Commentary: A Plan to End ObamaCare — and the Current Health Care Status Quo

(Editor's note: This article originally appeared on October 1, 2010.)

In his 2006 book "In Our Hands: A Plan to End the Welfare State," author Charles Murray proposed eliminating welfare, Medicaid, Medicare, Social Security, etc., and just giving every adult American $10,000 per year. Murray argues this would "supercharge" the voluntary institutions of civil society (the heartfelt interactions of families, friends, coworkers, charities, private groups, associations, religious organizations, etc.), and generate an improvement in public and private virtue.

The overall plausibility and ramifications of this proposal will be left for another day, but for those who concede as Murray does that income redistribution at some level isn't going away any time soon, the health care component of his plan may provide a framework for replacing ObamaCare and reforming the unsustainable current system as well.

Specifically, the plan proposes to enact certain free-market reforms that would dramatically lower costs, and then give every American a voucher to purchase a health insurance policy that covers unexpected and very expensive events but not routine costs. If a person didn't select a policy, presumably he or she would automatically be enrolled in one.

Murray's research indicates that with a specified package of patient-centered, market-based health care system reforms, the annual cost of a reasonably complete insurance policy for every American would be not much more than $3,000 per person. That would be a "community rated" price, meaning everyone pays the same amount regardless of age or health status. The proposed reforms are the key:

First, Murray would end the provider "protection rackets" created by burdensome licensing and scope-of-practice laws that restrict the supply of health care facilities and professionals. An example is state laws that make it difficult or impossible to place a walk-in clinic staffed by a highly trained nurse in a Wal-Mart.

Second, he would also allow consumers and providers to negotiate enforceable "waivers of liability," which would go a long way toward solving the medical malpractice lawsuit problem.

Under these reforms, something like a nasty cut requiring stitches and antibiotics could be treated by a technician with adequate training for the routine task, rather than a full-blown medical doctor with years of expensive education. Under a standard negotiated liability agreement, the technician could only be sued for messing up what he was paid to do, not for what he "should" have done. These measures would cut the cost of that routine injury from hundreds of dollars to $30 or $40.

Those $3,000 health insurance policies would also require rational decisions early in life about end-of-life care, which Murray notes currently consumes 11 percent of total health care spending. That's because the policies would not cover extraordinary (and extraordinarily expensive) end-of-life measures. Individuals could choose to buy extra insurance that does cover these with their own non-voucher money, but it would be expensive: Most people would decide that it makes more sense to spend the money enjoying life while healthy rather than claw for a few extra, painful months at the very end.

Two more reforms are required. One is that "one price for everyone" universal community rating. Every American would be in a single giant risk pool, regardless of medical history, prior conditions, etc. This addresses the "cosmic injustice" of some people who are just unlucky in having worse health than most.

It's important to recognize that under our current insurance system, community rating is unworkable, because it creates an incentive to not buy coverage until a person gets sick, especially when combined, as it inevitably is, with a "guaranteed issue" mandate that prohibits insurers from turning anyone away. This creates an "adverse selection death spiral" in the insurance market, because the coverage pool comes to include only ailing individuals guaranteed to rack up a lot of claims. (Imagine the effect on homeowners' insurance providers if you could wait until a fire started before buying coverage.)

ObamaCare superimposes "guaranteed issue" and a modified form of community rating onto the existing health care system, and supposedly avoids the "death spiral" by imposing individual and employer mandates that are odious to a free people, (And which probably won't work, because for political reasons the penalties were set too low to actually enforce compliance: Employers and healthy young people will come out ahead if they just pay the penalties and skip the coverage).

In contrast, Murray's plan incorporates this one-price-for-all regime into an overall set of incentive-changing, cost-reducing, market-based reforms, and combines it with the insurance voucher given to every person. Unlike ObamaCare, however, there are no mandates, because the voucher covers the entire insurance cost.

The universal coverage of both schemes (mythically "universal" under ObamaCare, genuinely so under "MurrayCare") is based on a recognition that it makes sense to spread the costs of treating those with chronic bad health across the entire population. And it also makes sense to bring young people under the insurance umbrella early: because as a class they consume few health care services, their premiums accumulate and grow enough to cover greater expenses when they're older, just like with life insurance.

Purists who oppose any form of wealth redistribution will grumble at "socializing" the expense of health care for everyone. There's a precedent for such a policy, however, which is public education. In that case, we made the mistake of also placing the delivery system under government control — thus the mass of mediocrity and/or dysfunction that is our current public school system; the school choice movement is now trying to correct that original misstep. Murray's plan avoids that same mistake in health care.

As for accepting some amount of wealth redistribution — something implicit in all social welfare schemes, including Social Security and Medicare — it's just a fact of life that Americans will not accept a system that requires them to step over the bodies of ailing individuals who could be cured if they could only afford available treatments: People will demand some form of health care access for all. In contrast, most Americans are willing to cut off other forms of welfare, in effect saying, "Tough luck, pal, you made bad choices." But not with health care.

Murray's plan boldly breaks out of this dilemma in a way that generates net benefits for the entire society without unjustly imposing disproportionate costs on any particular individual. It creates a win-win (or win-neutral) outcome that results in significant gains in overall economic efficiency and individual security. This in contrast to the bureaucratic, command-and-control nightmare that is ObamaCare, which creates countless losers and very few if any winners.

The current health care system is unsustainable, wasteful, filled with perverse incentives, creates economic inefficiencies, and generates tremendous insecurity for individuals. A different mix of the same negatives applies to nationalized systems, including ObamaCare. Reform efforts within the existing framework inevitably become irresolvable "circle squaring" exercises when they run into issues like reconciling the "moral hazard" of a Medicaid entitlement ("why work and provide for yourself if someone else will pay?") with our unwillingness to allow those who can't afford access to suffer from treatable diseases.

Could this plan provide the "replace" portion of politicians' "repeal and replace" ObamaCare pledges? In a state like Michigan, those insurance vouchers would cost around $30 billion, plus people's out-of-pocket expenses. Currently in this state, governments spend around $14 billion on health care for the poor, and $13 billion on health care for the elderly. Insurance provided by employers and individuals comes to around $30 billion, also not counting out-of-pocket deductibles, co-pays and just plain cash purchases.

In other words, on paper the Murray plan would actually cost less. However, in contrast to ObamaCare, which contains no market reforms and only worsens the perverse incentives that undermine our current system, in this case the lower cost claim is actually plausible. Unlike the current system, "insurance" would no longer be merely pre-paid health care (with all its perverse incentives to consume more), but would be restored to its proper role of providing against unexpected and catastrophically expensive events. Meanwhile, market reforms would drastically lower the cost of routine health care services

The main opposition would come from institutions and individuals with a vested interest in the status quo, including trial lawyers, licensed health care provider cartels (doctors, hospitals, the American Medical Association, etc.), state regulators, and many others. Also, some will point out that very poor people would not be able to afford to pay for routine health care expenses not covered by the plan's insurance policies, even though its market reforms would eliminate the causes that make routine services so costly.

As mentioned, Murray's complete proposal deals not just with health care but the entire welfare state. One effect of the stipend it would provide would be to supercharge the voluntary, private institutions of civil society — charity and community involvement, that is — especially when combined with the knowledge that with no welfare or Medicaid offices "taking care of" complex human problems in our communities, the responsibility would once again be "in our hands." Carving out just the health care component as a stand-alone adds to the challenge, but even this is not insurmountable, because most people would be able to pay those routine health care expenses without help.

At the very least, Murray provides a useful model, or "thought experiment," as we confront the immediate challenge of repealing ObamaCare and replacing it with a workable health care system that meets our population's demand for something better than the status quo.