Brian Holtz in reply to Michael H. Wislon:
Health care is subject to a superfecta of market failures:
- asymmetric information between doctors and patients,
- adverse selection of insurers by insurees,
- moral hazard tempting insurees, and
- free-riding of potential donors leading to the underfinancing of charity healthcare.
However, health care is also subject to massive government failure such as
- tax preferences that artificially bind health insurance to employment, hide costs from consumers, and encourage over-insurance,
- price controls dictated by a bloated mandatory insurance program that (thanks to high senior voting propensity) is funded via inter-generational income transfers,
- laws against interstate competition in health insurance,
- rent-seeking through legislated preferences sought by unions and hospitals and insurers and pharmaceutical patent holders,
- artificial barriers to entry via professional licensure and excessive safety/efficacy regulations, and
- laws preventing insurers and consumers from agreeing on lower-cost lower-coverage insurance.
America’s healthcare market has for so long been so distorted by government interventions that it’s hard for most people to see how a free market in healthcare would work. Piling on more government interventions is not a smart response to the situation. Instead, we need to replace the federal government’s centralized tangle of health care bureaucracy and regulation with a decentralized market-based system in which government intervention is restricted to just correcting market failure at the most local possible level.
The market failure of free-riding on healthcare charity — i.e. of under-donating to the safety net because you worry others will under-donate — can be corrected at the state level or lower. There is no state in the union so poor that it cannot afford to finance health insurance vouchers for its poorest citizens if its voters don’t think they would be charitable enough to the sick among them.
The remaining market failures — adverse selection, moral hazard, and asymmetric information — are all knowledge problems, and only require tax incentives to correct. Adverse selection by insurees can be corrected by tax incentives for insurees to join age-based risk pools (instead of our current brain-dead system of pooling risk by employer). Moral hazard to over-rely on the safety net can be corrected by tax penalties for those who under-insure themselves against health catastrophe. Asymmetric information held by doctors and hospitals can be corrected by tax preferences for providers who practice transparency. All these tax incentives could probably be done at the state level (even with interstate insurance competition), but even if initially implemented at the federal level this policy regime would be much smarter than any “single-payer” mandate — no matter how messianic the leader whose armed henchmen would be enforcing it.
For more on market-smart health care policy, see
- The Cato Institute Policy Handbook chapter on healthcare
- The Library of Economics and Liberty articles on health insurance and the health care industry
- Milton Friedman’s 2001 How To Cure Health Care
- analyses by libertarian economists like Arnold Kling, Robin Hanson, and Tyler Cowan.