Proponents of expanding the government role in health care argue that the private sector has not effectively controlled medical inflation and provided access to medical treatments. But, in fact, there is very little free enterprise in medicine. First, a significant amount of health care is by Medicare, Medicaid and other public ventures. These groups accounted for 46% of all health spending in 2006 according to CMS. And only 12% of spending was out of pocket. Second, most people who have health insurance in the private sector get it through their employer because that part of their pay becomes tax free. But if you buy at the company store you often get what the company wants. And 88% of employers offer one health plan to their workers. So in even private health insurance there is very little effective competition at the ultimate customer level.

Add to this the cost of various government regulations of health care which has been estimate to be over $300 billion annually. These include such things as mandated benefits, licensure, CON laws and many direct rules regarding the provision of care. Finally, the provision of health care by Medicare & Medicaid has a very costly direct and indirect effect. In fee for service care these government programs either use a “cost plus” methodology or, more often, a “prospective” payment system. Under the more common prospective system these programs establish a payment that is made for the provision of a particular medical service. The idea is that the payment functions as a price so that providers make more profit/income by providing the service in question in the most cost effective manner. Of course, since there is no real market here the payment is arrived at bureaucratically through a host of alphabet schemes like DRG, RBRVS and PFS.

Students of economics know that it is impossible to for governments to set prices so all of these schemes are nothing more than price controls. They produce shortages (especially in Medicaid), surpluses and significant short and long run dead weight losses. Just as bad, because of the lack of competition mentioned above, many private pay fee for service plans simply copy the government price controls. So much of the entire health system operates under this inherently inefficient framework. Before we expand the role of government in health care further, a reasonable experiment to try is a healthy dose of free enterprise. The perfect starting point is to make employer paid health benefits taxable and provide a refundable tax credit to all Americans.