President Barack Obama is right when he says that the U.S. health-care system needs reform. Although this country provides the finest care in the world, our health-care system has serious problems. It costs too much. Too many people lack health insurance. And quality can be uneven.

The president and his supporters in Congress would have you believe that the only choice is between their plan — which amounts to a government takeover of the health care system — and the broken status quo. That is a falsehood.

But supporters of the free market, frankly, have been remiss in positing viable alternatives. So what exactly would a free-market approach to reform look like? Quite simply, it relies on those time-tested building blocks of marketplace efficiency: competition and choice.

There are two key components to any free-market health-care reform. First, we need to move away from a system dominated by employer-provided health insurance and instead make health insurance personal and portable, controlled by the individual rather than government or an employer.

Employment-based insurance hides much of the true cost of health care to consumers, thereby encouraging overconsumption. It also limits consumer choice because employers get the final say in what type of insurance a worker will receive. It means that people who don't receive insurance through work are put at a significant and costly disadvantage. And, of course, it means that if you lose your job, you are likely to end up uninsured.

Changing from employer-provided to individually purchased insurance requires changing the tax treatment of health insurance. The current system excludes the value of employer-provided insurance from a worker's taxable income. However, a worker purchasing health insurance on his own must do so with after-tax dollars. This provides a significant financial reward for those who have employer-provided insurance. That should be reversed.

For tax purposes, employer-provided insurance should be treated as taxable income. To offset the increased tax, workers should receive a standard deduction (or in some plans, a tax credit) for the purchase of health insurance, regardless of whether they receive it through their job or purchase it on their own.

The other part of effective health-care reform involves increasing competition among insurers and health providers. Current regulations establish monopolies and cartels in both industries. Today, for example, people can't purchase health insurance across state lines. And because different states have very different regulations and mandates, costs can vary widely depending on where you live.