What a free market in healthcare would look like

Type: Think Pieces Written by Tom Clougherty | Wednesday 19 January 2011

The coalition government’s health proposals are a mixed bag, and much will depend on the final legislation and implementation process. But whatever happens, they will not create a real market in healthcare…

There are pluses and minuses to the health reforms proposed by the government. On the plus side, the reforms will give patients greater choice and practitioners greater freedom. Both those things should drive up quality. Meanwhile, introducing (some) competition on price should help keep spiraling costs under control (a bit). On the downside, the reforms will trigger an enormous, and probably very costly upheaval, and the resulting system will still be highly bureaucratic.

Will the pluses outweigh the minuses? That very much depends on how much freedom, choice and competition the reforms are able to inject into the system. As yet, I’m not convinced they do enough to deliver major benefits to the patient – though I am open to persuasion on this, and much will depend on the final legislation and its implementation.

Still, whatever you think of the government’s planned reforms, it is important to realize that there is a huge gulf between what they would create – a government-funded system of heavily regulated, managed competition – and a genuine free market in healthcare. Indeed, if I were being harsh, I’d say the government’s proposals are merely another attempt to make socialism work, rather than a shift to a more liberal system.

Let’s imagine a free market health system. Of course, all the doctors’ surgeries and hospitals would be independent, private operators, which would vie with one another for patients, and compete on price. Some would be standalone companies, others would doubtless be part of big corporate chains. Some would be owned by cooperatives or mutual societies, and others perhaps by charitable foundations. The point is, there would be diversity, and with it choice, competition and independence.

Now look at it from the patient’s perspective. Again, there would be countless possibilities (ranging from private insurers and health maintenance organizations, to old-fashioned friendly societies and mutual benefit organizations), so I’ll just highlight the sort of arrangement I would expect to be most prevalent.

For the vast majority of medical interactions (visits to the GP, for example) people would simply pay out of pocket, or otherwise join some kind of basic medical plan. I’d expect chains like ‘MediSavers’ or ‘DoctorsExpress’ to offer low-cost appointments to all comers, or to offer package deals (say, three diagnostic examinations, an annual health check, and discounts on specialist referrals, elective procedures and medicines). Within that market setting, I’d expect pharmacists to take on a much bigger role, which would drive costs even lower. Indeed, I would also expect to see doctors, dentists, pharmacists and opticians to club together and form all-in-one ‘healthcare supermarkets’, perhaps with gyms and healthfood stores getting in on the action too. As I say, the possibilities are endless.

For most people, in most years, that would be the extent of their healthcare experience. At most, it would set them back a few hundred pounds. But what about bigger-ticket healthcare expenses, like complex operations or cancer treatments? This is where insurance would come in. But not the kind of comprehensive insurance that we see driving massive cost inflation in the US.

Instead, I’d expect something like the Western Provident Association’s XS Health plan to become popular. Even now, in a relatively underdeveloped market, this would allow a 40 year non-smoker to claim for “hospital and out-patient treatment, scans, tests, physiotherapy and cancer cover” and be treated “by a specialist of [his] choice, at a hospital of [his] choice, anywhere in the UK” in return for a premium of £200 per year. What keeps it cheap is the £1,500 rolling excess – essentially, the insured party’s medical costs would be capped at £1,500 in any 12-month period. Should they spend more than that, the insurer would pay all expenses incurred in the 12 months that followed.

Now, OK, £1,500 might seem like a lot. But in a free market (and therefore low-tax) system where people were expected to look after themselves, that is not an unreasonable amount to expect people to keep tucked away for emergencies. And of course, people would be perfectly free to choose an insurance package with a lower excess, or a co-payment instead of an excess, or even one that covered every medical expense from the first £ onwards. Those might be more expensive on an annual basis, but people might think they suited them better in the long term. Who knows? The essence of a free market is a multiplicity of options to suit a multiplicity of preferences.

The thing to note is that this free market that I am sketching out would allow people to tailor their healthcare far more closely to their individual requirements, while also costing a lot less than the current nationalized system does. We’re comparing annual costs of a couple of hundred pounds on primary care and a couple of hundred pounds on big-ticket insurance, plus very occasional larger outlays, with an annual government spend of well over £2000 per person. An improvement, I would suggest.

Of course, there would remain a difficult welfare issue. Presumably even in a free market setting, people would insist on some sort of redistribution to ensure a minimum standard for everyone. But this need not be an insuperable problem. Just as private optical services are currently subsidized for people in certain categories, so could routine visits to the doctor or dentist. As for the insurance element, you could say that if a defined package of coverage cost more than a set percentage of a person’s income, then the government would pay the rest. Naturally, doing anything like that would reduce the savings to the taxpayer, and would also create all sorts of distorted incentives. A balance would have to be struck.

But regardless, wouldn’t this free market system – in which patient choice was everything, in which providers competed to offer higher quality at a lower price, in which the vast majority fended for themselves and those unable to do so were empowered by government to enter the market – wouldn’t this be infinitely preferable to the sort of bureaucratic, managerialist compromise we have today? It might not suit the public sector unions, which is not the same thing as saying it would not suit their members. And it might not suit politicians, although in the long run they’d be as relieved to be rid of the NHS and they were to be rid of British Leyland. For the rest of us, however, it would surely be a huge improvement.