Health insurance costs more than it should. These 2 simple reforms would help
When shopping for clothes, food and just about everything else, we want to know the price. If it isn’t posted with the product we ask the seller. Knowing the price allows us to make good decisions.
Shopping for health care services is another story. Despite the “major reforms” to health insurance over the past decade, consumers still make decisions in the health care market with limited information.
Economic theory and history show that when prices are missing or distorted, they cannot perform their needed function of allocating scarce resources. That is, our limited resources are poorly used without price information.
People respond to price incentives. When the price of a good or service rises, consumers buy less of it. Higher prices give producers an incentive to move more resources to the production of the good or service.
Subsidies or price controls distort this important function.
For decades the U.S. government has subsidized health insurance through tax deductions. Since the 1940s, employer-provided health insurance has been excluded from taxable income. As a result, consumers simply take what their employer offers, choose their doctor from a limited list, and expect the plan to cover all or most of the costs.
Although the employee portion of premiums and most deductibles have risen, consumers covered by employer-sponsored plans do not know the total cost of their health services. Furthermore, people in the government-run Medicare and Medicaid rarely see any part of the price for their services.
The supply side of this market is also distorted. Like the rest of us, Insurance companies and health care providers respond to incentives. With more insured people, these suppliers increase services and charge higher prices. The Affordable Care Act years ago, and the recent expansion of Medicaid during COVID-19, brought more people into the market with subsidized health insurance, thereby increasing the likelihood of overconsumption.
The Center for Medicare and Medicaid Services reports that health expenditures now account for about 20% of all spending in the US economy. For the most recent year of data, total spending rose nearly 10% while out-pocket expenses declined. Consumers likely know even less about the price of their health care.
Two simple policy reforms would change incentives and allow prices to work.
Eliminating the tax deductibility of insurance will force insurance companies to market directly to consumers, thereby increasing competition. We would all be better off buying health insurance the same way we buy life or auto insurance.
Simply allowing for the purchase of insurance across state lines would also increase price competition and lower costs. Under current law, insurance companies must set up separate firms with different policy offerings in each state. Interstate competition has improved efficiency and raised consumer value for many different types of products, but health insurance buyers have been denied these gains.
Only when we start letting prices do their job will we get control over health care spending.
Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa, Idaho. prcrabb@nnu.edu
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