the purpose of coverage is to minimize out-of-pocket costs. When the insurer picks up nearly the entire tab, patients have little reason to consider costs, and doctors don’t need to compete on price.

Effective reform would put patients in charge of their own spending, while giving them a way to gain from paying less. The first step is to broaden the availability of high-deductible insurance plans with fewer mandated coverage requirements. ObamaCare went in the wrong direction. Its regulations—including required “essential benefits”—raised prices on these plans and limited their availability.

My analysis of data from the Employer Health Benefits Annual Survey shows that premiums on high-deductible policies rose between two and five times as fast as other types of coverage. It would also help to repeal ObamaCare’s 3-to-1 age rating, the rule that insurers can charge the oldest customers only three times what they charge the youngest ones. This alone raised premiums for young people by 19% to 35% in 2014, according to an estimate for America’s Health Insurance Plans.

A second tool for motivating patients to consider price is large, liberalized health savings accounts. These tax-sheltered accounts are generally used to pay for the noncatastrophic expenses that form the bulk of medical care. Better than tax deductions, HSAs introduce something unique—an incentive to save.

When people have savings to protect in HSAs, the cost of care drops without harmful effects on health. A study two years ago that analyzed data from 2003-07 showed that the spending of patients with HSAs and high-deductible plans decreased by 15% a year. If even half of Americans with employer-sponsored insurance enrolled in this kind of coverage, U.S. health expenditures would fall by an estimated $57 billion a year, according to a 2012 study in Health Affairs.

HSAs should be available to all Americans, including seniors on Medicare. Given that seniors use the most health care, motivating them to seek value is crucial to driving prices lower. Life expectancy from age 65 has increased by 25% since 1972, meaning Americans need to save for decades of future health care. Raising maximum HSA contributions, now $3,400 a year for an individual, to at least match the limit on individual retirement accounts of $5,500 a year, is one important step. When a person with an HSA dies, the funds should be allowed to roll over tax-free to surviving family members. HSA payments should also be permitted for the expenses of the account holder’s elderly parents.

The information that patients require to assess value must be made radically more visible. A 2014 study on magnetic resonance imaging showed that price-transparency programs reduced costs by 18.7%. The most compelling motivation for doctors and hospitals to post rates would be knowing that they are competing for price-conscious patients empowered with control of their own money.

Second, work strategically to increase the supply of medical services to stimulate competition. In large part, this means deregulation. Lawmakers should remove outmoded scope-of-practice limits on qualified nurse practitioners and physician assistants. That would enable them to staff private clinics that would provide cheaper primary care, including vaccinations, blood-pressure checks, and common prescriptions. In a 2011 review, 88% of visits to retail clinics involved simple care, which was provided 30% to 40% cheaper than at a physician’s office, while keeping patients highly satisfied.

Medical credentialing should be simplified, and the licensing boards should institute reciprocal (national) licensing for doctors to help telemedicine proliferate across state lines. Medical school graduation numbers have stagnated for almost 40 years. Some projections suggest a shortage of 124,000 doctors by 2025, with almost two-thirds being specialists. Yet medical societies artificially restrict competition by imposing protectionist residency limits that raise prices and harm consumers.

Archaic barriers to medical technology also impede competition and raise prices. Although originally intended to restrain “health care facility costs,” certificate-of-need requirements, which require health-care providers to get permission from the state to add medical technology like MRI scanners, are an example of bureaucratic overregulation. Despite unintended consequences, they are still in place in 34 states, Puerto Rico and the District of Columbia.

Third, introduce the right incentives into the tax code. Today employees aren’t taxed on the value of their health benefits—and there is no limit to that exclusion. This creates harmful, counterproductive incentives. It encourages higher demand for care and minimizes concerns about cost.

Similarly, ObamaCare’s premium subsidies and the tax credits proposed by Republicans artificially prop up high insurance premiums for bloated coverage that minimizes out-of-pocket payments. This prevents patients from caring about the bill, which reduces the incentives for doctors and hospitals to compete on price. If health-care deductions are maintained, the tax code should cap them and limit eligibility to HSA contributions and catastrophic premiums.

In other countries, governments hold down costs mainly by limiting access to care, drugs and technology. The results are long waits and worse medical outcomes, particularly for the poor and middle class, who are unable to circumvent those single-payer systems. If Republicans want to avoid going down that road, they need to educate the public on the benefits of a different approach: leveraging incentives and deregulation to reduce prices so that quality health care is affordable for all Americans.

I agree with a lot of that particularly eliminating CONs, changing scope of practice regulations, and tax changes affecting health are. I would concentrate on the income part of that equation rather than the deduction part. Employer contributions to health are insurance should be taxable as income.

However, since so much of health care spending is in fact provide-induced, I wonder how much that would really reduce costs even if implemented in toto. Something else that might be tried is lowering the reimbursement rates for Medicare. That would be dreadfully unpopular so I’m sure it would hardly be whispered about let alone implemented.

All of these things point to why I’m skeptical that any measure that’s presently on the table will actually lower the cost of health care.