Why We Should Separate Health and State

Here’s my opening statement for today’s Separation of Health and State Debate.  Hope to see you there!

---

Government already plays such a large role in health care that it may be hard to understand what “separation of health and state” means.

Let me be clear: In my ideal world, we wouldn’t just abolish Obamacare.  We’d abolish Medicare, Medicaid, regulation of health insurance, medical licensing, and the Food and Drug Administration… for starters.  Unlike many opponents of the latest legislation, I’m not saying, “Keep your government hands off my Medicare.” 

Needless to say, my position is unpopular.  You might even think I’m a villain for holding it.  So just to play into your fears, I’ll begin by quoting Dr. Horrible’s Sing-Along Blog.  In this scene, Penny is telling Dr. Horrible about her last date – never realizing that Dr. Horrible is secretly in love with her.  

Penny: But, he turned out to be totally sweet. Sometimes people are layered like that. There’s something totally different underneath than what’s on the surface.
Dr. Horrible: And sometimes there’s a third, even deeper level, and that one is the same as the top surface one.  Like with pie.

This scene perfectly captures what I’m going to tell you about health care.  On the surface, a free market in health care seems like the best approach.  When you look a little deeper, the free-market approach seems naïve and dangerous.  When you look deeper still, however, the free market approach turns out to be the best after all.

Why does a free market in health care look good on the surface?  The same reason a free market in almost anything looks good on the surface.  On the free market, firms strive to satisfy the customer, and constantly look for new and improved ways of doing business.  Why?  The profit motive: Firms that make customers happy prosper, and firms that don’t go out of business. 

In the health sector, however, most people – including economists! – think that free-market logic fails.  The main complaints:

• High cost. Health care is ridiculously expensive.

• Externalities.  My health depends on your health, and vice versa.

• Moral hazard. Health insurance encourages unhealthy lifestyles and risky behavior.

• Adverse selection.  People with bad health are more likely to buy insurance, which raises rates, which makes healthy people even less likely to buy insurance.

• Consumer ignorance and irrationality.  People don’t know much about health, and it’s costly to learn.  Even worse: They make systematic mistakes, and foolishly defy medical authorities. 

On closer look, however, it’s the complaints that fail, not the market.  Some are false or greatly exaggerated; others blame the market for problems caused by regulation; some are true, but preferable to the alternative.  The problems with the problems:

• High cost. A mountain of regulation makes health care and health insurance a lot more expensive than they’d be on the free market.  Examples: Medical licensing greatly increases the cost of doctors, many of whom are overqualified for the work they actually do.  Regulation makes it hard to sell catastrophic and other low-cost insurance policies.

• Externalities. This is largely bait-and-switch. Only a tiny fraction of modern health care treats contagious disease.

• Moral hazard.  Insurance encourages unhealthy lifestyles and risky behavior if everyone pays the same rates.  But in a free market, insurers would charge riskier customers higher rates.  So why don’t they?  Because regulators often tie their hands in the interest of “fairness.” 

• Adverse selection. The least healthy people buy the most insurance if everyone pays equal rates. But again, the free-market solution is to charge riskier customers higher rates.  Governments habitually create adverse selection problems by trying to equalize rates, banning pre-existing conditions clauses, and so on.

• Consumer ignorance and irrationality.  If consumer ignorance were the problem, government could easily solve it with a good website.  What about the deeper problems of systematic error and blind trust?  They’re both very real, but argue against government involvement.  If you take any decent health econ class, you’ll hear about a pile of research showing that we greatly overestimate the health benefits of medicine – and put too much trust in medical authorities. The government’s response: Encourage us to use more medicine, and remove financial incentives to second-guess the experts.  Real smart. 

If you’re paying attention, you might notice that I’ve suggested some economically sensible role for government.

What’s wrong with government programs to fight contagious disease, fund a health information website, or study the effectiveness of different treatments?  My answer: When you give government an inch, it takes a mile.  Government involvement in health care started with small measures like vaccinations.  Now it’s over 20% of the budget, and rising fast.  Government involvement in health care is too dangerous to allow in any form. We need to just pull the plug.

But wouldn’t that be unjust to the poor?  Even if free-market health care is a lot cheaper, there will still be some Americans who can’t afford it.  Many people think that a just society should proudly protect its weakest members – just like a family would. 

I could object that the “society as a family” analogy is oppressive, even totalitarian.  But I’m happy to accept it for the sake of argument.  Notice: Within the family, you are only legally obligated to care for your minor children and your spouse. You are not legally obligated to take care of your siblings, your nephews and nieces, or even the parents who gave you life!  Almost everyone agrees with this approach.  So: If you don’t think it’s just to legally compel people to support the parents who gave them life, why in the world would it be just to legally compel people to support complete strangers?

It gets worse: Exaggerated notions of how much we owe our countrymen are a major rationalization for treating foreigners unjustly.  Billions of people around the world earn a dollar or two a day.  Haitians, for example, would be delighted to take a low-skilled job in the United States – even without health care. But a leading argument against letting immigrants come is that they’re already “bankrupting our health care system.” We’re so obsessed with helping relatively poor Americans that we’re willing to deny absolutely poor foreigners the basic human right to sell their labor to willing U.S. buyers.  That’s evil enough to appall Dr. Horrible himself.

The post appeared first on Econlib.