Healthcare incentives are necessary if we want to spur innovation
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The healthcare sector suffers from an unfortunate lack of real competition, encumbered by a seemingly ever-expanding pack of new rules and regulations. Many of these, in theory at least, are designed to make healthcare more affordable for consumers.  

The Affordable Care Act (ACA) was supposed to solve the problem of ever-rising healthcare costs while bringing health insurance coverage to every American. Instead, the law has yielded higher premiums and fewer choices for consumers, results that ObamaCare’s critics predicted again and again when it was still a bill.  

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There is at least one thing that the drafters and proponents of the law could not do. They could not abolish incentives, and the law as it stands creates a healthcare system that simply cannot work given the incentives at play.

 

When policymakers do not allow rational self-interest to operate within normal, socially-beneficial parameters, that self-interest asserts itself in ugly and perverse ways.

For example, because ObamaCare regulations have outlawed insurance as we know it, forbidding insurers from accounting for health differences and thus risk, the law and its rules effectively punish insurers that offer coverage for certain very expensive conditions.  

Sure, the insurance companies cannot deny one with such an expensive pre-existing condition a policy, but, compelled by cost considerations, they can “either leave the market, as many have, or slash their coverage.” This is just one of many examples of incentive problems created by a shortsighted law that, however well-intentioned, will end up hurting those segments of the population it is intended to help.

History hints at a world of potential. The decades enveloping the turn of the century were the golden age of fraternal lodge practice, an innovative ground-up answer to a problem facing working people, a voluntary solution produced by civil society on its own.

As historian David Beito teaches, by 1920, “at least three out of every ten adult males” were dues-paying members of fraternal orders and thus entitled to certain benefits in times of sickness and need. Such societies anteceded the modern welfare state; they were a way to spread — indeed socialize — risk without compulsion or coercion.

So were these lodge practices examples of free market healthcare? Much, of course, turns on how one defines the free market. Fraternal societies generally were not run for profit. Far more important than the term “free market,” though, is the fact that lodge practice was a spontaneous and cooperative response to a perceived problem, a response organized and administered not by politicians and bureaucrats, but independently, by the people with the problem for themselves.

Though far from perfect, lodge practice suggests the possibility of a less centralized and more flexible healthcare ecosystem. The defective American healthcare system calls desperately for heterogeneity, for a variety of delivery models of shapes and sizes that correspond to patients’ wants and needs. Rigid uniformity, created and nurtured by and for government bureaucrats and private pressure groups, is limiting the prospects for genuine affordable care.

An economic architecture with so few outlets for energy, resources, and innovation — a relatively static system with few nodes and connective avenues — offers insufficient opportunities for change and course correction. With new, cost-competitive delivery models and medical products actively proscribed, the American healthcare system is constantly tending toward collapse, unable to function successfully even with billions of dollars in subsidy handouts to insurance companies.

Politicians and industry groups profess their commitment to addressing the crisis of ever-rising healthcare costs even as they continue to erect entry barriers and consolidate the market. So onerous are existing healthcare regulations that many companies are simply unable to remain in business, forced to leave the business altogether or be swallowed by larger conglomerates in the search for economies of scale.

Rather than trying desperately to preserve America’s entropic status quo, policymakers ought to allow free market competition to disrupt and destroy that status quo.

That they consistently decline to consider the most basic economic principles bespeaks either a profound ignorance of those principles or (perhaps more accurately, if more cynically) an acute awareness of what might be gained from their violation. Their criticism against the potential of free markets ring hollow and are laden with old fallacies that reek of special interest influence.

Good public policy seeks to understand and accommodate ordinary economic incentives, not pretend they don’t exist or attempt to override them. Properly directed, self-interest and incentives are a powerful force for good. They economize and preserving scarce resources, which spur innovation, driving us to search for the best, most efficient ways to provide goods and services.

If we must have massive subsidies and special tax benefits, these ought to attach to individual Americans, not giant corporations. Healthcare dynamism requires real market reforms that center on the consumer, not stale D.C. platitudes and the concerns of powerful pressure groups.

David S. D'Amato is an attorney, a policy adviser at both the Future of Freedom Foundation and the Heartland Institute. D’Amato is also columnist at the Cato Institute's Libertarianism.org.


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