Of all the things we might do to improve our healthcare system, the one reform that is more important than any other is almost never discussed: If we want the system to work well, we must make it profitable to take care of sick people.

Profitable to whom? Profitable to everyone whose services are needed. To doctors. To hospitals. And most important of all, to the “third party payers”: insurance companies, employers and government agencies – the entities that initially control all the money.

The idea is not new. Almost 250 years ago, Adam Smith observed that the reason the free market works so well is that each of us has a financial self-interest in meeting other people’s needs. The more needs we meet, the more income we earn; the wealthier we become. It’s as simple as that.

But in healthcare, we have suppressed the market so much that there is no entity left that has a financial self-interest in caring for the sickest patients with the most costly illnesses. It gets worse. Not only do we discourage organizations from profiting by solving our most serious health care problems, all too often we insist that they incur losses. That is to say, we make it in the financial self-interest of organizations to run away from problems, rather than solve them.

Employers have learned that if their health plan is attractive to the sick, they will attract the sick. The remedy: the typical employer plan today covers primary care with very little out-of-pocket cost but charges the employee thousands of dollars for a hospital stay. The implicit message: “If you plan to go into a hospital, you should probably look for work somewhere else.”

Insurers in the Obamacare exchanges have learned that the way to avoid sick people is to make cancer patients and AIDS patients pay thousands of dollars for specialty drugs out of pocket and to block access to the best doctors and the best hospitals for any kind of serious illness.

Government programs are not immune. Medicare is far more attractive to the healthy than to the sick.

Politicians, by the way, have two kinds of payoff from the decisions they make: money and votes. Money not spent on health care is money they can use to reward other constituencies. Within a normal health insurance pool, about 5% of the beneficiaries tend to account for about half of all spending in any given year. In a government-run health program, that means that half the budget will benefit 5% of the voters.

The political incentives are to change that. In every country where health care dollars are allocated through the political system, the temptation is to take from the small number who are really sick and spend it instead on the very large number who are relatively healthy.

That’s what happens in Medicare. It’s also what happens in the Canadian and British healthcare systems and in other countries with national healthcare programs.

So, what would the healthcare system look like if we based it on the insights of Adam Smith?

Cancer Treatment Centers of America, to take one example, would enter the individual market. It would advertise and actively seek enrollees who have cancer. It would do that because CTCA would receive a premium for each patient that covers the expected cost of their care.

CTCA wouldn’t be alone. Other centers of cancer care excellence would also enter the market and actively seek patients. Costs would come down, quality would improve and access to care would get better – not because of government mandates but because of free-market competition.

Could there be a real market for patients with cancer, diabetes, heart disease and other chronic conditions? One already exists.

More than one-third of seniors on Medicare are participating in the Medicare Advantage program, which gives them access to private coverage – similar to the health plans employers offer.  Seniors pay community-rated premiums, and no one can be penalized because of a health condition – just like Obamacare. But unlike Obamacare, special-needs plans that attract high-cost enrollees receive risk-adjusted additions to the standard premium to cover the extra costs of their care.

As a result, health plans in this program actively seek out high-cost patients, instead of running away from them.

Risk adjustment in Medicare Advantage is done by Medicare itself. That means, it is done by the federal government. And like all government programs, it is far from perfect.

However, economist John Cochrane has shown how we can have market-based risk adjustment without government involvement and I have expanded on this idea in a Goodman Institute Brief Analysis. These ideas were actually incorporated in the Sessions/Cassidy health reform bill.

Some readers may wonder how the reforms proposed here fit in with the very common notion that there is too much greed in health care.

The greed that exists today is the wrong kind of greed. Today’s greed is directed at maximizing one’s take from third-party reimbursement formulas, avoiding sick people, shifting costs to sick people and denying them care.

Adam Smith would have understood all this. In almost every case, perverse incentives are created by unwise government regulations.