The Annual Report of the Council of Economic Advisers, March 2019
As shown in the Report that follows, we are ushering in an era of renewed dedication to our citizens. It is my great honor to champion the American people and to make their success and well-being my top priority. This pro- growth, pro-opportunity agenda celebrates the irreplaceable value of America’s working families and embraces the extraordinary possibilities for American ingenuity to improve the human condition. It is an economic agenda that lays the foundation for the future of American greatness.
Chapter 4 – Enabling Choice and Competition in Healthcare Markets
The dominant theory in economics for centuries in the Western world has been the efficiency of the free market system. For a free market to be efficient, free choice and competition must exist in the market to allow consumer demand to be met by suppliers.
Of course, many markets deviate in substantial ways from the conditions under which markets are perfectly efficient. Market failures occur to a greater or lesser extent throughout the economy. The important question is what to do about them.
Following the research of Kenneth Arrow (1963), many economists and policymakers have argued that unique features of healthcare make it impossible for competition and markets to work. They claim that uncertainty in the incidence of disease and in the effectiveness of treatment, information asymmetry between providers and consumers of healthcare, barriers to provider entry, and the critical importance of and inelastic demand for health services all interfere with market function and justify government intervention in—or even its takeover of—healthcare markets. Some members of Congress have proposed nationalizing payments for the healthcare sector (which makes up more than a sixth of the U.S. economy) through the recent “Medicare for All” proposal. This policy would distribute healthcare for “free” (i.e., without cost sharing) through a monopoly government health insurer that would centrally set all prices paid to suppliers such as doctors and hospitals. Private insurance would be banned for the services covered by the “Medicare for All” program.
This chapter begins by critically examining the rationales offered for the government’s intervention in healthcare. We find that though some characteristics of healthcare may present obstacles to a perfectly functioning market, these are not insurmountable problems that mandate the government’s intervention in healthcare and can be overcome by market and nonmarket institutions. Moreover, these problems also occur in markets for many other goods without calls for government takeovers and the suppression of consumer choice and competition. Government intervention in healthcare is only clearly warranted where the political process has made a determination that some level of healthcare for low-income people is a merit good—a beneficial good that would be underconsumed, justifying replacing consumer sovereignty with another norm—so that government redistribution programs to provide health- care in kind for low-income people might enhance efficiency.
We next critique the “Medicare for All” proposal. This plan would eliminate choice and competition—everyone would be forced to participate in the same insurance, with mandatory premiums set through tax policy and without the option of choosing an alternate insurance if they dislike the government’s plan. Our analysis shows that the proposal would reduce longevity and health in the U.S., decrease long-run global health by reducing medical innovation, and adversely affect the economy through the large tax burden required to fund the program.
In contrast to proposals that diminish health and damage the economy by curtailing market forces, the next section of this chapter details the Trump Administration’s efforts to improve choice and competition in health insurance markets so as to help them better serve low- and middle-income people. The Administration has reduced the penalty associated with the Affordable Care Act’s (ACA’s) individual mandate to zero, so consumers can decide for themselves the value of purchasing health insurance. We analyze this deregulatory reform and find that it will generate $204 billion in value over 10 years. In addition, the administration has increased the choices and affordability of available health insurance plans by expanding association health plans and extending the available terms and renewability of short-term, limited-duration insurance plans. As opposed to sabotaging healthcare markets, conventional incidence analysis by the CEA implies that these three deregulations of health insurance markets together will benefit Americans by $453 billion during the next decade.
Finally, the last section discusses the Administration’s reforms to enhance choice and competition in biopharmaceutical markets by streamlining the drug application and review process in a way that effectively lowers barriers to entry while ensuring a supply of safe and effective drugs.
We conclude that the market for health insurance and healthcare should be supported through increased choice and competition, not hampered by increased government intervention. Competitive markets for healthcare services and insurance—whether privately or publicly funded—can and do work to provide high-quality care for people at all income levels.
Conclusion (Chapter 4)
The U.S. economy generally relies on free markets to maximize benefits for U.S. citizens. The hallmarks of any free market are consumer choice and competition. Although some have claimed that healthcare is an exceptional case that cannot be produced and allocated through the market, we argue that these claims are exaggerated and that the costs of market failure are often lower than the costs of government failure. Deviations from perfect market conditions are present in healthcare and many other markets, but promoting choice and competition is the appropriate way to maximize efficiency and consumer welfare.
The recent push in Congress to enact a highly restrictive “Medicare for All” proposal would have the opposite effect—it would decrease competition and choice. The CEA’s analysis finds that, if enacted, this legislation would reduce longevity and health in the United States, decrease long-run global health by reducing medical innovation, and adversely affect the U.S. economy through the tax burden involved.
The Trump Administration has instead concentrated on deregulatory reforms that will increase choice and competition in the health insurance markets and pharmaceutical drug markets. Bringing the ACA’s individual mandate penalty down to zero will allow consumers to choose how much health insurance they desire. Expanding the availability of association health plans and the duration and renewability of short-term, limited-duration health plans will increase consumers’ options and spur competition. Finally, the FDA’s initiatives to speed drug approvals have already had tangible benefits in record numbers of drug approvals and increased pharmaceutical competition. All these reforms are expected to bring down prices, encourage continuing innovation, and maximize consumer welfare.
The Annual Report of the Council of Economic Advisers (705 pages):
By Don McCanne, M.D.
President Trump’s Council of Economic Advisers begins their report on health care by dismissing the seminal work of Nobel Laureate Kenneth Arrow demonstrating how markets do not work in health care – a concept that has been confirmed by many decades of non-structured natural experiments. Ignoring facts, they then move into a magical world crafted from wishes derived from their ideology of free markets, competition and choice.
There is no way that this approach can lead to sound decisions in health policy if our goal is to ensure affordable, accessible, and equitable health care for everyone.
President Trump announced this week that he intends to terminate Obamacare by supporting the lower court decision declaring the entire Affordable Care Act to be unconstitutional, while at the same time promising that “we will have a plan that’s far better than Obamacare.” He has never explained what that better plan he keeps promising us would be, but by using advisers that reject Kenneth Arrow’s fundamental premises, we can conclude that our health care financing system is not in good hands. We have to do something about that.
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