Commentary: Health care reform must have a true private option

A group of protesters against health care reform picket in Minneapolis, Minnesota.
A group of protesters against health care reform picket in Minneapolis, Minnesota. Richard Sennott/Minneapolis Star Tribune/MCT

The debate over health care reform has reached an odd interlude. The rowdiness of the town halls continues, but behind the scenes the players are looking over their cards and considering their next moves.

Last week, the Obama administration seemed to back away from the controversial public option, the government-backed entity that supporters say would "compete" with private insurance.

Some Democrats proposed a substitute plan involving health "co-ops." Other Democrats, who view a public option as essential, cried "foul."

Republican opposition hardened as ObamaCare continued to sink in the polls. But the Democrats' real problem isn't Republicans, it's the 50 or so House Democrats from relatively conservative districts. They fear a vote for ObamaCare will cost them their seats.

Late last week, Rep. Emanuel Cleaver, a Missouri Democrat, suggested starting over. Health care was "too important" to be passed solely with Democratic votes, and he's right.

A proper reassessment would show that much of this debate has been taking place on fallow ground.

What have we been talking about? Trying to reduce health care costs with government rules and mandates, when the only effective means for policing any market is consumer sovereignty — a fancy phase for an individual's power to fire an insurance provider that's doing a lousy job, and hire a new one.

Most people can't fire their insurance company. They didn't do the hiring; their employer did. Most health care is paid by third parties, so naturally costs keep going up. When somebody else pays, no one has an incentive to insist on good value.

Supporters of ObamaCare say its web of rules and mandates will work to curb costs, even though similar strategies in several states have had the opposite result.

Supporters also point to Medicare's supposedly low administrative costs, as evidence that government can indeed restrain expenses.

But as economist Ed Yardeni points out, what's going on with Medicare is a theft of services. The program doesn't pay enough to cover the expenses of doctors and hospitals. Those costs are shifted to private health insurance, another big reason health care costs are rising faster than inflation.

What's frustrating about this debate is that few people in Washington seem to be talking about the one change that would make a real difference: eliminating the link between employment and health insurance. Ideas about how to do this have been floating around for years. They've gotten nowhere.

The current system is fundamentally unfair. Employers get a tax deduction when they buy health insurance for their workers, but people in the individual market don't get a deduction. We should give individuals a tax break — a tax credit or a deduction — or eliminate the employer deduction altogether and shift the tax break to individuals.

The blogger James Pethokoukis suggests something he calls a Purple Plan, a compromise that mixes red-state and blue-state ideas.

Let Congress make health insurance mandatory. Approve subsidies for people who can't buy it on their own. That will please the blue staters. Then dismantle employer insurance, which shields consumers from the true cost of their health care choices.

How to make the shift? As Regina Herzlinger of Harvard Business School suggests, take the money companies spend on health insurance and give it to the workers, tax free.

"Insurers would then compete for customers with policies that offer better value for the money," Herzlinger wrote.

People at companies that currently don't offer insurance could also receive a tax deduction or credit to help them get policies. At the same time, we should be spending more of our own money for routine procedures, just as we don't rely on car insurance to pay for oil changes or new tires.

Once you get more purchasing power in the hands of consumers, you'll start to see the creation of a real market with more choices &mash; and the beginning of cost control in health care. Trying to control costs with bureaucratic controls will never work — unless health care is rationed.