By any measure, the United States spends more on medical care than any other nation. Health expenditures exceeded $10,000 per person in 2016, for a total of $3.6 trillion. Health care accounts for more than 18 percent of the U.S. economy. The problem with U.S. health care is not how much Americans spend, however. The problem is how little they get in return.

The U.S. health care sector has produced countless innovations that make health care better, more affordable, and more secure. These and further innovations should be exploding across the U.S. health care sector — making primary care more affordable for vulnerable patients such as low-income single mothers and their children, making health insurance more secure for patients with expensive illnesses, and driving high-cost and low-quality providers and insurers out of business. Instead, Americans are suffering under a ridiculously cruel system of high and hidden costs, low-quality and inconvenient care, and shaky health insurance — because government protects high-cost, low-quality providers who would never survive in a market system.

Health care is a special area of the economy, where the right policies can save lives and the wrong policies can do extraordinary and irreversible harm. This chapter provides an introduction to the successes and failures of the U.S. health care sector. It and subsequent chapters then offer reforms that state and federal officials must enact to make health care work for all Americans, particularly the most vulnerable.

Government Control, Government Failure

Contrary to popular belief, the U.S. health care sector is no more a free market than other nations' health systems. In the United States, government directly or indirectly controls more than 80 percent of health spending (Figure 35.1). It controls 51 percent ($1.7 trillion in 2016) directly by taxing that money away from the people who earned it. It controls another 21 percent ($707 billion) by penalizing workers unless they surrender control over those earnings to their employers and let their employers choose their health plans. Government effectively controls the 10 percent of U.S. health spending that consumers pay toward private health insurance premiums ($345 billion) by penalizing consumers if they don't purchase a government-designed health plan. At best, consumers control just 10 percent ($350 billion) of U.S. health spending. Yet even that is an overestimate, since patients spend much of this money under terms dictated by government and employers.

Government further dictates what goods and services consumers may purchase, who may provide them, and what the prices will be. These interventions have reduced the quality of care, increased its cost, and made health insurance less secure.

Government Failure: An Epidemic of Low-Quality Care

The United States produces more new medical treatments and diagnostic tools than any other nation. Those innovations go on to improve health outcomes around the world. Open-ended health care subsidies and other government policies may play a role in this success. Even so, Americans suffer from an epidemic of low-quality care.

Figure 35.1

Government Control of Spending on Health Care

S OURCE : U.S. Centers for Medicare & Medicaid Services, Table 16 National Health Expenditures by Type of Sponsor (2016), https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/Proj2015Tables.zip.

Researchers at Johns Hopkins University estimate that preventable medical errors cause 250,000 deaths annually, or roughly 1 out of every 10 deaths in the United States (Figure 35.2). That means preventable medical errors are the third-leading cause of death, after heart disease and cancer, and the cause of far more annual deaths than firearms (34,000) or a lack of health insurance (45,000 under the highest estimates).

Other examples demonstrate the poor quality of U.S. health care as well. For instance, researchers estimate that fewer than half of all medical interventions have reliable evidence demonstrating their effectiveness. Some estimate the share to be as low as 15 percent. Another example is from the U.S. Food and Drug Administration (FDA): the agency prevents terminally ill patients who have exhausted all approved therapies from accessing promising new treatments. In addition, the health care sector is behind other sectors in providing basic conveniences available in other sectors, like electronic scheduling, records, and communications.

Figure 35.2

Causes of Death in the United States

S OURCE : Washington Post, https://www.washingtonpost.com/news/to-your-health/wp/2016/05/03/researchers-medical-errors-now-third-leading-cause-of-death-in-united-states/, based on data from National Center for Health Statistics and British Medical Journal.

Government Failure: Health Care Costs

Health care prices are high and continue to climb faster than incomes or the overall economy. A typical family health insurance plan, for example, costs $18,142 — nearly a third of median family income ($56,516). Prices for medical services are unnecessarily high and opaque as well.

Countless government interventions increase medical prices and wasteful health care spending. Clinician licensing laws, the tax preference for employer-sponsored insurance, and government health care programs like Medicare, Medicaid, and the State Children's Health Insurance Program all discourage patients from scrutinizing the costs and benefits of the services they receive, encourage providers to raise prices, encourage providers to deliver unnecessary services, and discourage transparent pricing.

On average, only 10 cents out of every dollar Americans spend on health care comes directly from the patient. Patients thus have little to no incentive to scrutinize whether the care they receive is worth the cost, or to demand lower prices. The result is health care prices that are higher than they would be in a market system and unnecessary services that account for an estimated one-third of total spending.

Government Failure: Insecure Access

Thanks to various government interventions, Americans routinely lose their health insurance for no good reason. Americans can lose coverage when they quit their jobs, get laid off, get fired, or become too sick to work; when their employer goes out of business, stops offering health benefits, switches health plans, or changes how much it pays for their benefits; when they divorce or a spouse dies; when they turn 19, or 26, or 65; when they become disabled; when they get arrested; when their income falls, or when their income rises; when their insurer offers coverage attractive to the sick; and when courts or elections reduce or end the taxpayer subsidies propping up their plan. Compounding the insecurity, Americans can lose access to their doctors and other providers because they lose their health plan, because government regulations punish insurers who offer comprehensive coverage, and when courts or elections intervene.

Even when Americans maintain consistent coverage, government erodes their access to care. With the implementation of the Affordable Care Act, the federal government now imposes "community rating" price controls on every health insurance plan in the United States. Community rating forces insurers to offer narrower provider networks and less coverage by punishing carriers who provide attractive coverage to the sick. Government literally creates a race to the bottom in health insurance.

A Market System: Better, More Affordable, More Secure Health Care

It does not have to be this way. Though far from a free market, the U.S. health care sector provides evidence that a market system can deliver better, more affordable, and more secure health care than alternative systems. In corners of the U.S. health care sector where market forces have had room to breathe, they have produced remarkable innovations that protect the most vulnerable patients. These innovations save lives, reduce the burden of disease, get the right medicine to the right patient, reduce medical errors, and make health care easier.

Market Innovation: Prepaid Group Plans

Markets have developed innovative health plans that solve seemingly intractable problems. Unlike most health insurance, prepaid group health plans like Kaiser Permanente and Group Health Cooperative excel on many dimensions of quality where American health care suffers. They provide coordinated care with a single point of payment and accountability. They operate under incentives that encourage them to conduct comparative-effectiveness research and to use that research to guide clinical decisionmaking. They use medical teams to coordinate care. They encourage providers to make medical care safer by making the providers bear the financial costs of medical errors. They offer conveniences like electronic communications, scheduling, and medical records that are ubiquitous in other consumer industries. They even have the capacity to certify and monitor the safety and efficacy of drugs and medical devices in a way that respects the right of patients to choose their own course of treatment.

Integrated, prepaid group plans make health insurance and medical care more affordable. They create incentives to avoid wasteful and harmful care. They also make greater use of midlevel clinicians (e.g., nurse practitioners and physician assistants), who can deliver many services at a lower cost than physicians.

Market Innovation: Affordable Primary Care

Integrated health systems are not the only way market innovations reduce the cost of health care. Innovations in laser-eye surgery, for example, have caused prices to fall even as the quality of those services improves. Other examples include retail clinics, such as CVS's MinuteClinic, that make greater use of nurse practitioners and other midlevel clinicians — much like prepaid group plans — thus reducing prices for primary care visits by an estimated 30 percent.

The growth of ambulatory surgical centers and specialty hospitals provides more evidence that innovations are driving the cost of those services below the prices Medicare sets. Conversely, their growth means Medicare is keeping prices for those services higher than they would be in a market system.

Market Innovation: Reverse Deductibles

Markets have developed insurance features that drive down the prices of common procedures by thousands or even tens of thousands of dollars. One such innovation in insurance design, called "reverse deductibles," makes patients more cost conscious. With reverse deductibles, insurers offer to pay health care providers a fixed amount per procedure, leaving their enrollees to pay 100 percent of the cost of the service above the fixed amount. When consumers face 100 percent of the marginal cost of services, they are much more likely to demand lower prices and switch to lower-cost providers.

In California, reverse deductibles caused prices for colonoscopies to fall by an average of 21 percent, or $360; for knee arthroscopy, more than $1,000 (18 percent); for shoulder arthroscopy, $1,336 (17 percent); and for hip and knee replacements, an average of $9,000 (26 percent). At hospitals that had been charging the most, they caused joint-replacement prices to fall by $16,000 (37 percent).

Market Innovation: Secure Health Insurance

Markets have developed innovative health-insurance products that make access to care more secure and save consumers potentially thousands of dollars. Voluntary health insurance is itself a market innovation. It harnesses the self-interest of policyholders and carriers to provide a sustainable system of subsidies to patients with expensive conditions. After that, markets kept innovating, offering greater protections to the sick and vulnerable.

The federal government's tax preference for employer-sponsored insurance diverts more than 80 percent of Americans with private insurance into employer-sponsored plans, where sick patients can see their premiums skyrocket if they divorce or leave their jobs. By contrast, the individual market that covers the remaining consumers developed protections such as "renewal guarantees" that allow patients with expensive conditions like diabetes, heart disease, or cancer to keep purchasing insurance at standard rates. Guaranteed-renewal health insurance swept the market years before the federal government required that all individual-market policies carry this feature.

Markets developed a further innovation known as "preexisting conditions insurance." This revolutionary product allows uninsured patients who develop expensive conditions to purchase health insurance at standard rates. Premiums for preexisting conditions insurance cost one-fifth the premium for the underlying health insurance policy. That's an 80 percent discount that would save the typical enrollee thousands of dollars. In 2008 and 2009, insurance regulators approved this product for sale in 25 states.

When Congress passed the Patient Protection and Affordable Care Act (ACA) of 2010, markets were close to offering health insurance products with a total-satisfaction guarantee that frees sick patients to fire their insurance companies and choose from other carriers who would compete for their business. The ACA destroyed guaranteed-renewal insurance, preexisting conditions insurance, and any further health insurance innovations.

Government Regulations Cost Lives

The government has kept these and other innovations from making health care better and more affordable for the most vulnerable patients. One example is integrated, prepaid group plans, which markets developed more than 70 years ago. The government has been blocking them — and the cost and quality improvements they offer — for even longer by way of almost countless interventions. Many states enacted laws directly prohibiting prepaid group plans. More broadly, government licensing of clinicians and insurers inhibits prepaid group plans.

Government harms consumers by tilting the playing field in favor of certain ways of organizing and financing health care. The federal government's tax preference for employer-sponsored health insurance and government entitlement programs steer providers and patients away from prepaid group plans and toward fee-for-service payment and nonintegrated providers. Government policies not only inhibit prepaid group plans, which create incentives to reduce medical errors, but Medicare, Medicaid, and the tax preference for employer-sponsored health insurance literally punish providers who save lives by reducing medical errors. These interventions mandate or encourage fee-for-service payment systems where providers receive payment both for the medical error that injures the patient and for the follow-up care to treat that injury. Such payment systems pay providers less when they invest resources in preventing medical errors. In addition, the federal government grants itself a monopoly over certification of the safety and efficacy of new drugs and devices, which denies prepaid group plans yet another competitive advantage. Even where such plans have broken through these barriers, mostly on the West Coast, consumers are still not free to choose them. Federal and state tax laws penalize workers who choose health plans other than those their employer offers.

Day after day, Americans suffer the consequences of a century of mounting government failures. American health care is worse, more dangerous, more expensive, and less secure than a market system would deliver. Helping the most vulnerable patients requires more than repealing "Obamacare." It requires repealing all the barriers government places in the way of better, more affordable, more secure health care. It requires replacing America's dysfunctional government-run health care system with a market system.

Making health care better, more affordable, and more secure requires policymakers to do two things. First, they must return control over the $3.6 trillion America spends on health care to the patients that sector exists to serve — and eventually, leave that money with the workers who earned it. Like all government subsidies and tax preferences, those that separate Americans from their health care dollars inhibit innovation and create wasteful incentives. Second, policymakers must remove regulatory barriers to innovations that could bring better, more secure health care within reach of the most vulnerable patients.

Eliminate Government Licensing of Medical Professionals

Markets make medical care more affordable in large part by allowing less-trained clinicians, such as nurse practitioners and physician assistants, to perform tasks that were once performed only by highly trained physicians, whose services are more expensive. As Harvard Business School professor Clayton Christensen and his colleagues explain, "Many of the most powerful innovations that disrupted other industries did so by enabling a larger population of less-skilled people to do in a more convenient, less-expensive setting things that historically could be performed only by expensive specialists in centralized, inconvenient locations." State licensing of clinicians inhibits that market process.

To practice medicine in a state, physicians, nurse practitioners, physician assistants, and other clinicians must obtain a license from that state. Each state specifies the minimum requirements for each type of license and the tasks each license allows clinicians to perform. That list of tasks is called the clinician's "scope of practice."

Somewhat counterintuitively, groups representing various types of clinicians are constantly lobbying state governments to make these regulations more restrictive, by increasing the minimum requirements to obtain a given license or by limiting scopes of practice. The stated purpose is always to increase the quality of care. But the evidence does not support such claims. For example, when physician groups argue to restrict the scope of practice of nurse practitioners, they argue that a broader scope of practice would threaten patient safety. Yet study after study has shown midlevel clinicians provide a level of quality equal to that of physicians performing the same services. As the American Medical Association, the nation's largest lobbying group representing physicians, grudgingly admitted: