America’s health care system is a dysfunctional mess for a fundamental reason: There is no real market in health care. It was wrecked by a combination of incentive-skewing federal tax policies, innovation-killing “fee for service” payment systems in the two federal programs that pay for practically half of all health care consumed (Medicare and Medicaid), restrictive state policies that create limited cartels of health care professionals and facilities (reducing supply and so increasing price), and more.

It all seems a hopeless quagmire, in part because instead of going to the root cause of the dyfunctions to find solutions, politicians have instead “doubled down” on market-killing policies, most recently with the monumentally destructive Obamacare law, which comes on top of innumerable other counter-productive government intrusions enacted on a bipartisan basis at both the state and federal levels.

An interesting proposal from a Mackinac Center sister-think tank in Wyoming seeks to cut this Gordian knot of perverse incentives and pernicious restrictions with something called “medical freedom zones”: a “legally recognized geographic area where health care professionals may provide services and conduct research governed by professional associations and private contracts.”

Here’s more from the paper on the idea authored by the Wyoming Liberty Group:

Both the federal and state governments hamper doctors’ ability to innovate in medicine and to offer more affordable or alternative care. While the federal government delays innovative medicine, state governments make affordable care more difficult by limiting the number of doctors and saddling those who do practice with difficult liability rules. Similarly, the ability of care providers and patients to fashion their own agreements governing medical procedures is entirely hamstrung through state regulation. The result? More than 500,000 Americans fled the United States in 2008 for medical tourism. The time for innovative reform is now.

Alas, even this creative solution cannot get to the root of the problem, because the “freedom zones” don’t fix the two “original sins” primarily responsible for wrecking health care, and which can only be fixed in Washington: Allowing unlimited employer tax deductions for the cost of employee health insurance, and Medicare and Medicaid’s “fee for service” payment model.

The first of these, the tax code, is responsible for the third-party payment system under which, unlike areas where markets truly exist, consumers don’t behave like frugal, prudent value seekers, and providers aren’t forced by competition to respond by becoming innovative, efficiency-generating value-maximizers. The second source of the dysfunctions, Medicare and Medicaid’s payment system, imposes price controls in a way that mostly takes away any reward for providers reducing costs through innovation, destroying the incentive for them to even try.

Fix those two things, and our health care delivery system can finally begin to heal itself by becoming a real market. Leave them untouched, or worse yet pile a huge new layer of regulation, subsidy and rationing on top of them (Obamacare), and no fundamental improvement can ever be expected to occur in our health care system.

It’s in our hands to make this right — but this requires forcing the politicians in Washington to undo these core sources of dysfunction. If they did, medical freedom zones could have the potential to accelerate the healing process for our health care system.