Free Market Alternatives to the ACA

Back in December, I criticized the false dichotomy set up by those who claim that the only available alternative to the Obama health care plan is some form of socialized medicine.

In this recent essay, University of Chicago economist John Cochrane gives an excellent summary of free market alternatives to the ACA that can cut health care costs and deal with the problem of preexisting conditions, which is the main justification for the ACA’s individual mandate.

Here’s one of his key points:

We all agree what we’d like to see: Health care needs to become efficient, innovative, and provide high quality care at lowest possible cost….

How will this happen? Well, we have before us many good examples. Walmart and Home Depot revolutionized retail. Airlines are dramatically cheaper than in the 1970s. Consumer electronics, telecommunications, computers, and even cars are much better and cheaper, for what you get, than ten or twenty years ago.

These revolutions are not just about technology. In most of these cases, we see process innovation, reorganizing activities to deliver complex services at lower cost and with better and more uniform quality. This process efficiency is most glaringly absent in health care…

How will this change come about? My examples share a common thread: Intense competition by new entrants, who put old companies out of business or force unwelcome and disruptive changes. Microsoft displaced IBM, and Google is displacing Microsoft. Walmart displaced Sears, and Amazon.com may displace Wal‐Mart. Typewriter companies didn’t invent the world processor, nor did they adapt. The post office didn’t invent FedEx or email. Kodak is out of business. Toyota gave us cheaper and better cars, not Ford/GM/Chrysler competition. When the older businesses survive, it is only the pressure from
new entrants that forces them to adapt….

A small example: In Illinois as in 35 other states, every new hospital, or even major purchase, requires a “certificate of need.” This certificate is issued by our “hospital equalization board,” appointed by the governor (insert joke here) and regularly in the newspapers for various scandals. The board has an explicit mandate to defend the profitability of existing hospitals. It holds hearings at which they can complain that a new entrant would hurt their bottom line. Specialized practices that deliver single kinds of service or targeted groups of customers cheaply face additional hurdles, as they undermine the cross‐subsidization provided by “full service” hospitals….

Cochrane discusses various ways in which deregulation and competition can cut costs and increase access to health care, including for those with preexisting conditions. He also points out that the ACA and various other highly interventionist policies are not needed to provide health care for the poor:

If cash markets were functional [as would be the case under deregulation], health insurance could become what it should be: a way of protecting lifetime wealth from catastrophic shocks, like life insurance. Such insurance would, of course, be a lot cheaper. It would not have to be a negotiator and payment plan for routine expenses. “Access” should mean a checkbook and a willing supplier, not a Federally Regulated payment plan. Insurance means your large‐scale standard of living isn’t enormously impacted by rare events….

“What about the homeless guy with a heart attack?”

Let’s not confuse the issue with charity. The goal here is to fix health insurance for the vast majority of Americans….

Yes, we will also need charity care for those who fall through the cracks, the victims of awful disasters, the very poor, and the mentally ill. This will be provided by government and by private charity. It has to be good enough to fulfill the responsibilities of a compassionate society, and just bad enough that few will choose it if they are capable of making choices. I wish it could be better, but that’s the best that is possible. For people who are simply poor, but competent, vouchers to buy health insurance or to refill health savings accounts make plenty of sense.

But supplying decent charity care does not require a vast “middle‐class” entitlement, and regulation of health insurance and health care for everyone in the country, any more than providing decent homeless shelters (which we are pretty scandalously bad at) or housing subsidies for the poor (section 8) requires that we apply ACA style payment and regulation to your and my house, Holiday Inn or the Four Seasons.

To take care of homeless people with heart attacks, where does it follow that your and my health insurance must cover first‐dollar payment for wellness visits and acupuncture?

UPDATE: Co-blogger Jonathan Adler made some related points here.