Because it was a form of compensation and not true insurance, health coverage became ever more expansive and expensive. Employees were shielded from the true cost of what they were consuming and accordingly failed to economize. If food were provided as a fringe benefit of employment, we'd dine on Chateaubriand every night. States compounded the problem in response to lobbying from particular providers, passing laws that required all insurance policies to cover expensive services, such as in vitro fertilization, pregnancy services, weight loss surgery and alcohol and drug rehabilitation programs. Over the past 30 years, 1800 mandates have been adopted, driving up the cost of insurance. This was bad enough for those with employer-provided insurance, but it hit those purchasing insurance individually particularly hard.
The high cost of insurance drove many who were not covered by employers to rely on hospital emergency rooms when they got sick. The federal government ratified this by mandating that hospitals treat all comers. Hospitals in turn charged more to their paying customers (i.e. insurance companies and the government through Medicare and Medicaid) to cover the costs of treating the uninsured. Rube Goldberg would be proud.
Medicare and Medicaid too have contributed to sharply rising health care costs both because the population is aging and because the programs' fee for service structure encourages overuse.
Smart conservative health policy analysts have proposed a way to cut the Gordian knot -- Remove the tax deduction for health insurance purchases from employers and give it to individuals. This was actually candidate John McCain's proposal in 2008, though, as Yuval Levin (editor of National Affairs and one of those smart analysts) noted ruefully, "Nobody told John McCain." As Levin explains, if individuals were given a $5,000 tax credit (fully refundable for those below the poverty line) for the purchase of health insurance, insurance companies would compete to provide excellent coverage for $5,000.
If, in addition, individuals were permitted to shop across state lines for insurance, those states with fewer mandates would be able to offer cheaper plans and would accordingly get more business. Replacing traditional Medicare with premium support would encourage competition in that market, as well.
Writing in National Affairs, James Capretta and Robert Moffit summarized the ideal Republican approach this way: " ... The essential common element is a move toward consumer control. Individuals would become active, cost-conscious consumers looking for value in the health care marketplace. This shift would, in turn, create tremendous incentives for those delivering medical services to find better and less expensive ways of caring for patients and keeping them well."
As Obamacare's rising costs and constricted choices alienate the American people, Republicans should be ready with an alternative that is market-oriented, assembled and on the launchpad.