Abstract
Although the U.S. health care system has made remarkable advancements, it is costly and wasteful, and it leaves many people without appropriate care. The challenge for public policy is to enable consumers and taxpayers to obtain good value for their health care dollars. Achieving this objective stands the greatest chance of success if health care markets function well. To make markets work, we recommend changes in five areas of public policy: tax reform, insurance reform, improved provision of information, enhanced competition, and malpractice reform. Our policy reforms will improve the productivity of the health care system, make insurance more affordable, reduce rates of uninsurance, and increase tax fairness and progressivity.

What should be the focus of U.S. health reform? Policymakers, like Americans as a whole, are divided about whether the solution lies in private markets or increasing direct government involvement. Supporters of private markets point out that competition and choice provide consumer satisfaction and keep costs down in most markets; health care should be no different. Supporters of public intervention argue that market failures and distributional concerns give government a direct role in health care.

In our view, any plan for health system reform must begin by taking advantage of the power of markets. Neither market-based reform nor government intervention is a cure-all. Neither will eliminate wasteful health care cost growth or uninsurance. But the power of markets to allocate resources efficiently—power evident in every other sector of the economy—is part of the solution.

Unfortunately, a handful of U.S. public policies prevent markets for health services from accomplishing this objective. In two areas—tax policy and health insurance regulation—government policy has actively hindered the operation of markets. In three other areas—the provision of health care information, the enforcement of antitrust laws, and medical malpractice rules—government policy has failed to adequately promote the proper functioning of markets. In doing so, it has contributed to the spread of wasteful (inefficient) medical practice, rising health care costs, and rising rates of uninsurance. Although making markets work is not a silver bullet, it is a necessary first step.

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