Should health care costs be purely market driven?

The solution to the increasingly expensive U.S. health-care system is to abandon insurance plans and government programs — and throw the beast into the open marketplace, according to 2004 Nobel Laureate Edward C. Prescott, professor of economics at the W. P. Carey School of Business. Prescott outlined the economic logic of his economic hypothesis at a recent Phoenix symposium on the future of health care.

It's time to abandon our current health-care model — in which consumers basically prepay for medical services via insurance plans or rely on government programs — and let the market dictate everything from consumption to costs, according to Edward C. Prescott, 2004 Nobel Laureate and a professor of economics at the W. P. Carey School of Business.

The economic hypothesis underlying Prescott's groundbreaking research is that the economy reacts to changes in public and private policy. To lower medical costs, encourage healthy living and keep a lid on taxes, it is necessary to drastically shake up our health-care system.

If we do, more people will go to the doctor only when they need to and obtain only the most appropriate care. At the same time, the money-wasting inefficiencies ubiquitous today — from exploitative malpractice claims to redundant tests, will drop, Prescott told the audience of medical policymakers at "Pathways to Change: Transforming American Healthcare Over the Next Decade," a symposium sponsored by the W. P. Carey School of Business.

Prescott bases his conclusion partly on stunning statistics tracking changes in health-care utilization. For instance, in 1967, just 7.6 percent of Americans' consumption went to health-care expenses. That percentage almost tripled by 2003, up to 20.7 percent, and is predicted to increase as the number of consumers over age 75 grows. Various studies cited by Prescott indicate that seniors 75 and older use 1.5 to three times as much health care as their younger counterparts. If that is accurate, given the baby-boomer dynamic, we are heading for a medical meltdown.

Analysis of another set of numbers yields more clues as to how differently we consume and pay for health care today. From 1965 to 1995, private insurance costs grew, going from 2.35 to 6.95 percent. The government, drawing on taxpayer money, also paid more for health care, up from 1.89 percent to a whopping 8.27 percent. (Note: percentages are health-care consumption versus total consumption).

Interestingly, over the same 30-year period, while private and public costs jumped, the percentage we spend on out-of-pocket health care — everything from doctor visits to prescriptions — dropped, from 3.36 percent to 2.65 percent. When private insurance, public health care and out-of-pocket numbers are crunched, our overall percentage of consumption spent on medical matters soared, from 7.6 percent to 17.9 percent, Prescott explained.

He insisted that the monster behind the numbers is third-party reimbursement, "the inefficient, over-consuming, excessive risk-taking system" with two legs, private insurance and public programs (Medicare and Medicaid). We slay the monster and numbers will normalize, Prescott said.

"Instead, we can use that money for education, building safer automobiles, healthier food, gym fees," he noted.

Here is Prescott's prescription for a healthier society: Consumers pay for routine care — doctor visits, prescriptions, immunizations and the like - as needed, from savings of pre-tax dollars. No more going to the primary-care doctor solely to get a referral to the specialist because that's the HMO's rule, or missing out on crucial treatment because your insurer refuses the referral.

Also, "when people are spending their own savings, they search for the lowest price provider of a given quality medical care," he said. Example: wouldn't you be content with a generic drug in most instances if the alternative is paying full freight for a brand-name drug? Another Prescott point: when you can't afford to get sick or hurt yourself, you tend to take better care of yourself. As he said, "paying-per-use encourages healthier living."

Consumers buy mandatory major medical insurance that covers the big-ticket items such as surgery, chemotherapy or months of physical therapy following a car crash. "This is real insurance, not prepaid medical care," which is what we've got now, thanks to managed care, he said. Being insured just for serious stuff would discourage hypochondriacs who depend on health-care for validation, too. "When it is costless to be a little neurotic, many people will develop imaginary sicknesses," he added.

But better health and lower costs aren't the only logical result of returning to the pay-per-use/major medical insurance system of the past, Prescott explained. If we don't vanquish our medical monster, the cost of public health care — government-run, taxpayer-financed — will swell. Lawmakers will be forced to raise taxes to cover the increased costs. They won't have a choice, especially over the next couple of decades, while the baby boomers segue into seniors and cope with growing medical problems.

We don't have to imagine what this scenario looks like, Prescott said; we just have to study the European health-care model, which, in general, is publicly funded. To pay for it, governments there tax consumers more. How much more? Rather than the U.S. marginal tax rate of 40 percent, Europeans average a 60 percent tax rate, he noted. (His numbers are based on aggregate-hours accounting, in which the number of employees is divided by the time they worked).

The more punitive tax rate — not a stop-and-smell-the-roses attitude — is why Europeans work 33 percent fewer hours than Americans, he said. The more they work, the less they take home. So Europeans work less.

If the rewards of working longer hours diminish, he suspects Americans will follow suit. And there's no way, Prescott stressed, that the increased tax revenue will make up for the lower output. Employment will fall, welfare rolls expand and consumer spending drop. As he concluded, "The cost of collecting a dollar of tax revenue is two dollars of foregone consumption."