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Healthy Competition: What's Holding Back Health Care and How to Free It Paperback – September 9, 2005
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From the Back Cover
"We begin with a riddle. What country's health care system offers the best health services in the world, is constantly criticized for not being accessible enough, and yet is so accessible that overuse is leading to runaway costs? The first part of the riddle reveals that the answer could only be America. The remainder gives the contours of a paradox that vexes policymakers year in and year out. Welcome to health care, American-style.... To carry the health care debate on its next lap, America first needs a clear, well-informed, and well-reasoned analysis of the apparent paradox of its health care system. And it needs an agenda for reform that respects the wonders that modern medicine has developed and the creative market processes that deliver them. Cannon and Tanner offer proposals that would further tap the power of markets to make health care more valuable and more affordable. That makes Healthy Competition essential reading."
--George P. Shultz, Former Secretary of State
"Surprisingly readable, extraordinarily comprehensive, highly persuasive. Read how the key to improving health care in the United States is to convert the patient from a ward of the state to an independent, self-interested customer."
--Milton Friedman, Nobel Laureate in Economics
"Health care costs and insurance premiums are rapidly increasing, making both insured and uninsured consumers worse off...[P]olicymakers are again confronting the fact that change is desperately needed. The direction of that change, however, is anything but settled. Does the solution lie in private markets, greater government involvement, or some combination of the two? Healthy Competition is a timely and important contribution to this debate. The authors argue passionately that markets are the best available vehicle for reforming the health care system. In general, their philosophy is that reform should increase the number of decisions made by patients and decrease the number of decisions made by government officials."
-- Deborah Haas-Wilson, Smith College, in New England Journal of Medicine
"In Healthy Competition, Michael F. Cannon and Michael D. Tanner provide a concise and highly readable summary of the evidence refuting the case against market competition in health care. Cannon and Tanner... provide a valuable service by accumulating the evidence that demonstrates that although health care is not the "same" as personal computers or household appliances, it is not so "different" that market forces cannot work to consumers' benefit." [Read the full review]
--Robert L. Ohsfeldt, Texas A&M Health Science Center
About the Author
Michael F. Cannon is the Cato Institute's director of health policy studies.
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“Economic competition… keeps revealing the new ‘best’ answer in an ever-changing world… When innovations come along that provide greater value—that is, higher quality and/or lower prices—consumers will gravitate toward those new options.”
“First and foremost, market competition requires a wide pool of competitors and potential competitors, including entrepreneurs with new ideas… In markets where consumers are free to choose from numerous producers, competition reduces prices and makes products of ever-increasing quality available to an ever-increasing number of consumers.” Within the medical field, examples include cosmetic surgery and laser eye surgery, where patients pay directly.
In the health care sector, “many of the necessary conditions of healthy competition have been disabled. On the consumer side, government promotes excessive levels of health coverage. On the producer side, it imposes excessive regulation, which dampens competition.”
The authors note that the majority of Americans (60.4% in 2003) get health insurance through their employer and “roughly 86 cents of every dollar spent on medical care in the United States today is financed through a third party.” Only 13.7% is paid directly by the patient.
“When patients enter the medical marketplace with excess coverage, they have less need to weigh the benefits of health care against the costs. They end up utilizing care that provides little value. Since patients are not very particular about costs and benefits, neither are providers. They have less incentive to focus on innovative ways of meeting patients’ needs or to furnish information about prices and quality. Costs cannot help but rise in such a market.”
“In most markets, the interests of consumers, producers, and payers are well-aligned because the consumer and the payer are the same person… Since patients directly pay on average only 14 cents on the dollar for medical care, they tend to demand medical care that costs $1,000 even if it provides only $140 of value.”
“America’s health care sector produces enormous waste alongside productivity gains because our overreliance on health coverage gives patients every incentive to consume technological advances, even if the added expense does them no good… A study of Medicare patients… who had little risk of adverse gastrointestinal reactions used the expensive COX-2 drugs as often as those at high risk, despite the availability of cheaper alternatives.”
The solution is to have consumers decide how to spend their health benefits. “Former Medicare trustee Tom Saving and Andrew Rettenmaier of Texas A&M University write, ‘When consumers care what health care costs, suppliers will have to compete for consumer dollars and this competition will reduce the cost of care.’ Reducing incentives for excessive coverage would also reduce wasteful expenditures.”
“When consumers are spending their own money, each purchase transmits information about their preferences, enabling producers to respond by providing more of what consumers value… Instead, payments to providers are based on what is important to insurers, employers, and government.”
Of course, in order to make informed decisions, consumers need to know prices up front. “The Federal Trade Commission (FTC) and Department of Justice (DOJ) observe, ‘The public has access to better information about the price and quality of automobiles than it does about most health services.’ … University of California, Santa Barbara, health economist H.E. Freh notes: ‘The problem is there are millions of prices… A typical hospital will have at least tens and maybe hundreds of payers with different prices.’”
The authors quote Michael Porter and Elizabeth Teisberg, authors of Redefining Health Care:
The most fundamental and unrecognized problem in U.S. health care today is that competition operates at the wrong level. It takes place at the level of health plans… It should occur in the prevention, diagnosis, and treatment of individual health conditions or co-occurring conditions. It is at this level that true value is created—or destroyed—disease by disease and patient by patient. It is here where huge differences in cost and quality persist. And it is here where competition would drive improvements in efficiency and effectiveness, reduce errors, and spark innovation.
Cannon and Tanner are proponents of Health Savings Accounts (HSAs) as a vehicle for giving consumers more control over their health care expenditures. An HSA is much like a 401(k) dedicated for medical expenses… However, in contrast to 401(k)s, withdrawals for medical expenses are never taxed… To be eligible for an HSA, individuals must be covered by a qualified high-deductible health plan.”
However, they recommend significant changes to the laws regulating HSAs:
Increase HSA contribution limits to allow employers to deposit the full value of workers’ health benefits directly into their HSAs.
Eliminate the health insurance requirement for HSAs.
Allow tax-free HSA withdrawals for all health insurance premiums.
“Congress should [allow] individuals to purchase health insurance with HSA funds. This would allow all individuals, even those without employer-sponsored coverage, to purchase health insurance with pretax dollars. Allowing full deductibility of individually purchased insurance in this way would make coverage more affordable for millions and further level the playing field between employer-sponsored coverage and other types of insurance.” I follow this logic, although most large employers are self-insured, so I wonder what the “full value” of a healthy worker’s benefit would be.
It is important to make a distinction between routine health maintenance and major procedures. “Like auto, fire, and homeowner’s insurance, health insurance is supposed to protect against unlikely but high-cost events. Ordinarily, it would not cover regular checkups for the same reason that auto insurance does not cover oil changes: such expenses are neither unlikely nor high-cost… Of course, there is no reason why someone should not be able to purchase coverage for regular checkups—as long as she is willing to pay the added cost.”
“As workers with low-deductible coverage accumulate savings, they would be able to cover more out-of-pocket costs. As a result, they likely would move toward higher deductibles to save money on their premiums… Lifting the insurance requirement would also give workers the option not to purchase health insurance at all, but accumulate savings in their HSA instead.”
The authors do not explain what happens when an uninsured consumer incurs a catastrophic medical problem without having accumulated sufficient funds in the HSA. I suspect that very few Americans could afford to pay for a major medical condition (such as cancer) without insurance, so I don’t agree with the authors’ recommendation to eliminate the catastrophic insurance requirement.
“Health care consumers would be more parsimonious when spending their own money, thus forcing producers to provide higher-quality, lower-cost services, and to provide better information to help patients make good decisions… Large HSAs would also reduce administration costs for employers. Employers would be able to maintain their current level of health benefits while eliminating the layers of bureaucracy required to administer them.”
The book includes a chapter on regulation. The authors are in favor allowing consumers to buy health insurance across state lines. “Competition among states would lead them to tailor their regulation regimes to consumers’ preferences and to abandon regulations that make health coverage unappealing or too costly.”
Cannon and Tanner note that costs could be lowered revising medical licensing laws to allow more health care to be provided by allied health professions, such as nurse practitioners and physician assistants. “Studies have shown that within the scope of their training, nurse practitioners perform comparably to physicians in terms of cost, health outcomes, and patient satisfaction. Nonetheless, many states’ licensing laws forbid allied health professionals from having direct access to patients and prohibit these professionals from opening independent practices.”
State certificate-of-need (CON) laws are another barrier to competition. “Currently, 35 states have such laws that require hospitals, nursing homes, and other facilities to obtain state approval before they may build a new facility, expand an existing facility, or offer new services. In such proceedings, it is common for competitors to have much to say about whether a new facility is needed. The FTC notes that numerous studies show ‘market incumbents can too easily use CON procedures to forestall competitors from entering an incumbent’s market’ … CON laws serve special interests at the expense of other providers and the public at large.”
Cannon and Tanner write about the lengthy FDA approval process. “The FDA’s power to withhold new treatments is a threat to the freedom and the health of patients. Each year, the agency denies terminally ill patients access to experimental treatments that might improve or save their lives.”
The authors also advocate medical malpractice reform. “However, the U.S. Constitution does not grant Congress the authority to impose substantive rules of tort law in the states… State legislatures are the proper venue for correcting excesses in state civil justice systems… A ‘loser pays’ rule often would reallocate the costs of frivolous lawsuits to the correct party.”
The U.S. health care system is by far the most expensive in the world: 18% of GDP compared with 4% in Singapore. Congress cannot solve this problem by rearranging the deck chairs on the health insurance Titanic. Health insurance premiums are driven by the cost of claims. Addressing the underlying costs must be part of any real solution. This book offers a path to lower costs through price transparency, removal of anti-competitive barriers, and reduced waste.
Cannon and Tanner's book starts with a foreword by the Hon. George P. Shultz: "We begin with a riddle. What country's health care system offers the best health services in the world, is consistently criticized for not being accessible enough, and yet is so accessible that overutilization is leading to runaway costs?" The answer is, of course, America.
The following 147 pages offers a detailed analysis of what's wrong with American health care (government and insurance industry policies that lead to overuse of medical services) and what's right (the strong remnants of a free market system that encourages innovation, high quality, at an often lower cost). Both detailed and heavily footnoted, but also very readable at the same time, "Healthy Competition" strikes the right balance between a dense academic paper and a clarion call for action.
In concluding the book, Cannon and Tanner write:
"Despite its marvels, America's health care sector continues to present troubling symptoms: excessive costs, uneven quality, a lack of useful information for patients and providers, extraordinary waste, and enormous burdens for future taxpayers. An accurate diagnosis points to too much government influence and too little choice and competition. Proposals to increase the role of government would aggravate these symptoms. More subsidies or controls would drain from the medical marketplace even more of the dynamics that drive other sectors of the economy toward lower prices and higher quality. The only sure remedy is to restore those dynamics to the health care sector.
"Although there are dark clouds on the horizon, we are heartened by the creation and steady growth of health savings accounts. HSAs have already begun to change private-sector health care from within, and will enable a reexamination of the role of government in health care."
The last citation in "Healthy Competition" comes from a June 1, 2004 Harvard Business Review article by Michael Porter and Elizabeth Teisberg. It deals with the oft-heard argument that we somehow should not apply free market principles to the health care sector:
"It is often argued that health care is different because it is complex; because consumers have limited information; and because services are highly customized. Health care undoubtedly has these characteristics, but so do other industries where competition works well. For example, the business of providing customized software and technical services to corporations is highly complex, yet, when adjusted for quality, the cost of enterprise computing has fallen dramatically over the past decade."
Cannon and Tanner accept this argument while also embracing the argument of many of the proponents of government control of health care because it is special and distinct from other parts of the economy - they just come to the opposite conclusion, concluding in their last paragraph, "...Unlike software, wireless communications, or banking, health care involves very emotional decisions, which often entail matters of human dignity, life, and death. However, we do not see the gravity of these matters as a reason to divert power away from individuals and toward government. Rather, we see the special nature of health care as all the more reason to increase each consumer's sphere of autonomy. The special nature of health care makes it all the more important that we use the competitive process to make health care available to more consumers - and makes it all the more important to get started now."
Two side notes of a personal nature: on February 1, 2007, I introduced AB 245, a bill that would allow the tax deductibility of contributions to HSAs (California is one of only four states that do not treat HSAs as tax deductible); and author Michael Cannon is someone I have grown to respect from our first meeting in 2004 as Lincoln Fellows of the Claremont Institute. I suspect we will be hearing quite a bit from Mr. Cannon over the next few decades - and, if policymakers are smart, they will listen carefully to what he has to say.
Reviewer: Chuck DeVore is a Vice President at the Texas Public Policy Foundation. He served in the California State Assemblyman from 2004 to 2010. Before his election, he was an executive in the aerospace industry. He was a Special Assistant for Foreign Affairs in the Department of Defense from 1986 to 1988. He is a lieutenant colonel in the U.S. Army (retired) Reserve. DeVore is the author of "The Texas Model: Prosperity in the Lone Star State and Lessons for America" and the co-author of "China Attacks."