AEI Health Plan: Many Good Ideas, but Some Missed Opportunities

The reason why the health care systems of developed countries are so dysfunctional is that most of the time patients are not spending their own money; they are spending someone else’s money. That means when they spend a dollar on health care, they have no incentive to ensure that they get a dollar’s worth of value in return. And, unlike a normal market, when the providers receive a dollar in payment, they have no incentive to deliver a dollar’s worth of value.

The health policy analysts assembled by the American Enterprise Institute are fully aware of these perverse incentives and in a new reform proposal they have an idea on how to correct them. Any assistance we get from government should be in the form of a fixed sum of money (a defined contribution) instead of a blank check to pay for a promised set of services (a defined benefit), regardless of what that might cost.

Let people make the marginal purchasing decisions with their own money, rather than with the taxpayer’s money. In the words of the AEI team:

Any federal subsidization of health care should take the form of defined contributions to support consumer choices in highly competitive open markets rather than defined benefits to control provider behavior in highly restricted captured markets. That subsidy would not vary based on a person’s choices of coverage or where they get their care. Those selecting more expensive options would pay for the added cost out of their own pockets. Those choosing low-cost, high-value options would pocket the savings, ideally in personal health savings accounts.