The Folly of "Free Market" Healthcare Reform

The purpose of the Supreme Court hearings on President Obama's health reform law is to determine whether a key provision, the individual mandate, is constitutional. But the case may end up demonstrating something else: That there is no "free market" solution that will extend coverage to millions of uninsured people and get skyrocketing costs under control.

[See photos of protesters outside the Supreme Court.]

It's worth stepping back for a moment to examine why the individual mandate even exists. The idea is to force healthy people to buy insurance even if they think they don't need it. That will bring more revenue to insurance companies, which they'll use to keep premiums down for sick people and those with preexisting conditions. Penalty fees paid by those who refuse to get insurance would bring in more revenue to help subsidize policies for those who want them, but need financial help. And healthy people who unexpectedly need care would get it through their plan, instead of racking up huge emergency room bills that typically get passed on to everybody else who pays for healthcare.

The whole scheme is meant to mimic free enterprise, in which people make rational choices about how to spend their money.

The justices must determine whether buying insurance is a form of commerce that Congress has the authority to regulate. But they've also highlighted the absurdities of pretending that healthcare is just another product people buy and sell. Several justices, for example, suggested that if Congress can require Americans to buy health insurance, then by the same logic it can require them to buy cell phones, broccoli, pre-paid funeral arrangements, and in fact, anything.

[See what would happen if Obamacare were repealed.]

Obama administration lawyer Donald Verrilli argued that each of those instances is different, because health insurance is a unique product. Legal eagles and policy wonks will endlessly debate the technical questions about what kind of product healthcare really is. But the broader takeaway may be that it's not possible to design a free-market dynamic that will accomplish the main goal of Obama's health reform law: Extending coverage to everybody.

Even without Obamacare, the healthcare and insurance industries are a badly distorted version of what most people consider pure capitalism. Hardly anybody pays for healthcare out-of-pocket because it's far too expensive. You can't look up prices for hospital procedures, or comparison-shop for them. And prices are largely set by middlemen—the insurance companies—not by a marketplace agreement between buyer (the patient) and seller (the healthcare provider).

[See the real reason Obamacare scares people.]

Beyond that, the practices that people find most objectionable tend to reflect what often happens in a truly unregulated free market: One party becomes too powerful and exploits the others. Refusing coverage to sick patients or charging them exorbitant premiums, for example, is a very rational thing for insurance companies to do because it protects the profits that are at the heart of a free-market system.

Verrilli is right that healthcare is a unique product, but he didn't go far enough. There's no evidence that the free market can provide the combination of quantity, quality and affordability of healthcare that we deem necessary. The administration's lawyer had no choice but to defend the free-market mechanism that Obamacare attempts to create.

But the mechanism interferes with capitalism instead of enhancing it, which makes it flawed whether it's constitutional or not.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success, to be published in May. Follow him on Twitter: @rickjnewman.

http://www.usnews.com/news/blogs/rick-newman/2012/03/28/the-folly-of-free-market-healthcare-reform