During the heat of the rising healthcare debate, some conservatives and libertarians have been left baffled at what has unraveled in the during the past few weeks. Senator Rand Paul (R – Kentucky) has repeatedly referred to the administration’s health care plan as “Obamacare lite“, due to the many regulations, guarantees, and entitlements that remain from the current Affordable Care Act (ACA). Some of these include government coverage for pre-existing conditions and staying on your parent’s plan until your 26.
Congressman Jason Chaffetz (R – Utah) refuted this claim on CNN, saying “we’re getting rid of the arbitrary lines around the states”, and “we’re getting rid of the individual mandate, we’re getting rid of those things that people said that they don’t want”. However, we see that not even this is true, as the current healthcare plan encourages charging a 30% premium hike for a year to people who did not have previous continual coverage.
This got me thinking, what exactly would a lasseiz-faire free market healthcare system look like? It’s easy for libertarians to describe the problem, however many falter when arguing the specifics of a free market health care system. Let’s delve into this subject, but first we need to ask:
How does the healthcare market work?
What does it mean when people say “lines around the states”? What are they and why are they there? When a health insurance company decides to do business, it does a risk assessment of an area before it decides if there is a profit in covering that area. This is called risk scoring – the process by which information about an individual is used to predict, or explain, uncertain events. These events may include mortality rates, utilization of healthcare services, healthcare efficiency or healthcare costs. In short, insurance companies use risk scoring as a variable in a function associated with the cost of covering patients in a particular area, meaning the insurance company will not do business there if the risk score is too high.
The government attempts to combat this by restricting insurance companies from doing business in other states. They believe that if they force insurance companies to bundle risk by state, it will give people in rural or high risk communities a chance to attain healthcare regardless of where they live. However, as many Republicans have noted, the restriction of outside competition causes average premiums to go up. In addition, this means that people cannot attain healthcare plans that are tailored specifically for them. My uncle’s insurance plan covers breast cancer treatments, despite the fact that he is a man, and he pays for this.
What Republicans, and many economic conservatives fail to explain, is how does a free market healthcare system encourage insurance companies to do business in areas whose risk score is too high? Let’s go back to those uncertain events that determine risk score.
The Bureau of Economic Research claims that mortality rates have declined by nearly 200% over the past century due to two factors: our conquest in fighting cardiovascular disease, and the prevention of death at birth for low-weight infants. There is a large misconception that mortality rate is directly associated with healthcare. Even in Ancient Egypt, where the mortality rate was exponentially higher and the average age of death was 30 years old, was because of how many infants (age 0) had passed away during birth. Innovations in technology and healthcare quality provided by a competitive free market have undoubtedly driven our research efforts, and costs as well. As the free market continues to innovate, not only will we see more advances in technology, but complicated technology we use today will be simplified and more cost efficient. An easy example is a computer, which once was the size of a whole room and cost over $50,000 can be purchased for even $50 today in our current market. Mortality rate is probably one of the lesser of the factors insurance companies evaluate, as it is pretty average across the board, but just some food for thought.
Utilization of Healthcare Services
According to the Center for Disease Control and Prevention (CDC), factors involved in the utilization of healthcare services include, but are not limited to: decreased supply (hospital closures, high employee turnover rates, etc.), public health/sanitation advances (quality standards for food and water distribution), understanding risk factors of prevention initiatives (smoking prevention programs, cholesterol-lowering drugs), discover/implementation of treatments, payer pressure to reduce costs, so on and so forth. The idea is the overall access to not only “healthcare”, but “healthy facilities” as well. When the population is surrounded by aging infrastructure, often combined with limited healthcare resources (sparse hospitals or towns with no more than a clinic), insurance companies will see this as a risk for health care costs, since they assume that this determines the health of the overall population.
Regulations often keep insurance companies from supplying the demand. In a truly free market system, insurance companies would be able to configure lite healthcare packages tailored for rural areas that don’t have access to as many healthcare services. In turn, this restriction of market choice in healthcare access will either spotlight the current facility’s services, encouraging them to remain integral with qualification, or it will encourage others to move in and provide alternative services to those who demand it, thus driving down cost, providing market choice, and lowering insurance rates.
The International Journal of Health Policy and Management did an in-depth study on what factors affect the technical efficiency of healthcare globally. They used GDP per capita, health expenditures per capita, the number of physicians per thousand people, and the number of hospital beds per thousand people as factors to an equation to use as a function when determining efficiency. They included that “in order maximize technical efficiency, health policy-makers should pay special attention to the proper use of healthcare resources according to the people’s needs, the appropriate management of the health system resources, allocating adequate budgets to the health sector, establishing an appropriate referral system to provide better public access to health services according to their income and needs, among many others”.
While I disagree with allocating adequate budgets to the health sector, since the free market should be solely responsible, the most important part of this is the management of the health system resources and establishing an appropriate referral system, both of which the free market does so well. Economics is the study of supplying an unlimited want with limited resources, so efficiency is key in providing the masses. A free market healthcare system would better manage resources because of specialization. Government is often poor at what it does because it does too much. Government is centered around policy, meaning providing insurance is the lesser of what it does. Because of this, quality goes down, and resources are aimlessly wasted. Specialization in individual companies means that people dedicate their lives to this one thing, looking for ways to manage their own resources in the hopes they can provide a product for the lowest price and attain the highest profit margin. A referral system even sounds like a brilliant phone application idea, because it can transmitted to you in the palm of your hand.
This is the big one. The Center for Aids Research assesses healthcare costs through 5 factors: Cost-Consequence Analysis (multi-dimensional listing of outcomes), Cost-Minimization analysis (equivalence demonstrated or assumed in comparative groups), Cost-Effectiveness Analysis (single “natural” unit outcome measure), Cost-Utility Analysis (multiple outcomes-life years, adjusted for quality of life), and Cost-Benefit Analysis ($).
I know that’s a lot of medical jargon, but when we break it down with the free market mind, we see who is really in the money. “Cost-Consequences” and “Cost-Utility” Analyses are both subjective, because their variable is dependent on the outgoing real and opportunity cost per person, and can only be strongly “guesstimated”. Cost-Minimization, Effectiveness, and Benefit are all determined by the previous section on healthcare efficiency, where specialization and competition strongly encourage In fact, insurance companies already do this.
Managed healthcare plans involve the insurance company finding specific physicians and facilities that provide care for the lowest cost in order to tailor the least expensive plans for their patients. This sacrifices choice, but keeps costs at a minimum. One reason many were enraged with the Affordable Care Act was because the president had promised that Americans would be able to keep their doctor. When a public option entered the exchange, insurance companies were forced to change Americans’ individualized healthcare plans and replace them with managed care insurance plans, where they were forced to choose a doctor that was cheaper, and at the same time premiums still sky rocketed.
In conclusion, the free market system will always provide the best product for the lowest price. This is not due to the good will of man, but it’s because if you want to make money, you have to give people what they want at a price they can afford. Insurance companies and healthcare providers cannot lower price when it is inflated by an artificial “free” alternative. The free market will always efficiently manage resources and drive down cost as long as people are willing to pay. Every American should know this.
Image: Michael S. Williamson/The Washington Post