Odysseas Papadimitriou is founder and chief executive officer of Evolution Finance, the parent company of Wallet Blog and Card Hub, an online marketplace for credit cards.

The discussion about health-care reform tends to center around coverage: Who pays for it? Who will get it? And what does that mean for those who do? What's missing is an acknowledgment that a system that doesn't hold the recipient partily responsible for the financial burden of medical expenses is likely to fail.

The problem with America's current system is evident when looking at its global performance. Though our life expectancy is about the same as in France, Sweden and the U.K., the price of health care (as a percentage of gross domestic product) varies greatly. According to the World Health Organization's 2009 report, the U.S. pays more than 15% of GDP, whereas France pays 11.2%, Sweden 9.2% and the U.K. 8.2%. We are spending more for the same level of health care because our system encourages inflated costs.


For the system to succeed in keeping health-care costs down, the recipient needs to be discouraged from frivolous medical procedures and frequenting expensive medical practitioners when equally competent and cheaper alternatives are available. The success of a free market depends on its ability to reward medical providers who offer the best service for the lowest price. Under the current system, the majority of patients have no such incentive as long as the insurance company is picking up the tab. Moreover, doctors have no incentive to keep costs at a minimum, given that patients don't care as long as their insurance company pays.

While insurance companies like Aetna(AET:NYSE), UnitedHealth(UNH:NYSE) and Cigna(CI:NYSE) negotiate lower rates from doctors in their networks, they aren't as well positioned to do so as consumers are. For starters, insurance companies are interested in keeping costs down -- but only up to a point. Then they make up their increased expenses by increasing customer premiums. Moreover, insurance companies can't incite doctors within their network to compete against one another in making their practices more efficient. A consumer actively seeking out the best deal would naturally force health-care providers, even in the same network, into the state of competition upon which free market principles depend. Lastly, comparison-shopping can more efficiently control prices for medical treatment than can an insurance company, which must deal with large unified national groups of health-care providers. By being hands on, the individual seeking health care necessarily avoids the problems of collective bargaining. In fact, consumers involved in medical-price comparisons, acting en masse, would create a workforce that places constant and organic downward pressure on medical costs.

In a recent interview, Ken Schachmut, a senior vice president at Safeway(SWY:NYSE), described how the company overhauled its health-care system and reduced per-capita spending by 13%. His method relied on the foolproof free-market notion that between two similar alternatives, consumers will purchase the least expensive. His company offered to pay an amount equal to what it considered an average cost for procedures as a reimbursement, leaving the patient responsible for the remaining costs. According to Schachmut: "We found the cost for a colonoscopy within a 30-mile radius of our headquarters building ranged from under $1,000 to almost $6,000 -- without, as far as we can discern, any difference in outcomes or quality." What the limited reimbursement did, in this case, was to encourage Safeway workers to shop around.

A similar consumer incentive will be a necessary component for success, no matter which health-care plan rises out of current discussions. I also realize that there are those who will bristle at the idea of out-of-pocket expenses when it comes to universal health care, especially for those who live below the poverty line. Exceptions will need to be made but, without free-market incentives, the system is in danger of not working at all. One possible solution might be for the government to offer zero percent interest medical loans to cover expenses that exceed a deductible. The loans would need to be repaid if the patient's income becomes higher in the future.


However you spin it, the system that exists now, under which the insured are never asked to shop around for their health care, causes costs to rise. In the end, consumers pay for these expenses through increased insurance premiums and limitations to coverage. The way to keep costs low is not through a government-run health-insurance plan, through insurance companies, or through the "commitments" that health-care providers have made to President Obama. Consumers are in the best position to perform comparison-shopping and, as a result, rein in the excesses of health-care costs.