Wednesday, April 11, 2007

Why Health Care Costs Are High and the Solution

I can not imagine an area more vital to our everyday lives than the field of medicine.

Everyday we hear about the so-called health care "crisis". It appears that medical costs are high and rising, insurance premiums are high and rising out of control, drug costs are prohibitive, mal-practice insurance premium for doctors are so high that many don't even carry it anymore. Going to the doctor today usually involves long waits for appointments, frustrated waiting rooms, insurance bureacracy, revolving doctors who do not know you or your history and spend little time attending to your problem. The solution we are told is ever more government intrusion and regulation from medicare and medicaid to a prescription drug bill for seniors to insurance regulations mandating coverage to calls for "universal" health care and on and on.

Yet, does anyone ask, why there is a crisis in the first place? Presumably, if we could understand what caused this situation then perhaps we could solve it.

So first, let's ask is there a pizza "crisis"? Is there a shoe "crisis"? Is there a car repair"crisis"? Why is it that when a market is left relatively free of government interference there seems to be almost an infinite variety of products and services offered at every price level from dirt cheap to ridiculously expensive and there seems to be plenty for everybody (except for the people that want stuff for free and even they sometimes get it)? When was the last time you called Pizza Hut for a delivery and were told that it will be delivered in 4 weeks? When was the last time you waited in line to get your car fixed and the mechanic refused to spend more than a minute working on your car?

Economically and morally, what is different in principle between someone who works on your body and someone who works on your car?

First and foremost, we must address the moral question. The economics of the health care crisis can be analyzed rather easily. Essentially, government intervention in virtually every aspect of the market causes prices to be higher than they would otherwise be on a free market (which always must be the case if reality is still there), and I will discuss this later in more detail. The more fundamental question is should the government intervene in the health care market in the first place? What justifies government intrusion into the affairs of free people exchanging value for value on an open market? Do doctors have a duty to offer their services for less than market value or for nothing? Does anyone have a "right" to medical care and if so shouldn't we ask: provided by whom (to paraphrase Ayn Rand)? Should the government take one person's money by force and give it to someone else who has not earned it and if so, why?

The answers to these questions are the essence of the problem facing the medical profession today and the answers to them are literally a matter of life and death.

For some background I quote Leonard Peikoff from his essay "Medicine: The Death of a Profession" which appears in Voice of Reason: Essays in Objectivist Thought: (

"One day, when you are out of town on a business trip you wake up with a cough, muscle aches, chills, and a high fever. You do not know what it is, you start to panic, but you do know one action to take: you call a doctor. He conducts a physical exam, takes a history, administers lab tests, narrows down the possibilities: within hours he reaches a diagnosis of pneumonia and prescribes a course of treatment, including antibiotics. Soon you begin to respond, you relax the crisis is over...

We take all this completely for granted, as though modern drugs, modern hospitals, and modern doctors were facts of nature which always had been there and which will always be there. Many people today take for granted not only the simpler kinds of medical intervention , but even the wonder cures and wonder treatments that the medical profession has painstakingly devised - like the latest radiation therapy for breast cancer, or the intricate delicacy of modern brain surgery, or such a breathtaking achievement as the artifical heart implants...Most of us expect that the doctors will go on accomplishing such feats routinely, steadily removing pain thus enhancing the quality of our life while adding ever more years to its quantity. "

Referring to the grueling years of medical school and the life and death pressure that doctors work under every day he writes:

"What I personally admire most about doctors is the fact that they live this kind of life not out of any desire for altruistic self-sacrifice, but selfishly-which is the only thing that enables them to survive it. They love the field-most of them; they find the work a fascinating challenge in applied science. They are proud men, most of them, with an earned pride in their ability to observe, evaluate, act, cure. And, to their credit, they expect to be rewarded materially for their skill; they want to make a good living, which is the least men can offer them in payment for their achievements. They make their living , as a rule, by standing on their own, not as cogs in some faceless government subsidized enterprise, but as entrepreneurs in private practice. The doctors are among the last of the capitalist breed left in this country. They are among the last of the individualists that once populated this great nation."

The principle here is that doctors like anyone have a right to their life, liberty and pursuit of happiness. They are not slaves. Doctors offer a service and have the right to ask payment for it. They have the right to treat anyone they desire on whatever terms they can negotiate. If they choose to take charity cases that is their business. If they charge exorbitantly high prices then you are free not to pay them and to not use their service. Why should they be treated differently than you?

Could you imagine showing up at a repair garage with a broken down wreck and demanding that someone fix your car for free? Or, could you imagine demanding (not asking) that your neighbor pay to fix your car? Yet in essence, this is what proponents of government medicine are seeking. Ultimately, someone must pay the doctor. If you don't pay then someone has to pay, right? Who should pay your bill, your neighbor, a guy in another state, who? Amidst all the complicated machinations of the government bureacracy and all the endless debates about the minutia of government programs, insurance regulations and the like - really what it comes down to is the desire for a free lunch or at least a redistribution of lunches. The implication is that somehow, anyone must pay MY medical bill as long as it is not ME.

What else does "universal" health coverage mean? It means taking money from some people by force and giving it to others who have not earned it to pay their doctor bill. By what right does one demand that others pay their bill? If someone chooses to pay another persons' bill voluntarily that is fine and dandy, but what right does one have to use the threat of force (uh, that's taxes in cased you missed it) against another to make them pay their bill?

If you think in principle, you could stop here because you know the solution. Doctors and patients should be left alone to trade freely just as diners trade money to restaurants for food and movie watchers pay actors to pretend they're other people. And guess what, as economic science tells us, this will result in the most people getting the most care for the least amount of money just as is always the case in a free market in every case for every product for all humans everywhere for all time!!!! Isn't reality great?

Under capitalism, will every person get the greatest treatment everywhere all the time? No, of course not. Each person will simply get what they pay for (or are given voluntarily) and on average the most people will get the most stuff for the cheapest price. And some people will get defrauded by evil doctors and some people will take drugs that are ineffective, and some poor people will get crappy care, and on and on. The justification for capitalism is not that the most will benefit. Although it certainly is true that under capitalism the most will benefit, the justification for capitalism is that it is moral. Why? Because under capitalism individuals are left free to think, act independently, and own and trade property as our nature requires if we choose to live and want to be happy. Anything less is slavery by definition and a contradiction of man's fundamental nature as an independent, reasoning being and thus impractical. Note that our old nemesis altruism (self-sacrifice and self-denial) is the opposite of this egoist ethics and is the root of all justifications for government intervention in the economy and necessarily leads to disaster in practice.

So as always, a seemingly complex "economic" problem is reduced to ethics; particularly egoism: rational self-interest, individualism, freedom, happiness or altruism: self-sacrifice, collectivism, slavery, and misery.

So wait you say. Don't we have capitalism now and isn't the current "crisis" an example of a free market failure? Wasn't all this government intervention a response to this market failure? Weren't people dying and bleeding in the streets before the benevolent state began insuring the elderly and regulating the evil drug companies? Afterall you say, it is one thing to let the market work for shoes and bananas but surely with something as important as health care the government must intervene...

No, No, No, No, No,....

The present crisis is a direct function of government intervention in the health care market. As all the detail would require a treatise I will sketch the main areas hilighting the big picture problems and leave references for further research. Anyway, I believe the primary problem is moral not economic. Once the moral argument for egoism is accepted, freedom and capitalism follow logically. As to the last question above, I submit that the more important an area is to our lives the more important it is to keep the government out. I'd be fine with the government regulating Chia Pets and etch-and-sketches if they would get out of health care.

1) Let's go back to the car repair case. Imagine after your demand for free car repair is rejected by the evil, greedy car mechanic you go to the government and plead that only rich people can afford car repair and the lower class needs to have the best in auto repair. It's simply not "fair" that some can go the dealer for the latest in auto mechanic wizardry while others have to go to the neighborhood Shell station. So the government passes a bill called "car-aid" subsidizing the poor and offering a virtual blank check on service. So, now the car-aid people can bring their car in for even the slightest nick or engine noise all on Uncle Sam. And guess what, the car dealers love it because now they have more business and they start to build bigger garages with fancier machines and guess what - prices start rising because of all the new demand. This creates a "crisis" in car repair costs forcing the government to pay ever higher car-aid premiums creating a self-perpetuating spiral of costs. The government then steps in and begins regulating car mechanics with hundreds of pages of regulations and creating schedules of "approved" repairs... Ladies and gentleman, welcome medicare and medicaid.

Medicare and Medicaid started in the early 1960's with the idea of just covering the "elderly" and quickly costs quadrupled in the first 10 years to the behemoth it has become today consuming almost 25% of the entire federal budget.

2) Why do employers offer benefits instead of cash wages? Cash wages are taxed but benefits from an employer are not. In other words, if an employer pays you $30 in cash wages then he must pay payroll taxes on $30 and so do you. If you now go to buy benefits you must pay for them in after tax dollars. If he pays you $20 in cash wages and $10 in "benefits" both will only pay payroll taxes on $20. Imagine an extreme case where an employer pays only "benefits" then he would pay no payroll taxes. This tax treatment encourages and incentivises employers and their employees to find ways to compensate employees with non-cash benefits such as insurance. Such artifical demand bids up insurance premiums and creates the blank check affect for holders of policies. As employers compete for labor, they must offer "comprehensive" policies to prospective employees. (see This would not be enough to really kill the market except for number 3.

3) As group insurance plans became more popular, the government has intervened to mandate coverage in stupid ways. For example, in Florida, group insurance plans must provide maternity coverage to all females regardless of age or fertility. Also, there is no restriction on coverage based on when one enters the plan so if someone enters 1 month before birth they must be fully coverered. In general, the more the state mandates, the higher premiums go as insurance companies simply do an actuarial calculation. If the state mandates people get $10 every time they fart, then guess what - the insurance company does the calculation and adjusts premiums accordingly.

4) This is a vicious cycle. As more employers compete to offer more comprehensive plans and government mandates on insurance companies force premiums higher, it becomes almost impossible for an individual not employed by a company offering a group policy to afford the premiums. Many employees stick with certain companies as they can not afford insurance on their own which encourages companies to offer good benefits - rather than just pay cash and let individuals get their own policies.

5) As government mandates force premiums higher, insurance companies still compete to control premiums by controlling costs through cutting doctor reimbursement rates and controlling procedures. These measures result in lower margins for doctor offices who contract with insurance companies as they get less money per patient visit. This encourages doctors to spend less time with each patient as they must now increase patient volume to make up for lost money per visit. So, artifical demand created by blank check insurance policies coupled with decreasing margins per visit results in --- shortages, waiting lines, and frustration of patients and doctors.

6) On top of this mess, our irrational legal system and a lack of caps on jury awards for malpractice leads to skyrocketing mal-practice premiums which doctors pass on to patients in the form of higher prices. In the US, there is no disincentive such as a "loser pays" rule to disincentivise lawyers from bringing mal-practice claims for even the slightest error. Doctors and hospitals are constantly being sued and the legal system is in desperate need of reform.

7) What causes drug prices to be higher than otherwise? Among other things, the FDA which is the government bureacracy charged with regulating and approving medications performs a lengthy, heavily politicized and bureacratic review process. Why is this important? Drug companies have a limited amount of time under which their patents are protected. For every one drug that works, drug companies spend hundreds of millions of dollars on thousands that don't. That means they must recover their costs and profits on the ones that do work. A lengthy regulatory process cuts into the time during which a company has patent protection and compresses the time during which they can charge a premium for their drug before the patent ends resulting in higher prices during that recovery time. The FDA should be abolished completely and independent, private peer review organizations should takes its place to render seal of approval type industry standards. This would result in faster approvals and allow patients who choose more experimental drugs to have access to them immediately.

(Many doctors are now simply refusing to contract with insurance companies and going to private or VIP practices where people pay the doctor for their service directly (weird idea, huh?) and I applaud their efforts. I have participated in one directly and I can personally say that it is worth every penny. I actually paid less to the doctor in a year than I do for servicing my car and I could call them at any time, get seen with no notice, no waiting lines, etc. Hmmm.. I guess the free market does work and it is so simple. Pay the doctor and he will see you, and the freedom from bureacratic hassles and overwork makes for a healthy benevolent doctor who is eager to focus on the work they love and practice it in the way it was meant to be practiced. )

In summary, what we need is less government and more freedom. Government medicine will have the efficieny of the post office and the bedside manner of the IRS. To those that call for "universal" health coverage believing that they will obtain something for free remember that nature and reality will insure that you get what you pay for.

See the link for the pamphlet "The Real Right to Medical Care Versus Socialized Medicine" by Dr. George Reisman
(In depth analyis of the economics and economic history of the medical "crisis" in America caused by the government starting with wage and price controls implemented in WWII and ending with solution of free market medicine.)

Americans For Free Choice in Medicine

op-ed and links to other articles on health care from free market perspective

Cato Institute page with links to work on free market health care

Ayn Rand Institute op-eds on health care related topics

Link to Professor Reisman's blog and free link to entirety of his magnum opus Capitalism: A Treatise on Economics

Direct link to Professor Reisman's blog with link to his self-education program in economics

Voice of Reason: Essays in Objectivist Thought containing Ayn Rand's essay "How Not To Fight Socialized Medicine" and Dr. Peikoff's "Medicine: The Death of a Profession"

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