Replacing Obamacare

Opinion Journal:

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The core challenge, as Mr. Ryan laid out, is that "the health-care sector lacks most of the basic building blocks of a functioning market." The two major government health programs, Medicare and Medicaid, will pay for nearly anything regardless of value but then attempt to restrain costs through price controls. ObamaCare will do the same.

Meanwhile, what's left of the private insurance market is shaped by the tax preference for job-based coverage. This artifact of World War II-era wage controls creates a subsidy for open-ended tax-free benefits instead of taxable higher wages, and the third-party health-payment system that resulted has over the years suppressed the price signals that discipline other markets.

The irony, as Mr. Ryan put it, is that "the system that shields us from the cost of services has actually left us paying more." The "premium support" Medicare reform he proposed and the House passed this year would bring down the entitlement's high and rising costs through choice and competition, much like 401(k)s have arisen to replace increasingly unaffordable and impractical defined-benefit pensions.

Mr. Ryan's larger contribution in the Hoover speech was to highlight the problems in today's employer-sponsored insurance market, which can't be solved through, say, tort reform alone—or even by repealing ObamaCare alone.

 This reality was underscored by yesterday's Kaiser Family Foundation survey that found employer-sponsored premiums have jumped 9% for families and 8% for individuals since 2010, when the growth rate was about 3% over 2009. Much of this surge is due to ObamaCare's new coverage mandates, and in anticipation of insurers becoming public utilities with government imposing price controls on rates. But it also shows that health care exists in a different economic universe than other businesses, even amid the current stagnation, due in large part to the tax subsidies for third-party payers that don't exist for individuals who buy insurance.

Mr. Ryan's plan goes to the heart of this dysfunction by proposing a refundable tax credit for any insurance policy, allowing workers to shop outside of the company store without penalties if they prefer. As tax policy we'd prefer an individual tax deduction rather than a tax credit. But a tax credit might be easier to sell politically, and the key point is to change the incentives so the market for individual insurance policies will rebound and provide more options and competition

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The main reason health care is so expensive is there are no market forces to create competition.  If we can reintroduce competition to the health care market there is a good chance we can reduce the costs.