Pretty much everyone in the United States is in agreement that the healthcare system is critically flawed. Right now, there are two basic solutions being presented by the men in fancy suits:

1. Have the government press its way into the healthcare system and offer a public option that will force insurance companies to lower their prices in order to stay competitive. In order to make sure that this option is really, really hurts the evil, profiteering corporations, we also institute mandatory healthcare coverage for all U.S. citizens.
2. Pull the government entirely out of the healthcare system and let the free market sort out everything.

Neither of these approaches are actually going to be good.

Uncle Sam the Insurance Company

The government is an extremely powerful market force. This is because of two things: deficit spending and force monopoly. The government, unlike a private business interest, can run up staggeringly massive debts and continue to operate. In 2007, the United States had the 24th largest public debt to GDP ratio in the world at 60.8%¹. The American Recovery and Reinvestment Act of 2009 raised the statutory debt limit to over $12 trillion this year. That's 86% of the GDP! No established business would even think about being so far in debt. Yet the government can do so easily.

The other feature of government that contributes to its unfair advantage is the force monopoly. The government has the authority to order the citizens to follow its laws, and can back up such orders with the threat of overwhelming force. This is something that no business can do. As much as Microsoft and Apple would like to, they can't get together and force every person in the world to buy a computer, thereby racking up massive profits.

Why does all of this matter? Because healthcare costs don't magically go away when the government tells them to. Prices are all based on a simple feature of economics: supply and demand. Roughly, supply and demand affect price and quantity in this manner:

• If demand goes up, prices go up and quantity goes up.
• If demand goes down, prices go down and quantity goes down.
• If supply goes up, prices go down and quantity goes up.
• If supply goes down, prices go up and quantity goes down.

So let's see what the government insurance option does for us, shall we? First, the government enters as an insurance supplier. Quantity goes up and price goes down because of competition. Sounds good, doesn't it? But then demand comes up because insurance is now mandatory. Quantity goes to its maximum, but prices ends up pretty much right where they started. Everybody is doing okay, except that the consumers have not gotten their promised price drops.

So now the government decides to cut its prices, because the people want it to. In order to not lose all of their business, the private insurers then also have to cut their prices. Now it seems like everybody is doing just fine. Happy good times all around.

Wrong.

See, while the insurers all had to cut their prices, their costs stayed pretty much the same. This means that their profit margins became much, much thinner. In some cases, they may have gone negative. The businesses that don't have any profits anymore are going to be leaving the market pretty soon, and the others will be very vulnerable to sudden jumps in healthcare costs (like a sudden outbreak of buffalo flu or somesuch). The big insurers and the government insurer can pick up the slack at the beginning, but that just makes them even more vulnerable. The government, of course, doesn't have to worry, because of its deficit-spending superpowers, but private insurers are now a little queasy. With such low profit margins, new companies are no longer attempting to enter the market, causing a slow progression towards oligopoly. Does this sound familiar to anybody?

Ultimately this system ends with the private insurers getting slowly wiped out, leading to (yep, you guessed it) a government monopoly on health care. Note that the consumer is not actually getting favored here, because the costs in the system are still present and ultimately just show up in your taxes in the end.

Laissez Faire

At this point, you might be thinking, "By golly, we have to keep the government as far away from the health care companies as we can!" Perhaps you don't sound quite as quaint in your head as I do, but still, it's not a rosy picture on that side of the issue either. This time, there's just one problem, but it's a big one:

Companies only do what is profitable.

Kaiser Permanente reports that 5% of its members account for a staggering 51% of it's costs². I'll remind you that these are members that are still within the company's reasonable operating budgets. The simple fact is that if you take away government intervention, a large portion of the population is just not profitable for the insurance companies to insure. These people get left out in the cold, and do some pretty severe damage to the rest of the country.

The government would be failing its duty to protect public welfare if it allowed that to happen. Some regulation must be necessary, but how much is too much?

The Solution

A solution to healthcare that is simple and effective is possible. It will be difficult, because the medical and insurance lobbies are mighty, but if it can be passed it will work out well.

1. Shut down the AMA's restrictions on doctor certifications.
I'm not saying we need to let anybody go out and call themselves a doctor. I'm saying we need to stop this stupid quota business that the AMA has going. By restricting the supply of doctors, the AMA keeps their salaries arbitrarily high because they never have to compete on costs.
2. Make public doctor success rates.
Right now, it's next to impossible to find out how good your doctor is. It's kept a secret. Because of this, doctors don't have to compete for patients, raising costs, and incompetent doctors are allowed to perform procedures, increasing malpractice lawsuits and raising costs.
3. Stop charging per-procedure.
Having patients pay for care by itemizing each procedure encourages them to skimp on procedures in order to keep costs down. It also creates a paperwork hell for hospitals, who have to negotiate payments to half a dozen different people for three dozen separate procedures.
4. Require people to buy healthcare.
Yes, it feels heavy-handed. It's necessary, so stop whining. Require that people either buy from a private group or allow those who qualify because of low or nonexistent income to use Medicaid. While you're at it, restructure Medicaid so it functions as similarly as possible to the private insurers.
5. Implement tort reform.
It is laughably simple to sue medical professionals in this country. This cannot be allowed to continue. If you really do want to bring down costs, you have to start by allowing doctors to do their jobs without constantly wasting time on dozens of extra procedures just in case someone decides to call in an attorney.

ushdfgakjasgh has suggested in his wrietup in Obamacare and the GOP Alternative to stop requiring FDA approval of medicines. I feel that this is a terrible idea and will result in low quality products. Certainly, someone should get in and have a good look at the FDA's process and see if it's being excessively bureaucratic, but completely removing it from the picture is just too risky. Not everything The Man does is bad.

1. Source: CIA World Factbook: United States: Economy
2. Source: Population Care: Why Should I Care? (PDF)