Ronald Reagan once said, “Individual freedom and ingenuity are at the very core of everything we’ve accomplished.”

Indeed, everything that has made America great has come from empowering the people, including and especially when it comes to the market.  Capitalism has been the engine of prosperity for this country going back to its founding.  As such, I am now proposing that Congress and the President consider the “Capitalist Manifesto for Healthcare Reform,” several specific, free-market fixes for the healthcare problem.

In the first article of this series, I examined the importance of breaking down two critical barriers to competition: the third-party based system that sets consumers apart from paying and decision-making and state laws prohibiting insurance purchases across state lines.  Cost and affordability, not quality of care, are the key issues with our healthcare system.  So let’s look at another way in which we can directly empower the individual beyond increased choice and expand affordability—by adjusting policies surrounding the importation of cheaper prescription drugs.

High Costs: Prescription drug costs often contribute greatly to higher healthcare costs.  According to the Kaiser Family Foundation, the number of prescriptions purchased in the U.S. between 1994 and 2004 was a whopping 68 percent, with prices averaging increases of 8.3 percent yearly during that period.  “Although still only a modest part of total health care spending in the U.S (11 percent),” they note, “with so many people relying on prescriptions, the cost implications loom large for the American public, health insurers, and government payers.”  The problems lie in Research and Development spending—specifically, patents and FDA regulations—and the fact that importing prescription drugs is illegal under current U.S. law.

Patents: Both patents and FDA regulations are significant contributors to $800 million in costs to launch a single new pharmaceutical product—costs which result in higher prices for consumers.  First, patents are designed to give a company temporary monopoly on the product so that they can recover their R&D spending.  A patent lasts 20 years, yet as the CATO Institute’s Roger Pilon points out, “the effective life for drug patents is about nine years.”  Logically, the shorter the time, the higher companies must charge per unit during that time to make up for the costs.  This process must be changed to permit the same amount of patent time that other products have.

FDA Regulations: Then there are regulations.  Today, according to PHRMA, the process of discovery to FDA approval takes an average of 12 to 15 years.  As such, many people who would accept the risks involved suffer during this time.  As economist Milton Friedman suggested, “[T]he one big development you could make would be to go back [to the situation where you have] the FDA certify safety…but not efficacy, and let the market itself work in determining efficacy.”

Indeed, the FDA should test only for safety and allow doctors and consumers to judge efficacy, which would decrease costs substantially and thus allow for cheaper medications.  By altering the regulatory process, more innovation and development will result in addition to lower prices.

Prescription Drug Importation: Finally, current law makes it illegal for prescription drugs to come to the U.S. from anyone other than the American producer.  As of now, they must be approved by the Food and Drug Administration (FDA) for importation.  Consequently, competition between prescription drug providers is stifled, as U.S. manufacturers lack the incentive to cut prices to beat out lower-priced contenders.  But individuals, states and cities are already beginning to avoid these laws and import drugs from other countries.  This should be made official: by permitting the importation of lower-cost prescription drugs from countries like Canada, consumers will have a larger list of affordable, cheaper medications to choose from.

Of course, we do have a right to know if what we’re buying hasn’t been FDA, so what’s to say that the government can’t mandate that imported prescription drugs say “NOT APPROVED BY FDA” in big, bold letters and be placed in sections stating “NOT APPROVED BY FDA” in the pharmacy?  Leave it up to me and my doctor, not big brother Sam, to decide whether or not I want to buy a cheaper drug from Canada, approved by their version of the FDA, instead of the more expensive product from Georgia.

There are other concerns as well.  The Heritage Foundation’s Nina Owcharenko, for instance, makes a good point: prescription drugs in other, Westernized countries are fixed in accordance with price controls, which would distort the international market and advantage foreign manufacturers.

However, we must recognize that the vast majority of R&D costs are being paid for by the Americans, with other countries essentially getting a free pass.  The U.S. is the only nation where market dynamics of supply and demand play out in pharmaceuticals—and with good reason.  Price controls in other countries, as Owcharenko points out, reduce R&D spending (not costs) for new drugs by as much as $5 to $8 billion each year and trials for new medical compounds by as much as 50-60 percent.

But as long as the ban on importation is in effect, American drug manufacturers are going to recoup their R&D costs here instead of pushing supply and demand principles on other countries—meaning higher prices for us.  Essentially, prices are set differently in the U.S. from other countries, meaning the U.S. shoulders the cost burden.

By eliminating the importation ban, other countries will have no choice but to react to supply and demand principles, as American manufacturers will find it necessary to cut prices at home and raise them abroad.  Thus, other countries will have to share in R&D costs, which is long overdue.

As Roger Pilon notes, pharmaceuticals can use contractual agreements (to do such things as restrict drug resale), limits on supply, and export pressures, among other things, to help ensure that foreign countries are not undercutting the company.  In effect, American manufacturers will be encouraged to do whatever they can to discourage importation in order to maintain their market share, which can be done by lowering prices here and raising prices elsewhere.

Capitalism has been the engine of prosperity for this country going back to its founding.  As such, I am now proposing that Congress and the President consider the “Capitalist Manifesto for Healthcare Reform,” several specific, free-market fixes for the healthcare problem.  The most critical aspect of reform, and the starting point, must be increased competition—something else President Obama claims to favor.

Government regulation and policies have essentially mandated a third party-based system that forces the consumer to work through health insurance companies, HMO’s, employers and other middlemen that pay the supplier.  84% of all personal healthcare spending is made through private health insurance, the government or other private expenditures that are not directly from the patient.

Encouraging the third-party system are tax exemptions for employer-provided health insurance that the millions of self-employed and small business owners and workers who pay on their own do not receive.  Own a big business?   Congrats—you get a nice little tax exemption for healthcare!  Run that mom-and-pop shop down the street, or your own home-based business?  Tough.  As Seinfeld’s Soup Nazi would put it, “No tax exclusion for you!”

These government incentives, policies and regulations put in place, in large part by the federal tax code, do nothing more than exacerbate the problem.  Because of the third-party-payer system, health providers aren’t competing for individual consumers—they’re contending for large corporations like Target and Cisco.  The problem here is that individuals are separated from the cost, driving up prices (premiums), and thus taking away decision-making authority of the patient.

Not a day goes by where we don’t see commercials for Geico, AllState and other car insurance companies competing over who provides the best service at the lowest price—competition absent from healthcare because of the third-party system.  To fix this, the government must equalize the healthcare tax exemption across the board so that everyone, not just middlemen and big business, will benefit from it.  That means small businesses as well as individuals, all of whom will then be far more equipped to go out and find an affordable health insurance plan for themselves, their families, and their employees—plans that are right for them.

We should also examine the other policies and regulations that encourage the third-party system.  As a result of both of these decisive actions, costs will go down.  Making these adjustments to the current system would open up the market to increased competition by allowing consumers to shop around on their own, decreasing costs substantially while maintaining high quality.

Expand the Sphere of Competition: In his recent speech to Congress on healthcare, President Obama acknowledged the extensive concentration of business in the health insurance industry.  As he pointed out, “75 percent of the insurance market is controlled by five or fewer companies.  In Alabama, almost 90 percent is controlled by just one company.”  While there are some issues with the calculation of these numbers, he is generally correct—the market is highly centralized and void of real competition.  Another fundamental reason for this problem is again government-created: the inability to purchase health insurance plans across state lines.

Thanks to the 1945 McCarran-Ferguson Act, which granted states the ability to use licensing laws to prevent trade with insurers in other states, John in Colorado cannot purchase a plan from a company licensed in Arizona; instead, he must buy a plan from a firm in his state.  Health insurance is largely regulated by the states, which require that any plan an individual insurance purchaser wishes to buy must comply with all of that state’s regulations.  This advantages both insurers and regulators in maintaining psuedo-monopolies in their respective states, in turn hurting consumers, who have few lower-cost options available to them.

Congress should do what it is granted by the Constitution and mandate that every state recognize insurance licenses of other states.  According to the CATO Institute, “Letting individuals and employers purchase health insurance from out of state could reduce the number of uninsured Americans by as many as 17 million, or one-third of the most-cited estimate of the number of uninsured.”  An individual state’s regulations, as CATO points out, need not be changed and can be enforced in the other states.

But what about states’ rights, you say?  If ever there were an area where the feds can play a legitimate role, it’s this.  The Commerce Clause in Article I, Section 8 of the Constitution explicitly grants Congress authority to regulate interstate commerce.  What was one of the big reasons they did this?  Because each state had its own tariffs between states under the Articles of Confederation—basically the same thing as these obstructionist regulations.

The country is now immersed in a deep debate.  President Barack Obama is advocating sweeping “reforms” to the American healthcare system that will inevitably lead down the dark path to socialized medicine.

First, President Obama’s plan would force private healthcare operations to crowd out.  Through taxes, those who are paying for their own coverage would also be paying for those who are under the new government program, eventually discouraging them from maintaining private coverage and encouraging them to switch to the cheaper government program.

Additionally, the government could initiate regulations and policies to benefit its program over competitors, and many employers will determine that it is more economical to drop their health insurance plans due to the increased financial strain the new program would force upon them.

Take Fannie Mae and Freddie Mac, the massive government-sponsored mortgage lenders that precipitated the current financial crisis.  Everyone knew that if something happened to either financial institution, the government would bail it out.  Government-sponsored programs and enterprises have a unique advantage over their private sector counterparts that, as inefficient as they may be, allows them to continue regardless of the results.  Risk is absent when the government is backing you up.

As the CATO Institute’s Michael Tanner wrote, “Government would compel Americans to purchase health insurance, controlling its content, how much we pay, and the relationships between insurers, doctors, and patients. Government bureaucrats would determine whether Americans received certain medical services.”

Obama argues that his plan would serve as a sort-of support system only for those who can’t afford it.  But when FDR began Social Security in the 1930s, it was intended as a supplement to personal retirement plans, not the primary source of retirement income that it is today.  In this case, a program meant as only a support system has grown to be the primary source for retirement funds.

It doesn’t have to be this way.  Our healthcare system contains the greatest innovations, the highest-quality care and some of the best doctors in the world.  The problem with our healthcare system is the disparity between those who can afford it and those who cannot.

Obama’s right.  We need reform.  The status quo is unacceptable.  But his government answer doesn’t address the fundamental reasons for such high costs.  The plan will do little more than inject more government spending and bureaucracy into the industry.  The way to fix this is not through greater government control or a new government program, but through more freedom in the marketplace.

The healthcare industry is one of the most heavily regulated industries in the country, with the net cost of regulation estimated by Duke University’s Chris Conover to be $169 billion a year.  As with any industry, in order to pay for the dictates of the government, institutions of health are forced to raise costs, which extends to consumers in the form of higher prices.

Government regulations and policies have essentially mandated a third party-based system that forces the consumer to work through health insurance companies, HMO’s, employers and other middlemen that pay the supplier.  84% of all personal healthcare spending is made through private health insurance, the government or other private expenditures that are not directly from the patient.

Human nature tells us that when someone other than the consumer is doing the paying, demand will rise.  When an individual is separated from the spending and someone else is paying, consumers are encouraged to use the service more as the incentive for individuals to save for themselves diminishes.  After all, if someone else is paying for it, why should I care?

Likewise, basic economics tells us that as demand rises and supply remains stagnant, prices (premiums) will inevitably go up, which in turn disadvantages those who pay directly, such as the self-employed.

Encouraging the third-party system are tax exemptions for employer-provided health insurance that the millions of self-employed and small business owners and workers who pay on their own do not receive.  The government incentives, policies and regulations put in place, in large part by the federal tax code, serve to do nothing more than exacerbate the problem.

The layman’s prescription for health reform is increased competition and market freedom.   Not a day goes by where we don’t see commercials for Geico, AllState and other car insurance companies competing over who provides the best service at the lowest price—competition absent from healthcare because of the third-party system.  Insurance companies aren’t competing for individual consumers—they’re contending for large corporations.

To fix this, the government must equalize the healthcare tax exemption across the board so that everyone, not just middlemen and large corporations, will benefit from it.  That means small businesses as well as individuals.  Tax-free health savings accounts need to be expanded, thereby helping individuals to purchase their own health insurance or pull from a pool of money when they need to.

Adjusting the policies and regulations perpetuating the third-party system, like the tax exclusion, would increase competition by allowing consumers to shop around on their own, decreasing costs substantially while maintaining high quality.  Furthermore, due to the high cost of regulation, deregulation is critical to opening up the market.