Fixing Health Care: Not Government vs. Market

July 10, 2007

Dean Baker
Truthout, July 10, 2007

See article on original website

With “SiCKO” rallying popular support for universal health care coverage, defenders of the insurance and pharmaceutical industries are shifting into high gear with their scare tactics. The key to their efforts is to frighten people about the prospect of the government managing their health care.

Whether or not this sounds scary, the reality is that the government already structures the way in which we receive health care. However, the current pattern of government intervention ensures high profits for the insurance and pharmaceutical industries; it is not designed to provide adequate health care.

Starting with a very simple but important form of government intervention, insurance contracts are enforced in a very different way than most other types of contracts. When a person fails to disclose information on an insurance contract, it is grounds for voiding the contract. This means, as shown in “SiCKO,” if a person did not report a pre-existing condition, even if it seemed trivial and irrelevant at the time, an insurance company can treat this fact as grounds for voiding a policy and not paying claims.

By contrast, most contracts have a buyer-beware structure. If I buy a house and didn’t bother to notice that the roof was falling in, that’s my problem.

We actually have a great model for reforming health insurance contracts that would bring them closer to the buyer-beware model. In 1994, the Gingrich Congress passed the Private Securities Litigation Reform Act. This law made it far more difficult for shareholders to sue corporate executives for stock manipulation. The law essentially requires the shareholder to prove that there was a deliberate act of fraud. It is not sufficient to show that the CEO dumped $100 million of company stock the day before announcing a plunge in earnings.

We can follow Gingrich’s lead and say that health insurers must pay claims unless they can show a deliberate act of fraud on the part of the beneficiary. In other words, unless the insurance company can show that the insuree deliberately lied or concealed information, they must pay the claim. After all, why shouldn’t the law give the same protection to ordinary people that it gives to CEOs.

In a similar vein, the extraordinarily high prices for many drugs and medical devices are almost completely attributable to patent protection. Virtually all drugs, medical devices, and medical tests would be cheap, if it were not for the monopolies that the government grants patent holders. Patent monopolies should be thought of as a prize that the government gives to reward innovation. It is because of this government intervention in the market that millions of people cannot afford the treatment they need. If the government stayed out of the market, treatments that can cost tens or hundreds of thousands of dollars would instead cost a few hundred dollars.

It can be argued that if the government restructured the law on insurance contracts that the private insurance market would disappear. Given the incredible inefficiency of the private market (administrative costs in the United States are approximately 10 times as high as in Canada), it is not clear why we would want a government intervention that makes the market less efficient.

Similarly, patent monopolies are one way in which the government can promote innovation. It is almost certainly not the best mechanism. We need a real discussion of the alternatives to patent monopolies.

The key point is that we must first recognize the important ways in which the government already shapes the health care market, before we can decide on the best way to structure the market. The choice is not whether the government will intervene, but how.

The insurance and pharmaceutical industries don’t ever want the question to be posed this way, because they know they benefit from public prejudices by having the issue portrayed as the market versus the government. The media, including the liberal media like the New York Times and National Public Radio (e.g. see “2008 Candidate Vow to Overhaul U.S. Health Care”), routinely frame their stories in ways that advance the insurance and pharmaceutical industries’ agenda.

But, if we are ever going to think seriously about how best to restructure health care, we will have to clearly understand how the system works now. The current system is not a free market; it is a set of government rigged rules that ensure that the insurance and pharmaceutical industries prosper, and that tens of millions of people go without access to care.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. You can find it at the American Prospect’s web site.

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