Last year, healthcare spending grew to around 18% of the American economy, further impeding the competitiveness of businesses and driving up costs for patients. Today, the average worker pays approximately $5,700 a year towards their coverage, while the average family pays $7,900. Unfortunately, this growth in spending does not correlate to improvement in outcomes, as nearly 30% of what is spent on healthcare has no impact whatsoever.
Some blame this waste and inefficiency on America’s “private healthcare system,” and argue that the solution to these problems is to increase government control of healthcare. This couldn’t be further from the truth: the blame should be laid on both the private and public players in America’s hybrid healthcare system, who realized long ago how to profit excessively off the misaligned incentives of central planning. Government directly accounts for 45% of total spending on healthcare, while government tax policy shapes and distorts the 20% spent by private businesses.
While care is largely delivered by private insurers, hospitals, and physicians, each of those groups is influenced by price controls and regulations that stymie their entrepreneurial spirit. Too often, consumers experience “the system” as unresponsive behemoths. What’s more, health insurance obscures the true cost of care from patients, removing any incentive to shop for value, and allowing insurance companies and other middlemen to turn a profit by raising prices. Let’s be clear: there’s no real market in American healthcare. That’s the real problem
Enabling price transparency is an important step towards injecting market incentives into healthcare, and restoring the economic discipline of a truly competitive market. Research by McKinsey and Company suggests that improving both market incentives and healthcare productivity could lower annual national health expenditures anywhere from $284-532 billion, bringing healthcare cost growth in line with the rest of the American economy. These gains could be supplemented by improving the demand-side market incentives as well: once patients can shop for quality, high prices will tend to be associated with better outcomes, as is the case in the rest of the economy.
Why is it the case that when it comes to healthcare -- nearly one fifth of the American economy -- we deny consumers the right to know the price of care before they select and purchase services? As a physician, I’m not naïve - I realize a patient in cardiac arrest isn’t going to “shop” around for an emergency room. But the vast majority of American healthcare spending doesn’t look like that: 86% of spending supports chronic and mental healthcare. When consumers are denied basic information on costs and quality, they have no incentive to select the most efficient and effective site of service. As a result, prices for the same healthcare services vary so considerably that a single procedure may be two to three times more expensive within the same state, or even the same city.
In most segments of the American economy, sellers compete for buyers by offering competitive prices, service guarantees, and even attractive financing. But in healthcare, consumers don’t benefit from the market discipline of transparency and competition. Some argue that American consumers are not sophisticated enough to shop effectively for healthcare. And yet, these same people sophisticated enough to buy in other sectors of the economy. More than 90% of Americans have figured out how to buy and operate a smartphone, and 51% of Americans use their smartphone for activities like buying a car, shopping on Amazon, or selecting a new outfit. 79% of Americans have made purchases online, while 64% of Americans have figured out the complex financing and paperwork necessary to buy a home. Americans are smart and adaptable in every other sector of the economy; under the right conditions, healthcare would be no exception.
Others argue that changing the way we provide healthcare will leave the poor without necessary services, which is simply not the case. The social safety net still exists – we spent $568 billion on Medicaid last year - and benefits for lower-income individuals can be designed to support them financially while still exposing them to incentives to demand value. Vice President Mike Pence implemented such a model during his tenure as governor of Indiana. In that program, pre-funded savings accounts are integrated into the Medicaid benefit design and give Medicaid consumers more control over how their healthcare dollars are spent. This program, Healthy Indiana, has proven to be a success, and is incredibly popular with beneficiaries.
Price transparency is important to those of us who believe in limited government and free enterprise, but the common sense reforms I’ve proposed should be appealing enough to consumers to transcend politics. Fortunately, most of these reforms could be enacted quickly and simply with an Executive Order, something that President Trump should prioritize in the coming months.
Americans are tired of getting ripped off by the healthcare system, and with good reason. The average person is more than capable of navigating a transparent and competitive market, and deserves to understand the value they’re getting – or not getting – in healthcare.
Dr. Tom Coburn is the Nick Ohnell Fellow at the Manhattan Institute and a former two-term U.S. Senator from Oklahoma.
Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, E21 delivers a short email that includes E21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the E21 Morning Ebrief.