Fixing the Health-Care System Requires Market Changes, Not a Government Takeover, Major Economists Say

By Pete Winn | August 27, 2009 | 9:48 PM EDT

A copy of H.R. 3200, America Affordable Health Choices Act of 2009 sits on the desk of House Energy and Commerce Committee Chairman Rep. Henry Waxman, D-Calif., after the markup on the health care bill was postponed on Capitol Hill in Washington, Wednesday, July 29, 2009. (AP photo/Susan Walsh)

( – Fixing the main problems with the health-care system should not take a major overhaul or government-run health insurance, or even a 700-page bill. What is needed is some good old-fashioned competition, according to the authors of a new book on the subject -- two economists whose research is highly regarded in the academic world.
“If (some) pro-competitive adjustments are made, you could write a bill probably of 30 pages or less – a very short bill that would make the necessary changes and would accomplish the objective of getting everybody covered with adequate insurance,” said Dr. Earl Grinols, distinguished professor of economics at Baylor University and co-author of the book, “Health Care for Us All: Getting More for Our Investment.”

“It would cost probably far less than one-half of one percent of domestic gross national product,” Grinols told in a recent interview. 

The answer to the problems with the health-care system is not to nationalize health care. It involves increasing competition – and making some innovative changes to insurance. 

“Health care and health insurance are best provided through robust competition in private markets," Grinols said. “To keep costs down, the only known reliable self-regulating mechanism requires competition, such as requiring health-care providers to publicly post their prices and charge all consumers who buy the same service on the same terms at the same price, so consumers could shop for services." 

Grinols and his co-author, fellow economist Dr. James Henderson, say that neither H.R. 3200, the House version of the health-care reform bill, nor its Senate counterpart solves the real issues with the health-care system. 

“I like to summarize it this way,” Grinols said. “The problems with the American health care sector today are: too-little insurance, too-little income and too-little market. 

“Too-little insurance means that there are people who are uninsured, and the reasons are that some people truly cannot afford it. Other people have the income – some 9 million plus have $75,000 a year annual income or greater -- but they choose not to buy health insurance, even though other people in the same circumstances are getting health insurance.”
The Answer: Increased Competition, Limited Financial Help and Insurance Innovations
The economists argue that we not only don’t need to create a huge new entitlement system similar to Medicare -- we shouldn't. 

“There are ways to deal with these things that don’t require the government taking over the insurance industry,” Henderson said.
But we should do more for the smaller group of people who genuinely need help in paying, the authors told They recommend income subsidies that would be available to everyone, but would primarily go to the hard to insure -- the 5 million to 10 million Americans who don't have insurance due to low earnings or previous medical conditions.
“A targeted intervention plan allows us to be more effective without collateral damage to the health-care arrangements of the rest of us,” said Henderson, the Williams professor of economics at Baylor.
The problem of too-little insurance will not be solved by insisting that insurance companies cover people with previous health conditions, he added.
“Just saying ‘Let’s guarantee renewability at standard rates’ is not going to solve the problem,” Henderson said. “It’s actually going to make it worse. Right now, the states that already mandate that have the highest insurance rates in the country.”
Henderson and Grinols said the so-called “public option” of a government-run health insurance pool is guaranteed to raise rates and drive some private insurers out of business – and would eventually put millions of Americans into the government insurance pool.
“Immediately, you would be looking at half of the people that have private insurance would lose it because their employer would put them into the public plan,” Henderson told
The economics behind the claim are simple enough that they should be apparent to almost everyone, Grinols said.
“If you are an employer, and you have before you rules that the government has set up which say that they are going to penalize your firm a certain amount of money if you don’t offer your employees some kind of coverage, unless that margin is set so burdensomely that all firms would choose to continue whatever they are doing now, whoever’s on the wrong side of that margin, is going to say, ‘You know what, I’ll pay the penalties and dump all my employees onto the public option’ because, a) there is a public option, and b) the cost to me is lower than providing the insurance myself,” he said.
The economists answer? Set up homogeneous risk pooling.
“Homogeneous risk pooling, is probably the single most misunderstood, and most important reform -- a feature that could be changed in just a couple of pages of legislation,” Grinols said.
The idea simply involves grouping people of similar age, sex and risk categories and basing their insurance premiums accordingly, said Grinols, who served as a senior economist on the Council of Economic Advisers for President Reagan and an international economist for the U.S. Treasury Department during the Ford administration.
It would lower the price of health insurance for many Americans – perhaps dramatically. It's the same idea we already see in auto insurance.
“If you were to tell teenage girls that their cars had to be insured in the same risk pool with teenage boys, it would obviously not be something they would be happy with,” Grinols said. “It would raise the cost of their insurance by a huge amount.”
Teen boys are, as a class, notorious risk-takers in a way that teen grls typically are not, he added.
“The same kind of thinking should apply to medical insurance,” Grinols said. “A man should not have to pay for breast cancer. Neither should a woman have to pay for prostate surgery. What if those two treatments cost hugely different amounts of money?”
Yet in today’s health insurance, some of the sickest members of society are lumped into the same coverage pool with the healthiest people – and the cost is averaged out. Health insurance, consequently, costs far more than it might otherwise.
“If you are going to group people into insurance groups that are homogeneous, you would have to rate (fix the cost of ) the insurance on the person’s age, you would have to rate the insurance on the person’s sex, and probably a few other things,” Grinols said.
Long-term disability insurance could ease the burden for those who have prior conditions, he added.
In the end, the economists say their proposed changes in insurance coverage and market-based reforms are less controversial and “unsexy” but are important and what's needed -- not the Affordable Health Choices Act.
“H.R. 3200, is just an agglomeration of regulations and ideas that a lot of people in the House of Representatives have wanted to dump on the insurance industry all along,” Henderson said.
Grinols, meanwhile, said that Congress doesn’t seem to understand that its solutions to some of the problems are just prescriptions for disaster.
“You’ve got to understand what you’re doing,” Grinols underscored. “Just making partial reforms without making complete reforms can worsen the situation.”
The book is published by Cambridge University Press.