When will health care costs stop going up? Perhaps when people start putting normal market mechanisms on the services, says Brian Blase, president of the Paragon Health Institute. I speak with him about it for the Overton Window podcast.

Blase says that people are generally satisfied when they have coverage through private insurance or through the government programs Medicare and Medicaid.

Part of the reason for this is third-party payments. Insurers pay medical providers on behalf of the people they cover. And taxpayers cover the costs for people enrolled in Medicare and Medicaid.

“We’ve done a pretty good job of suppressing who pays for all the health care spending. We’ve dispersed so much of the cost to taxpayers,” Blase says.

“Health insurance is not a typical insurance product. Think of typical insurance products: life insurance, homeowners insurance, your car insurance,” Blase says.

You are protecting yourself against financial ruin, right? It’s a very low-probability event. Obviously, that’s present in health care. You can get involved in an accident, you could develop a very expensive medical condition like cancer. That’s a relatively low probability but carries high financial cost. A large part of what health insurance also does is prepayment of medical services. It is the individual giving up negotiation and control to a third party, whether that third party is a government bureaucracy or a health insurance company or an employer.

Third-party payments also get in the way of efficient and effective provisions when the third party sets so many of the terms of service.

“One of the central features is that a federal bureaucracy in Washington, D.C., decides what gets reimbursed and what the reimbursement prices are,” Blase says. Medical decisions are determined by a political process rather than by a market process.

“And private insurers have tended to just go with Medicare’s reimbursement rates, which I think is a real problem,” Blase says.

This creates harms akin to those created by government price controls. “When it’s set too high or too low, you have problems,” Blase says. Shortages or surpluses develop, too much of one kind of services and not enough of others.

There are further complications stemming from the legal restrictions on the supply of medical care. Certificate of need laws hinder companies from building more hospitals, for instance. “And by the way, incumbent firms can sit on the boards of these certificate of need panels, which deny permission to competitors to come into the market,” Blase says.

Scope of practice rules also stop qualified nurse practitioners and physicians assistants from serving customers at lower costs, Blase says.

Subsidizing demand while restricting supply inflates prices and raises health care spending. “If I were to give you my main frustration with the American health care system, it’s that we have created a whole bunch of perverse incentives so that Americans who make decisions aren’t focusing on value,” Blase says.

Too many health care providers look to protect themselves from competition. When costs increase, they recommend spending more on subsidies. Lawmakers have taken their side, and this has kept costs on the rise.

Blase’s solution is to apply the processes that make markets work. Providers should earn profits when they find ways to deliver better services at lower costs. People should encourage competition by shopping around for quality services at good prices.

He’d like to see Medicare change from a centrally planned benefit to a plan “where the incentives are there for the enrollee to make the decisions that best work for them.”

Blase would also stop employers from determining the health insurance plans for their employees. “There’s not another major financial product that people purchase that the employer decides for the employees what the best product for all the employees are,” Blase says.

Instead, he’d let the money employers pay for employees’ insurance go to the employee to make insurance purchases. They’d get the same tax advantages that employers receive for insurance, too.

“Anything that we can do, on the margin, to move away from third-party payment to first-party payment improve the consumer’s ability to shop and get value,” Blase says.

There have been signs of progress. Congress has introduced Medicare premium support plans, where a portion of government payments could be directed by beneficiaries.

Medicare Advantage programs, which pay for health costs not covered by Medicare, have become more prevalent. Their continued growth can provide a more robust market for seniors than is available with Medicare. “Half of Medicare enrollees are in Medicare Advantage plans right now,” Blase says.

He notes that there are attempts to do better things around the third-party payments and price control problems in the market. California, for instance, manages a large health insurance program for retired government workers and offers reference prices to help beneficiaries control costs. People can pocket some savings if they can find medical providers who would perform the service for less than the reference price.

“When they had that incentive, consumers started shopping,” Blase says. “The most interesting part of this, though, is that high-priced hospitals in that area didn’t like the fact that they were losing customers. So they reduced prices significantly.”

Part of his work is to document the different models that people are trying, in order to to see if they can do this better. “We don’t want the government to regulate all of these alternatives out of existence,” Blase says.

“That’s why I do health care policy, right? We want people to have better health care access and get the best care available to them,” Blase says. “In order to improve health care access, we’ve got to reduce prices. We’ve got to undo all of these government programs and policies that have created such perverse incentives.”

Check out the conversation at the Overton Window podcast.

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