The first time "Smaller government is better" I encounter this statement was when it appeared as an exam question on the 1994 Chinese University Entrance Exam on Politics. The answer given by the official Chinese educators is quite sleek and they said that the size is not an appropriate measure to judge the effectiveness of the government. The government should be good at what it should function well.
The fact is that both market failure and government failure both exist in the economy. For health care, private market may fail to provide effective solutions under asymmetric information and the associated monopoly power, especially, if one using the fairness criteria to evaluate the health care system of the society. The problem with the current health care system of the US is that even though the government heavily regulate the health care industry, it has been lobbied against the consumers it supposed to protect. Bill Cusack gives a longer argument supporting the regulation in the market place in general.
A health care system with direct government involvement, may not be a full solution but it may be still useful and I do believe if we set up a good incentive structure for the clerks of the government, the benefit from a health care system with heavy government involvement can provide better service to the society than private market alone.
The solution of the problem is how to make sure that the government work well, which deserve a lot of research and study. The inefficiency of the current government activities should not be the reason to completely neglect the possible roles that can be played by the government. The basic dilemma here is that we can trust neither market or government alone, and the moment we start to trust either is the moment the trusted one starts working against us. The fact that market works or government works is not a reason to loose the leash on them.