The key to returning true competition to health care is to make it possible for individuals to fire their insurance company, which requires eliminating the tax break on employer-provided health insurance by extending it to privately purchased policies.

The kind of plan the Obama administration envisions gives us the worst of both worlds. Its artificially low premiums will drive most private insurance out of business. Once there are no private insurers left, there will be no place left to shift costs. In a very short time, then, we'll have no reduction in cost due to cost shifting, and we'll have substantially less competition. The absence of competition will result in higher actual costs.

The better solution is to eliminate the preferential tax treatment of employer-provided insurance. That also, indirectly, would reduce the scale of the other major problem in American health care: covering the uninsured. Now it is very difficult to purchase insurance if you are not employed or if you work for a very small employer. Once insurance migrates out of large employer pools, sufficiently large pools will become possible with individualized insurance. Customers then would be able to vote with their feet if they are unsatisfied, and those who don't work for large employers no longer would have to pay higher premiums than everyone else.


There still would be some uninsured people. But that could be handled directly through insurance vouchers. A comprehensive voucher program would eliminate even further distortions and that would produce significant reductions in costs, not just shift costs.

Indeed, we already have such a program for something that is even more important than health care. With all its faults, food stamps have essentially eliminated the problem of hunger in America. Food stamps are vouchers that solve the problem in question directly while preserving competition. Small wonder they work so well.