Free Market Healthcare: A Novel Solution

Let’s face it – we pay too much for healthcare in our country.  We pay roughly twice what most other developed nations pay, and while we may get better care would you really say its worth twice as much?  Before I get into any more of this diary (diatribe?) I am going to bring out some cognitive dissonance that many conservatives have on healthcare

  1. Other countries only contain their costs through ruthless government based market manipulations
  2. A free market brings better products at lower costs than any command market

To make it a little more explicit, people will say that in Canada the cost of healthcare is borne by higher taxes (true) and that they keep their costs down by rationing care (also true).  However, there is a slip between assuming higher costs (taxes) and lower costs (rationing).  It cannot be the case that Canadian care is both more and less expensive than the US system.  The reality is that Canadian care is cheaper, much cheaper.  So is care in the UK, France, Sweden, Japan, and Germany – all of which have systems vastly different from one another.  So the question might be, how is it that our system is more expensive than any of these systems if a free market is supposed to bring lower costs?  Answer – the market we have is nowhere close to free.  Our health spending is broken into ~4 categories

  1. Physician services
  2. Hospital services
  3. Prescription medicines
  4. Everything else (cost of insurance, medical equipment, dentistry, optometry, chiropractors, nursing homes, etc.)

To a rough extent the four categories have similar spend, although some of the lines will blur when you ask things like “when a doctor oversees a chemo treatment for a cancer patient is that oversight considered a physician service or pharmaceutical spend?”  That’s why I will say roughly equivalent.  Interestingly the breakdown has been basically stable for decades.  So I was wondering, what would it look like to get to a free market for those top three categories (since the fourth is actually ~15 different categories)?  Let’s take them one at a time

Physician Services:

Many of you may have noticed that you are getting more and more likely to see a Physician’s Assistant, Nurse Practitioner, or Family Nurse Practitioner for primary care (let’s refer to this category as PA just to simplify the discussion).  What you may not know is that while all PAs receive the same training the ability to operate independently is state dependent.  The training for PAs includes the ability to diagnose most common ailments and prescribe treatment, but again the ability to perform that task independently is state dependent.  Are PAs the equivalent of a MD?  No.  Let’s not pretend they are.  However, a large amount of care can be done (and is done) by PAs.  The scope of medical professionals with less than an MD should expand reserving the most expensive care to the highest trained professionals.

I would like the ability to subscribe to a physician network.  A simple setup where I pay a monthly fee based on my family profile and we get annual checkups, a moderate amount of routine lab work, and urgent care visits included.  That would probably include X-ray and ultrasound, but not CT or MRI.  Not exactly an HMO, but a payment I make to a primary care group.  Then the primary care group wouldn’t bill anything beyond that monthly subscription in almost all cases.  Critically, this is not an HMO.  You are free to go wherever you want whenever you want without a referal.  All this does is provide most primary care in a price-controlled environment.

In this model you have a physician network that is incentivized to keep you healthy (fewer visits) at a lower cost (fewer unnecessary tests), since the extra costs eat into their bottom line.  They also are likely to have PAs doing a lot of the routine work and expedite visits to the staff MD when necessary.  If a local network is large enough it will probably include dietitians, cardiologists, rheumatologists, dermatologists, and some other specialists.

Prescription Medicine:

Statins are cheap, but insulin is expensive.  It is not that the process of making insulin gets more difficult every year, it is that the manufacturers have a captured audience, while statin manufacturers have to deal with a free market.  A robust free market for pharmaceuticals includes generic equivalents, and alternate options.  You can imagine this for over the counter pain killers that include Tylenol, Acetaminophen, Advil, Ibuprofen, and other options.  In the pharmaceutical space we need to a) get more options into the market b) prevent price fixing.  The solution is multifaceted

  1. Increase approval rate for generics and biosimilars
  2. Set up a reciprocity agreement where the FDA automatically (or near to it) approves drugs approved by other advanced nations (Japan, Israel, France, etc)
  3. Allow unrestricted importation from reciprocity nations – if a pharmaceutical company cuts a great deal with Canada then our hospitals can purchase from Canadian wholesalers.  This prevents the US from being charged a jacked up rate
  4.  End evergreening (where a small nearly irrelevant change is made to a drug and a new patent issued, that patent then prevents generic competition on the original drug)
  5. Prevent collusion where a pharmaceutical company pays a generic company not to introduce a generic version of a drug

Notice, none of this calls for new government processes or regulations.  All of these moves operate by increasing market competition and remove government formed protections around individual drugs.


Have you ever asked for an itemized bill for a hospital visit?  The bills are ridiculously long and include an absurd number of individual items.  Also, frequently they are wrong.  I once got a bill than included a surcharge for night/weekend visit when the visit was at 11:00 am on a Tuesday.  If I can see that one, how many mistakes are there that I can’t follow?  While hospitals are where major emergencies are treated only 4% of US healthcare spend (and ~15% of hospital revenue) is through emergency departments.  Hospitals generate more revenue from maternity departments than from emergency departments.  What if a state passed a simple law “In all medical cases a patient shall be presented with an estimated bill including the total cost before treatment is rendered.  Patients will not be liable for any costs incurred that they did not consent to.  Exceptions to this rule are limited to a) situations where immediate harm is likely in the event of a non-intervention b) situations where the patient is not medically competent to consent.”  The result of this sort of rule would be that labor and delivery would move to a single bundled price, and so would knee and hip replacements.  Many cancer treatments would also move to a simple bundled payment.  In fact, well over 50% of what hospitals do would end up in bundled payments where you could call local hospitals and ask “how much is a routine labor and delivery?  What if I deliver naturally without and epidural?”

Again, the hospital is now incentivized to provide the service at the lowest cost.  Currently a hospital can make more money by racking up individual services and adding those to the eventual bill.  If there was no ability to add to a bill you as a hospital are now incentivized to provide the same service but with fewer “just to be sure” tests.

The other thing I would suggest is that the payment from insurance companies adjusts to match the charge model from a hospital.  Example:  I get diagnosed with stage 2 colon cancer.  I contact my insurance company and find out that they will pay out $35,000 into my HSA for treatment.  I contact 3 local oncologists.  The cost of treatment at the three is $32,000, $38,000, and $75,000.  Well, now I narrow my choice down to two oncologists.  Alternatively if I get cost estimates of $72,000, $75,000, and $68,000 I will probably end up in court arguing that the reimbursement from my insurance company is out of line with the cost of care.

Some Thoughts:

Notice that these options do almost nothing to insurance.  I have some other ideas for insurance, but the reality is that we do not have a free market in the delivery of care.  We should never call what we have a “free market” since it is nothing of the sort.  As long as we have a market defined by government protections, license restrictions, artificial barriers to entry, and government negotiated anything we don’t have a free market.  Let’s start proposing some solutions that bring a free market in care, and then solutions to the insurance side will become easy.

But honestly, who am I kidding?  Healthcare makes up 20% of our GDP.  The outcome of a free market would be that we pay less to hospitals, less to pharmaceutical companies, less to doctors, less to insurance companies, less to everyone.  The invested interests are so strong that there is absolutely no way that the groups involved are going to allow 10% of GDP to evaporate.  Doctors, Hospitals, Pharmaceuticals, and Insurance companies all agree that the cost is too high, and that guy over there should charge less.  They also agree that prices need to go up so they can make more.