Let markets solve health care crisis

By Antony Davies & James Harrigan. Antony Davies is associate professor of economics at Duquesne University. James Harrigan is managing director of the Center for the Philosophy of Freedom at the University of Arizona.

"The presidential election is just about a year away, and we are already being subjected to a steady diet of politicians telling us what we need to do to fix the health care industry. Their rallying cry is familiar: We cannot allow “unfettered capitalism” to “deny us access” to health care. But an honest look at the facts indicates that politicians themselves caused our problems in the first place.

Our current health care (more precisely, health insurance) problems are less the result of unfettered capitalism than of two major government interventions in markets. The first was the Stabilization Act of 1942, under the authority of which President Franklin Roosevelt issued an executive order prohibiting wage increases. But prices aren’t switches one can simply flip to alter reality; they are metrics that reflect a pre-existing reality. In 1942, the reality was that businesses were having a hard time attracting workers. Wage controls didn’t change that reality. When politicians prohibited employers from attracting workers with higher wages, employers began offering health insurance instead.

The second government intervention came in 1954 when the IRS ruled that employer-provided health insurance was not taxable. This made employer-provided health insurance less expensive than individual health insurance, and less expensive than a wage raise of the same pre-tax amount. This is about as far from unfettered capitalism as possible, but politicians know not to let the facts get in the way of good campaign slogans.

The first intervention contributed to today’s pre-existing condition problem. With employer-provided insurance, a sick worker who loses his job also loses his insurance. Any new insurer will, quite sensibly, count that sickness as a pre-existing condition. The second intervention contributed to today’s insurance premium problem. When it’s cheaper to take a raise in the form of tax-free benefits than taxable wages, demand for insurance rises. And that increases the price of insurance.

Medicare and Medicaid followed these interventions a decade later, and before we knew it, the government was so deeply involved in health care that it was difficult for many to imagine things any other way. For decades, we have been lurching toward a government-run health care system as state and federal governments have enacted a sequence of ever more elaborate plans intended to solve the myriad problems their previous plans created.

But it needn’t be this way, as some telling examples illustrate. Cosmetic surgeries are typically not covered by insurance, and are thus largely exempt from the government tinkering. From 1998 to 2016, consumer prices excluding medical care rose an average of 2.1% annually. Over the same period, prices of cosmetic surgeries rose an average of only 1.6% annually. Lasik surgery is typically not covered by insurance either, but its price has remained unchanged for the past decade — not even keeping pace with inflation. The prices of most health care services that escaped political planning have risen slower than inflation — just like those of other high-technology products.

There may be ways government regulation can increase people’s access to health care and insurance. But the evidence suggests that markets, when left alone, can take us a long way to the solution. And that means that the first thing politicians should do when they see a problem in health care markets is not to ask what they might do to make it better, but to ask what they might stop doing that is making it worse."