Research into the causes of the excessive health care price increases concludes that government policies are the primary reason why prices are growing excessively and coverage is so distorted. Consequently, the most effective method of controlling the excessive price increases is to remove those policies that are causing the excessive price increases in the first place.
The real alternative to today's health care system isn't the intrusion of federal power into the process, as presently proposed in Washington, D.C. The real alternative is the removal of government regulation and the consequent encouragement of robust competition among health care services and insurance products.
The impact from government policies on the health care market is of two kinds-direct and indirect. The direct impact refers to the direct government medical spending policies that are directly increasing health care costs. The indirect impact results from government interference that eliminates incentives for individuals or medical professionals to engage in economizing behavior that would increase quality and decrease costs in the health care field.
MIT economics professor Amy Finkelstein (2007) and University of Illinois economics professor Jeffrey Brown, along with Finkelstein (2008), establish a direct link between government Medicare and Medicaid expenditures and rising health care prices or other distortions that limit the efficiency of the health care market.24
Finkelstein (2007) illustrates that of the six-fold increase in per capita health care spending that occurred between 1950 and 1990, one-half of this increase could be explained by the impact of Medicare along with Medicare's impact on the spread of health insurance more generally.
Brown and Finkelstein (2008) show that Medicaid imposes a powerful crowding-out effect on private insurance purchases. Specifically, they find that the provision of even very incomplete public insurance can crowd out more comprehensive private policies by imposing a large implicit tax on private insurance benefits, thus potentially increasing overall risk exposure for individuals.25 These results show that the growing government involvement in the health care industry has helped drive up health care expenditures.
The President's Council of Economic Advisors has cited the incentive problem as one of the key drivers of the excessive health care inflation, saying:
While health insurance provides valuable financial protection against high costs associated with medical treatment, current benefit designs often blunt consumer sensitivity with respect to prices, quality, and choice of care setting. There is well documented evidence that individuals respond to lower cost-sharing by using more care, as well as more expensive care, when they do not face the full price of their decisions at the point of utilization. Additionally, most insurance benefit designs do not include direct financial incentives to enrollees for choosing physicians, hospitals, and diagnostic testing facilities that are higher quality and lower cost.26
Accordingly, it is necessary to change the adverse incentives on consumers so that they become price-sensitive when purchasing health care-and thus help, by their individual decisions, to contain out-of-control health care costs. The same logic holds for the adverse incentives the current system places on insurance companies, doctors, and other health providers.
