South By North Strategies, Ltd.

James Kwak of The Baseline Scenario tours the free market health care “fantasy Land.”

The question is, if we accept the principle that markets are generally the best way to allocate scarce resources, how should this work for health care? The theoretical answer is pretty simple. People who buy health insurance (mainly employers, but also individuals) want decent health care at a reasonable price. They shop among health insurers. Health insurers compete by figuring out how to offer better health care at lower prices. A traditional indemnity plan, where the insurer pays for 80 percent of whatever the provider charges for anything the insured wants, is a lousy way to compete: you end up with not-so-good outcomes at extremely high prices. That’s why most of the private health insurance market today is HMOs (access to procedures is controlled) and especially PPOs (negotiated prices with select providers, low payments to out-of-network providers). In theory, insurers should be figuring out how to get the best health outcomes at the lowest possible price. To do that, they should be figuring out what procedures are most likely to lead to good outcomes and setting payment schedules to motivate patients and doctors to select those procedures; they should also be figuring out what procedures are a waste of money and motivating patients and doctors to avoid those. They motivate patients and doctors by setting low payment rates for worthless procedures or simply refusing to pay for them. That will scare away some health insurance buyers, but in the long run, the good insurers will have better outcomes at lower prices, and they will attract customers on that basis.

He then returns to the world we actually live in.

Of course, this is all in free market fantasy land. The private health insurance market does not work that way; if it did, we wouldn’t have a health care cost crisis in this country. Why it doesn’t work that way is a subject of much debate. It could be because providers have too much market power relative to insurers; it could be because the main buyers of health insurance (employers) don’t actually care about outcomes, just about offering a decent-looking plan at the lowest possible cost.* But the key point is that competition is supposed to be driving insurers to become more efficient: creating health plans that produce better outcomes and lower costs.
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Is this rationing? Yes, in the uninteresting sense that people do not have unlimited access to health care for free. But is it rationing in the commonly understood sense of “something bad where someone unfairly decides you can’t have something you need”? No, almost by definition: when markets allocate scarce resources, we generally don’t call that rationing.