In what direction should we take American health care policy? The current climate seems to favor moving toward top-down rationing, price controls, mandatory coverage and payments, and numerous other controls on the buying of health care services and insurance. The less popular but more promising path would take us toward markets, choice, and individual responsibility. Advocates of a government-dominated health care system like to portray the existing US system as one of failed markets. But consider that the government pays directly for 45 percent of health care spending, while Medicare pays a third of hospital fees and one-fifth of all doctors’ fees. The heavy hand of government also influences the sector through extensive regulation of hospitals, pharmaceutical companies, doctors, and insurance companies. It further influences it through malpractice tort law and tax policies that tie medical coverage to jobs.
More regulation will not cure the health insurance system, as the authors of this paper argue. But what would a more market-based system look like, and how can we get there from here? One big concern currently is that if you change jobs, you can lose your health insurance. And if you then develop a long-term condition such as heart disease or cancer, you will be saddled with a pre-existing condition and find insurance prohibitively expensive, if its available at all. One major part of the solution is what the authors call “health-status insurance”. As they explain: “If you are diagnosed with a long-term, expensive condition, a health-status insurance policy will give you the resources to pay higher medical insurance premiums. Health-status insurance covers the risk of premium reclassification, just as medical insurance covers the risk of medical expenses.”
Market-based lifetime health insurance therefore consists of two elements: medical insurance and health-status insurance. Health-status insurance means you can always secure medical insurance, regardless of your medical condition, with no increase in out-of-pocket costs. With this in place, medical insurers would be allowed to charge higher rates for sick people while competing vigorously for all customers. Individuals would enjoy the unfettered freedom to change jobs, move, or change medical insurers without losing coverage. Stronger competition would lower the cost of medical care while improving its quality.
Despite being hampered by regulations and tax incentives, the individual health insurance market is already moving in the direction of health-status insurance, as the authors show. We can encourage the growth of health-status insurance by taking three main steps: First, eliminate the tax and regulatory preferences for employer-provided group health insurance. Second, allow and encourage insurers to adjust medical insurance premiums freely, so that anyone can get coverage, although at a price, and so that healthy people will not exit the market. Finally, lift the many other competitive restraints on insurers. The result will be a completely private, less-regulated, and competitive insurance market that solves the problem of a lack of secure long-term portable protection from health risks.