The big thing I don’t see addressed here, if you’re going to advocate for more market-based payment systems, is transparent and easily accessible pricing signals. In our current system, it is VERY difficult to understand what things cost and where to find competitive pricing when seeking out care. Providers behave as though they are members of a cartel. We should not switch to a market system where consumers have a severe information disadvantage against providers.
Thanks for the comment! I agree we need transparency BAD. I'm hoping we need not mandate it, as a system like this would incentivize transparency. If people are spending out of their own Funds, then they will seek out institutions that have transparency.
I don’t think there’s any incentive for incumbents to change their approach simply because the payment scheme has changed. First of all, current pricing schemes are infinitely complex and current systems are designed to making consumer-facing pricing opaque. I think companies will need to be forced to reform, or they just won’t.
Unfortunately, health care is a little different than some other industries. Health often isn’t an optional spending category and consumers can become a captive audience once in the system where multiple services need to be provided to address a single problem (e.g., you need to see a GP, get x-rays, see a specialist, etc. for one health issue). Also, there has been a lot of consolidation, so many regions of the country just don’t have competition within a reasonable distance from consumers.
Good market structures aren’t just an automatic function of a lack of regulation. You need to ensure competition, fair access to information, etc. Otherwise, what you get is not a market, but a government-enabled cartel.
Pricing schemes need not be complex. They only are because Medicare designed them that way from the top down. Competition has also been driven by Medicare policy. Get rid of that, and we take the thumb off the scale of complexity and consolidation. Now capital can be invested in new entrants who disrupt the system.
If the hospital in my community failed, it would be a disaster for the community. It’s not clear to me that there’s enough private capital available locally to rebuild it any time soon, particularly if its failure starts a chain reaction of population and capital flight. What you’re saying makes a bit more sense in larger cities. Hospitals and primary care are *infrastructure* for human capital.
Now that we have an opaque pricing system, it’s not obvious to me that providers would quickly adopt transparent pricing. What would be the incentive? How would they realize more profits in a short time period by behaving this way? Particularly in regions where they are the only provider. When you make major structural changes in a big, complex, already-operating system, you can’t just change one thing and hope everything falls into place. You have to ensure coordination through an extended transitional phase.
There's an extended transition in this proposal. My hope would be that for purely elective things like primary care, ortho procedures, pain management, etc, shortages would draw new entrants with the promise of guaranteed business.
For hospital services, I agree there should be some community funding (like firefighters) to maintain access to emergency services. The problem is right now the orthopedic surgeons are keeping the ER open because that gets reimbursed more. The ortho procedures can be done much cheaper at an ASC and the ER can be kept open with some government subsidy from the community or state/federal grants.
In many smaller communities, certain providers have monopoly power.
Other less regulated industries have opaque pricing schemes meant to frustrate and confuse customers into paying more than they need to (try to figure out how your cable bill works the next time they call you with a special offer). We currently have a system where prices are opaque, and it’s in an industry where services are complex and customers can’t necessarily opt out of services. Even if competition eventually does encourage more transparent pricing, it’s not clear to me that this will happen quickly or spread to the whole industry. If you’re going to radically push the health system to be market oriented, I think it would be necessary to regulate pricing transparency from the get-go. A market where customers are always at a significant disadvantage in information encourages rent-seeking and stasis. Private interests with lots of capital and a large market share have a similar capacity to become stagnant and bureaucratic and to make markets dysfunctional as governments.
Cartel is not exactly right. Providers aren’t colluding so much as operating inside a structurally concentrated market. Hospital consolidation, limited supply, and opaque insurer negotiations create cartel-like outcomes even without explicit coordination. Transparency helps, but prices are ultimately driven by those structural constraints more than by consumer search. That’s why transparency is necessary but not sufficient.
I’m exaggerating a little for effect (and out of disgust). “Cartel-like outcomes without explicit coordination” is a more correct way to describe the situation.
Lack of pricing transparency is one of the major problems with our current system, and it makes me boiling mad.
My response to the reforms imagined here is that if we deregulate funding without insisting on pricing transparency the system will become “cartel-like outcomes with cartel-like explicit coordination.” Other reforms and regulation may also be necessary. Well-operating markets don’t just spring out of the ground spontaneously in the absence of government involvement.
You may have well dropped the mic in the first few paragraphs. This is bang on and almost precisely the same solution I arrived at in my essay on healthcare (will publish soon). We need to allow insurance to be insurance and expose more of medical care to market forces.
The current system in America is, frankly, the worst of both worlds.
Love the freedom fund. The most important thing would be to end the pricing games. Let providers set their own prices, but they must charge the same price to all comers. Otherwise they will use big data to charge everybody all they are able to pay. They already do this to a large degree, by making a pill cost $1,000 if you're rich or have insurance, but they'll give it to you for free if you can't otherwise pay. This price gaming kneecaps the market forces you would need for this scheme to work.
I have long thought that it is odd how much routine care gets paid for by "insurance", and the analogy to car insurance is apt. But I work in a specialty field, where our care is far from routine, but also far from catastrophic. Our patients don't have frequent hospitalization or major surgery, but they do use new and expensive treatments that they "need" in the traditional sense that without them their quality of life would suffer and they would potentially need hospitalization or other more expensive interventions. And these treatments would, out of pocket, exceed most people's ability to pay. I think we can all agree that a cancer diagnosis or car accident might be catastrophic, and that check-ups and vaccines are routine. But what about a coronary stent? A knee replacement? Years of biologic therapy for psoriatic arthritis?
The first three paragraphs are the best distillation of the problem I’ve seen in a single piece. People particularly seem to ignore or not see the incentives for and deep problems with consolidation.
So finally there is a solution to healthcare in the US - the Freedom Fund!
The description of the fablulous Freedom Fund is very vague, especially on how one would phase it in.
I think Thomas Sowell proposed three question for such proposals (Compare to what? At what cost/What are we giving up to achieve this? What hard evidence do you have?).
I would be particularly interested in an answer to the second question and third question.
While I actually agree with you directionally, I just see no credible path forward.
I remember a talk by a representative from Singapore Ministry of Health at Stanford about 25 years ago, possibly Profressor Tan Chorh Chuan. According to Gemini, he explained that Singapore’s system (the 3M system: Medisave, Medishield, and Medifund) was designed from a "clean sheet" in the 1980s. Because they were a small city-state with a relatively new administrative infrastructure, they could mandate health savings accounts and integrated care paths without fighting 100 years of existing hospital networks and legacy insurance laws. He argued that in the U.S., any move toward a centralized, Singapore-style "integrated supply chain" for health would require existing stakeholders (specialists, private insurers, and even some patients) to give up choice or income. His point was that even if the system became more efficient, individuals within the system would perceive a loss of autonomy or status, leading to political gridlock.
Another area where market forces might be difficult to implement is in very rural areas. Urban or suburban areas may have several health care providers to choose from and with transparent pricing, they can compete. But rural areas may have one or maybe two hospital system for 50 miles, or only one agency that does specialized services over several counties. I don’t know what the answer is, but it’s worth considering.
Yes, some services should be funded more like firefighters. These are true common goods. Trauma, stroke, and some OB services should be like this. The control and financing is better suited at a local level, though, with federal/state grants as needed.
Even emergency services like firefighters are tricky in rural areas. There’s a reason they are volunteers in those areas. Ambulance services are often run by for profit agencies because the volunteer department, paid for with donations and taxes, can’t sustain it.
I like it for the most part. There also needs to be some different accommodations for birth. The hospital charged $50,000 dollars during my daughter's birth to the insurance company. If someone had 5 kids you are talking about a quarter million dollars. There should be some model where those costs are paid for by the public at large or its going to affect how people plan for families. But routine care should be all private pay.
Citation needed: where does that $500 median annual medical "spend" figure come from?
The OECD median spending for healthcare is 10% of GDP. That’s more than 10% of wages because GDP is more than wages. So one month’s wages is not an unreasonable benchmark. Out of $60,000 a year, $5000 for healthcare. If that sounds like a bargain, it’s because the American bill is twice that: 19% of GDP.
It’s easy to assume away the problem. If healthcare costs half of us less than $500 a year, then health insurance should be cheap, so it would seem. But someone has to fund the other half, and at any moment any one of us could find ourselves in that other half. That’s why we all pay into it, and why it costs so much when we — thankfully! — don’t use it.
No wealthy country emulates the American devil-take-the-hindmost system. No wealthy country has libertarian-dream efficient market-based healthcare. They all adopted socialized medicine in one form or another democratically, and not party in any of those countries advocates dismantling and privatizing it along the lines of the American so-called system.
What the United States could do is make Medicare universal. Medicare costs 90% less in overhead, before accounting for the cost-shifting bureaucracy of private health insurance. And Medicare, if universal, would have monopsony power in the market, meaning it could dictate prices (as it already does to a limited extent). That is how we start to bring the cost of healthcare under control: by eliminating the profiteering middlemen, and letting doctors and patients decide what is needed.
The basic idea, that insurance should cover costs that are beyond reasonable budgets, fails because sometimes spending a small amount today prevents spending a large amount next year. A doctor visit may avoid next week's hospitalization. Vaccinating a million kids against polio means the insurance company doesn't have to pay for iron lungs for the rest of the lives of dozens.
So, it's cheaper for the insurance company to pay for the doctor's office visit, pay for the vaccination, pay for the birth-control pills, so as to not be on the hook for the hospitalization, the long-term care, the delivery and neonatal care.
Care for just "catastrophic" health events isn't cheaper by enough to matter, when the lack of coverage for preventative care makes catastrophic events more frequent by even a little.
Great article, great suggestions. But I disagree with one point. You say that this should have appeal across the political spectrum. I don't think that is true. One of our country's political parties is enamored with socialized care, the other afraid to think big. The people themselves will have to lead here, and plenty of politicians will have to be dragged kicking and screaming. But we can dream, can't we?
It is a killing last para: lets not be stuck in the late 19th century of Europe! No peoples of the US America we can be stuck in the late 18th century of our foundation.
Why did you choose to mandate payment from employers rather than force citizens to save a dedicated portion of their paycheck?
If you mandate payment from employers it seems overwhelmingly likely that money will be directly taken from citizens take-home pay anyways, but forcing a savings rate applies a consistent policy to the self employed who wouldn't be affected by an employer mandate.
Obviously you might have to change the marketing on the "Freedom Fund", it's hard to call to call a fund "Free" when the government forces you to pay into it, but functionally the same thing would already be occurring with an employer mandate.
The big thing I don’t see addressed here, if you’re going to advocate for more market-based payment systems, is transparent and easily accessible pricing signals. In our current system, it is VERY difficult to understand what things cost and where to find competitive pricing when seeking out care. Providers behave as though they are members of a cartel. We should not switch to a market system where consumers have a severe information disadvantage against providers.
Thanks for the comment! I agree we need transparency BAD. I'm hoping we need not mandate it, as a system like this would incentivize transparency. If people are spending out of their own Funds, then they will seek out institutions that have transparency.
I don’t think there’s any incentive for incumbents to change their approach simply because the payment scheme has changed. First of all, current pricing schemes are infinitely complex and current systems are designed to making consumer-facing pricing opaque. I think companies will need to be forced to reform, or they just won’t.
Unfortunately, health care is a little different than some other industries. Health often isn’t an optional spending category and consumers can become a captive audience once in the system where multiple services need to be provided to address a single problem (e.g., you need to see a GP, get x-rays, see a specialist, etc. for one health issue). Also, there has been a lot of consolidation, so many regions of the country just don’t have competition within a reasonable distance from consumers.
Good market structures aren’t just an automatic function of a lack of regulation. You need to ensure competition, fair access to information, etc. Otherwise, what you get is not a market, but a government-enabled cartel.
Yes, I think old incumbents need to be allowed to fail (https://thedoctorslounge.substack.com/p/hospitals-should-be-allowed-to-fail?r=164k1s) for new entrants to change the baseline.
Pricing schemes need not be complex. They only are because Medicare designed them that way from the top down. Competition has also been driven by Medicare policy. Get rid of that, and we take the thumb off the scale of complexity and consolidation. Now capital can be invested in new entrants who disrupt the system.
If the hospital in my community failed, it would be a disaster for the community. It’s not clear to me that there’s enough private capital available locally to rebuild it any time soon, particularly if its failure starts a chain reaction of population and capital flight. What you’re saying makes a bit more sense in larger cities. Hospitals and primary care are *infrastructure* for human capital.
Now that we have an opaque pricing system, it’s not obvious to me that providers would quickly adopt transparent pricing. What would be the incentive? How would they realize more profits in a short time period by behaving this way? Particularly in regions where they are the only provider. When you make major structural changes in a big, complex, already-operating system, you can’t just change one thing and hope everything falls into place. You have to ensure coordination through an extended transitional phase.
There's an extended transition in this proposal. My hope would be that for purely elective things like primary care, ortho procedures, pain management, etc, shortages would draw new entrants with the promise of guaranteed business.
For hospital services, I agree there should be some community funding (like firefighters) to maintain access to emergency services. The problem is right now the orthopedic surgeons are keeping the ER open because that gets reimbursed more. The ortho procedures can be done much cheaper at an ASC and the ER can be kept open with some government subsidy from the community or state/federal grants.
Providers would get a reputation among the community based not just in quality of care but cost. This would put pressure on them to compete.
The problem with the current system is there is no incentive to provide quotes and very little to control costs.
In many smaller communities, certain providers have monopoly power.
Other less regulated industries have opaque pricing schemes meant to frustrate and confuse customers into paying more than they need to (try to figure out how your cable bill works the next time they call you with a special offer). We currently have a system where prices are opaque, and it’s in an industry where services are complex and customers can’t necessarily opt out of services. Even if competition eventually does encourage more transparent pricing, it’s not clear to me that this will happen quickly or spread to the whole industry. If you’re going to radically push the health system to be market oriented, I think it would be necessary to regulate pricing transparency from the get-go. A market where customers are always at a significant disadvantage in information encourages rent-seeking and stasis. Private interests with lots of capital and a large market share have a similar capacity to become stagnant and bureaucratic and to make markets dysfunctional as governments.
Cartel is not exactly right. Providers aren’t colluding so much as operating inside a structurally concentrated market. Hospital consolidation, limited supply, and opaque insurer negotiations create cartel-like outcomes even without explicit coordination. Transparency helps, but prices are ultimately driven by those structural constraints more than by consumer search. That’s why transparency is necessary but not sufficient.
I’m exaggerating a little for effect (and out of disgust). “Cartel-like outcomes without explicit coordination” is a more correct way to describe the situation.
Lack of pricing transparency is one of the major problems with our current system, and it makes me boiling mad.
My response to the reforms imagined here is that if we deregulate funding without insisting on pricing transparency the system will become “cartel-like outcomes with cartel-like explicit coordination.” Other reforms and regulation may also be necessary. Well-operating markets don’t just spring out of the ground spontaneously in the absence of government involvement.
You may have well dropped the mic in the first few paragraphs. This is bang on and almost precisely the same solution I arrived at in my essay on healthcare (will publish soon). We need to allow insurance to be insurance and expose more of medical care to market forces.
The current system in America is, frankly, the worst of both worlds.
Love the freedom fund. The most important thing would be to end the pricing games. Let providers set their own prices, but they must charge the same price to all comers. Otherwise they will use big data to charge everybody all they are able to pay. They already do this to a large degree, by making a pill cost $1,000 if you're rich or have insurance, but they'll give it to you for free if you can't otherwise pay. This price gaming kneecaps the market forces you would need for this scheme to work.
I have long thought that it is odd how much routine care gets paid for by "insurance", and the analogy to car insurance is apt. But I work in a specialty field, where our care is far from routine, but also far from catastrophic. Our patients don't have frequent hospitalization or major surgery, but they do use new and expensive treatments that they "need" in the traditional sense that without them their quality of life would suffer and they would potentially need hospitalization or other more expensive interventions. And these treatments would, out of pocket, exceed most people's ability to pay. I think we can all agree that a cancer diagnosis or car accident might be catastrophic, and that check-ups and vaccines are routine. But what about a coronary stent? A knee replacement? Years of biologic therapy for psoriatic arthritis?
The first three paragraphs are the best distillation of the problem I’ve seen in a single piece. People particularly seem to ignore or not see the incentives for and deep problems with consolidation.
So finally there is a solution to healthcare in the US - the Freedom Fund!
The description of the fablulous Freedom Fund is very vague, especially on how one would phase it in.
I think Thomas Sowell proposed three question for such proposals (Compare to what? At what cost/What are we giving up to achieve this? What hard evidence do you have?).
I would be particularly interested in an answer to the second question and third question.
While I actually agree with you directionally, I just see no credible path forward.
I remember a talk by a representative from Singapore Ministry of Health at Stanford about 25 years ago, possibly Profressor Tan Chorh Chuan. According to Gemini, he explained that Singapore’s system (the 3M system: Medisave, Medishield, and Medifund) was designed from a "clean sheet" in the 1980s. Because they were a small city-state with a relatively new administrative infrastructure, they could mandate health savings accounts and integrated care paths without fighting 100 years of existing hospital networks and legacy insurance laws. He argued that in the U.S., any move toward a centralized, Singapore-style "integrated supply chain" for health would require existing stakeholders (specialists, private insurers, and even some patients) to give up choice or income. His point was that even if the system became more efficient, individuals within the system would perceive a loss of autonomy or status, leading to political gridlock.
So, the opposite of what the "Affordable Care Act" does...
Another area where market forces might be difficult to implement is in very rural areas. Urban or suburban areas may have several health care providers to choose from and with transparent pricing, they can compete. But rural areas may have one or maybe two hospital system for 50 miles, or only one agency that does specialized services over several counties. I don’t know what the answer is, but it’s worth considering.
Yes, some services should be funded more like firefighters. These are true common goods. Trauma, stroke, and some OB services should be like this. The control and financing is better suited at a local level, though, with federal/state grants as needed.
Even emergency services like firefighters are tricky in rural areas. There’s a reason they are volunteers in those areas. Ambulance services are often run by for profit agencies because the volunteer department, paid for with donations and taxes, can’t sustain it.
Rural America is tricky for many services. Internet, postal, police... That's a bigger infrastructure problem not unique to healthcare.
I like it for the most part. There also needs to be some different accommodations for birth. The hospital charged $50,000 dollars during my daughter's birth to the insurance company. If someone had 5 kids you are talking about a quarter million dollars. There should be some model where those costs are paid for by the public at large or its going to affect how people plan for families. But routine care should be all private pay.
Citation needed: where does that $500 median annual medical "spend" figure come from?
The OECD median spending for healthcare is 10% of GDP. That’s more than 10% of wages because GDP is more than wages. So one month’s wages is not an unreasonable benchmark. Out of $60,000 a year, $5000 for healthcare. If that sounds like a bargain, it’s because the American bill is twice that: 19% of GDP.
It’s easy to assume away the problem. If healthcare costs half of us less than $500 a year, then health insurance should be cheap, so it would seem. But someone has to fund the other half, and at any moment any one of us could find ourselves in that other half. That’s why we all pay into it, and why it costs so much when we — thankfully! — don’t use it.
No wealthy country emulates the American devil-take-the-hindmost system. No wealthy country has libertarian-dream efficient market-based healthcare. They all adopted socialized medicine in one form or another democratically, and not party in any of those countries advocates dismantling and privatizing it along the lines of the American so-called system.
What the United States could do is make Medicare universal. Medicare costs 90% less in overhead, before accounting for the cost-shifting bureaucracy of private health insurance. And Medicare, if universal, would have monopsony power in the market, meaning it could dictate prices (as it already does to a limited extent). That is how we start to bring the cost of healthcare under control: by eliminating the profiteering middlemen, and letting doctors and patients decide what is needed.
The basic idea, that insurance should cover costs that are beyond reasonable budgets, fails because sometimes spending a small amount today prevents spending a large amount next year. A doctor visit may avoid next week's hospitalization. Vaccinating a million kids against polio means the insurance company doesn't have to pay for iron lungs for the rest of the lives of dozens.
So, it's cheaper for the insurance company to pay for the doctor's office visit, pay for the vaccination, pay for the birth-control pills, so as to not be on the hook for the hospitalization, the long-term care, the delivery and neonatal care.
Care for just "catastrophic" health events isn't cheaper by enough to matter, when the lack of coverage for preventative care makes catastrophic events more frequent by even a little.
Great article, great suggestions. But I disagree with one point. You say that this should have appeal across the political spectrum. I don't think that is true. One of our country's political parties is enamored with socialized care, the other afraid to think big. The people themselves will have to lead here, and plenty of politicians will have to be dragged kicking and screaming. But we can dream, can't we?
It is a killing last para: lets not be stuck in the late 19th century of Europe! No peoples of the US America we can be stuck in the late 18th century of our foundation.
Someone thought of the exact contents of your first two paragraphs in 1965, but took it much further than you did.
https://archive.org/details/rxforchaos0000anvi/page/268/mode/2up
Wiper fluid is $5.
A visit to a specialist is $550.
That quantitative difference (110X) is so dramatic that it's effectively a qualitative difference.
(After all, Americans often say that America is so much bigger than major European countries (5-6X) that it's a qualitative difference.)
Why did you choose to mandate payment from employers rather than force citizens to save a dedicated portion of their paycheck?
If you mandate payment from employers it seems overwhelmingly likely that money will be directly taken from citizens take-home pay anyways, but forcing a savings rate applies a consistent policy to the self employed who wouldn't be affected by an employer mandate.
Obviously you might have to change the marketing on the "Freedom Fund", it's hard to call to call a fund "Free" when the government forces you to pay into it, but functionally the same thing would already be occurring with an employer mandate.
Those are good points. Obviously it can be done a number of ways.