Overdependence on Insurance

If you change your mind
I'm the first in line
Honey I'm still free
Take a chance on me
--ABBA

Ryan McMaken argues that a primary way to improve the healthcare system is to reduce dependence on health insurance products. Use of insurance as a principal means of distributing healthcare is largely a post WWII phenomenon--borne from government tax and regulatory interventions that rewarded corporations for offering health insurance to employees. Subsequently, the insurance model replaced cash markets where consumers purchased healthcare goods and services for a fee.

As insurance replaced fee-for-service markets, healthcare costs began their ascent. Why? In large part because health insurance invites moral hazard and subsidizes consumption, thereby reducing incentives to shop for value.

Cash markets, on the other hand, encourage entrepreneurship among producers who must constantly become more productive in order to win the business of value-conscious buyers. Thus, as McMaken notes, we observe ongoing patterns of innovation in industries that rely on cash-for-service transactions. Food, for example, a cash market good that is no less essential for life than healthcare, constantly gets better and cheaper and now comprises a lower percentage of household budgets than in the past.

McMaken proposes changes to tax codes and regulations to reduce dependence on the health insurance model. Tax-free health savings accounts and tax credits for health spending should be expanded. Group coverage options beyond employer-sponsored plans should be nurtured. Markets need to be opened to more providers willing to operate in fee-based markets.

He makes a nice point near the end of his article. If a society wanted to build a healthcare system where prices were permanently high and improvement was hindered, then one would be hard-pressed to design a system more conducive to those outcomes than the current one.