Sunday, November 23, 2008

Socialism and Medicine

If the financial popularity of Michael Moore’s latest “documentary,” called Sicko, is an indication of popular sentiment in this country, then the United States seems to be ready for what once was called socialized medicine, but today is better known as “single-payer medicine.” All of the candidates running for the Democratic nomination for president of the United States this year promised programs similar to what exists in countries such as Canada, France, and Great Britain. The Republicans are promising “socialism lite.” Both parties promise that the government will be paying much, much more.

Any discussion of medical care and its availability can stir emotions like nothing else. Any time I write on this subject in a public venue, I am assured of receiving strong hate mail from people who are convinced that I want only the rich to receive health care. Other people try to defend what exists in the United States today, which is not easily defended, at least not from a free-market point of view.

As I see it, the subject of medical care is extremely complex, not because of the nature of health care, but rather because of the vast number of government regulations and policies that already govern what currently exists. Government intervention into nearly every aspect of our lives is so common that people often lose sight of how things would operate absent the intervention. Furthermore, people seem to be convinced that government really is the answer when it comes to medical care.

Since the country seems to be barreling headlong to full government-run medical care, I find it necessary both to explain why such a system is and will continue to be disastrous, resulting in costly, substandard care, and to explain the virtues of something that no longer exists in this country: free-market health care. It does no good to criticize the former but ignore the latter, especially since most people are led to believe that the current system of intervention plus “private” employer-based health insurance somehow is free-market medicine. Nothing could be further from the truth, but since there are few people speaking up for free markets these days, we should not be surprised when people confuse a thoroughly interventionist market with free exchange.

In this article, I first will explain what exists in this country today and why the “horror stories” that Moore showcased in Sicko have occurred. I also will point out how we have come to the current situation and why government intervention is the reason. Second, I will examine socialist medical care, both the “single-payer” socialism (such as that which exists in Canada) and the more “traditional” socialist model that exists in Great Britain, where the government owns the medical facilities and employs medical personnel.

Third, and last, I will explain how a free-market health-care system would operate and, more important, why it would provide the best care for people. Although the present political climate does not bode well for free-market anything, let alone something as government-controlled as medical care, nonetheless it is important that we understand why free markets are the best solution.

The world of Sicko

Earlier this week, I visited a local chiropractor to have treatment on my ailing back. My insurer covers chiropractic care, so I did not pay the doctor directly for services. In fact, the vast amount of medical care in the United States is paid by third parties, be they insurance companies or governments, and that is the root of the problematic situation that exists today in medical care.

Keep in mind that the “solution” that always is touted is the “third-party” system, but that the third party must be the central government and no one else. However, that arrangement simply transfers the problems that already exist; it does nothing to deal with the central problems in health care.

Third-party payers were not always dominant in medical care. Until the post–World War II era, medical services were pay-as-you-go affairs. Those who could not afford the best care depended on charity hospitals or doctors who were willing to stretch out the payment structure. In other words, people purchased medical care the way that they purchased most other goods: directly and in close relationships with those people who provided the services.

The first real break in that system came during World War II, when the government had strict wage-price controls. Employers making war goods (the only real game in town) were faced with chronic labor shortages, yet could not offer higher pay in order to attract workers. Thus, they turned to providing tax-free “benefits” such as health insurance.

I have talked to people who were involved in those early programs. For the most part, employers offered insurance plans to employees in order to provide protection from catastrophic illnesses or accidents. The idea at that time that an insurance company would pay for regular doctor visits and the like was seemingly far-fetched.

However, the social effects of the Great Depression and World War II would have an enormous impact on medical care in this country and elsewhere. First, following the war, Great Britain embarked upon an ambitious program of socialism, not only “nationalizing” the railroads and many businesses, but also creating the British National Health Service in which all medical care, from doctor visits to other medical procedures, would be provided free of charge to anyone living in Great Britain. Other Western European nations quickly followed, urged on by social reformers who said that socialization of medical care would serve as a powerful antidote to the lure of communism on the eastern side of the Iron Curtain.

Intellectuals in this country latched upon the medical socialism across the Atlantic Ocean and soon became a background political force that kept this issue in the public eye. At the same time, American labor unions (and especially the United Auto Workers) were pushing the corporate welfare state as an American example, and health care was front and center.

Insurance plans that once were employer-paid and meant to ward off catastrophic illness expenses became a means by which employees had all of their medical expenses paid. Granted, only a minority of American workers had this privilege, but health insurance as a means of increasing de facto income without increasing tax liability became increasingly popular.

(As employers turned to benefit packages such as health insurance as a means for giving raises without placing employees into higher income-tax brackets, the Internal Revenue Service began to look more closely at health insurance as a source of new revenues. However, every time the IRS has tried to move in this direction, a public outcry has beaten back the agency. Even today, medical benefits are not taxable.)

Furthermore, the welfare state “ideal” was growing quickly, and in 1965 Congress passed a number of welfare measures as part of the Great Society package that Lyndon Johnson was demanding. Among the measures that passed was the Medicare Act, which made the government the “single payer” for health-care services for persons 65 and older.

At the time, I recall vividly that many doctors complained of “socialized medicine,” and predicted Medicare would doom their profession. However, in at least the short term, Medicare has been an income boon to physicians, who quickly found out that the government would pay almost anything doctors charged for their services. Thus, instead of the dreaded “socialized medicine,” doctors were given the Great Sugar Daddy, and the race was on.

In 1965, the U.S. economy was unquestionably the most productive and vibrant in the world. Doctors and hospital administrators were enjoying high revenues, and at that time health insurers generally did not worry about such things as “cost containment.” Life in the medical field was a big party, and people were paying the bills without asking, especially those with deep pockets.

It is no surprise, then, that all of this new-found largess would attract a number of new entrants into the medical field. Doctors discovered their incomes rising, but a number of other people also discovered that the lure of profits into the field was a big draw for drug companies and creators of medical devices. The once semi-sleepy world of county hospitals and quaint doctors who made home visits with their medical bags had leaped into the modern age.

There are two aspects of new potential profits that one must recognize. First, as more entrants come into a particular field of business, they compete for the existing resources, which drives up the prices of those resources, or what we in economics call factors of production. This is a fancy way of saying that in the short term new entrants will drive up the costs.

Second, entrepreneurs do not simply do business the way everyone else does; instead, they find new resources or take existing resources and change them to create new goods or to enhance existing services. Over time, in a free-market setting, entrepreneurs lower real costs to customers, especially when one examines the entire picture.

Consider the MRI (magnetic resonance imaging) device by which doctors are able to “take pictures” inside the human body without invading it. This device is much more versatile than an X-ray machine, which is far more limited in what it can detect.

Thanks to the MRI, doctors can engage quickly and painlessly in exploratory surgery to find damaged tissues without having to engage in “invasive” procedures (i.e., cutting someone open). While the MRI is expensive both to purchase and to maintain, nonetheless it is a cost-saving device because it shortens the time for critical examinations and requires fewer people to perform more medical assessments.

The genius of this machine is not simply in what it does, but rather that someone had the foresight to recognize its medical potential. That is the heart of entrepreneurship, and it is as active in the health-care field as it is elsewhere.

When people make economic decisions, they weigh costs and benefits, something that is hardly profound. However, the ability to accurately examine costs and benefits depends on having accurate information, and the presence of third-party payers changes that situation considerably.

For a simple example, let us assume that I am purchasing a house. In one scenario, I must make the payments myself, with no help from anyone else. In the other scenario, someone else is making all of the payments for me, and no hard-and-fast cost constraints are given. It is obvious that I would be much more careful in the first scenario than in the second. In both situations, I would be purchasing a house, but the economic calculus in the two cases would differ greatly.

If I were building the house, it is obvious that in the different scenarios I would approach all of the various factors that go into the house differently. If I had unlimited funds, I could purchase all of the finest materials, hire an architect, and generally build a luxury villa. However, if I am paying for it, I will go with what I can afford, given my other obligations in life.

It is clear that economic calculation is much clearer and more exact if one is not depending on third parties for payment, so it is not surprising that when insurance companies and government officials realized they did not have bottomless pits of cash to pay to medical professionals, they began to limit what they were willing to pay. Despite the claims of economist Paul Krugman, who writes a column for the New York Times, and others who advocate socialist medical care, all third-party payers, be they insurance firms or governments, face cost constraints and have sought to limit their own exposure.

At the same time, the system has worked to make things more costly on the supply side. For example, state legislatures are fond of mandating new programs requiring all private insurers to provide certain benefits, such as yearly mammograms or mental-health coverage. Invariably, as health care becomes increasingly politicized, politicians seek to force insurers to carry the programs that are politically popular, even if they drive up costs and make insurance less affordable for private customers.

Third-party dependency has another drawback, and that is that the entities paying the bills also try to narrow the choices to familiar practitioners and treatments. Ordinarily, the presence of more choices also means more competition and lower costs, but in the heavily regulated field of medical care, things often are turned upside down.

To give a personal example, in the summer of 2004 doctors found three 90 percent blockages in my arteries. In a normal situation of choice, I could have gone with stents (what my doctor wanted to do) or tried alternative remedies, such as chelation therapy or taking vitamins. However, my insurer would pay for only one remedy, and that was the placement of stents. Thus, my insurer ultimately was billed for $31,000 (stents placed in July and December 2004). I paid nothing. Had I chosen a different treatment, it would have meant thousands of extra dollars from my pocket. Free was better, even if it might not have been better, medically speaking.

Was that the most cost-effective treatment? Who knows? Was it the correct treatment? Again, who knows? Between the political pull of the American Medical Association and the various state and federal regulations that govern nearly everything that doctors, nurses, and hospitals do, it is difficult to know which treatments work and which do not work. (The doctors’ lobby historically has referred to any kind of alternative medicine, be it homeopathy, chiropractic, or the like, as “quackery,” and insurers do not like to pay for “quacks.”)

Likewise, I, like other patients, do not find incentives for making cost-effective decisions. In fact, it is safe to say that in medical care, I and other direct health-care consumers do not make many choices at all. I pay a fixed amount to the insurer and, while there are some co-pays for doctor visits, there is no incentive for me to spend less than what I have paid in premiums. The incentives in such a situation obviously are skewed, creating a situation that is ripe for abuse. Moreover, when economic calculation no longer makes sense, we then see situations in which someone has to choose between which fingers to have sewn back on his hand, as Moore points out in his documentary Sicko.

This is the world of insurer-led medical care that Moore calls “free-market.” It clearly is not. American medical care is heavily regulated on all fronts, and is dominated by third-party payers who are under pressure to keep from giving away the store. (That includes government payers and providers of medical care, which also face real cost constraints and often are stingier than private insurers.)

Given the frustration that people have with the present third-party system, some are declaring that it is the fault of private enterprise. Give government the full reins of medical care, and we will see an improvement both in quality of care and overall costs, a message that Krugman has trumpeted from his position at the New York Times and Princeton University, where he serves on the economics faculty.

If we wish to gain a sense of what to expect with government-sponsored medicine, we should look to Canada to see why the system there has its detractors – and defenders. However, before looking at our neighbor to the north, perhaps we should look at the United States, especially since government payments account for nearly half of all medical expenditures in this country and governments at state and federal levels strongly regulate all facets of medical care.

In other words, while we can draw comparisons with Canada, we are not comparing a free-market system of care to “socialized medicine.” Instead, we are comparing two systems dominated by third-party payments, the Canadian being 100 percent tax dollars, and the American system a combination of taxes and private dollars. The heavy regulation of private insurers, including the many mandates that are placed on insurance companies by all levels of government, guarantees that the medical system in existence here will be semi-socialistic – and costly.

Much more here

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