(Summary of George Reisman article by Chuck Braman, published in Serial 104-49 for the use of the Committee on Ways and Means by the U.S. Government Printing Office in 1996.)
The Medical Crisis and the Need for Radical Pro-Capitalist Reform
For decades the cost of health care, unlike the cost of other economic goods, has risen relative to prices in general and to people’s incomes. The cost of health care is now so high that radical reform is necessary. The current type of reform being advanced by the Clinton administration, however, is an anachronism. It is, to be exact, the enactment of a full system of socialized medicine, a system based on the mistaken and discredited tenets of Marxism, which will aim to reduce the cost of our partially socialized medical system by means of its full socialization accompanied by price controls and rationing. In contrast, the real reform necessary to reduce the cost of health care would be one based on opposite premises, i.e., one based on the tenets of capitalism, tenets which in this century have reached their fullest development in the political philosophy of Ayn Rand, and in the economic theory of Ludwig von Mises. The radical reform necessary is based on the movement away from government interference and toward individual freedom.
The Right to Medical Care and the Causes of the Medical Crisis
The root cause of the runaway cost of medical care is philosophical. The cause is the current perversion of the concept of rights, a perversion which underlies the laws which have been passed, the consequences of which are responsible for the current crisis.
The correct concept of rights is based on the individual’s right to life, which right includes the right to take the actions necessary for sustaining one’s life. Rather than being a claim to goods to be provided by others, it is an injunction against the whole rest of society to leave one free so that one may produce the values which one’s life requires. Such a right can only be violated by the initiation of physical force so that under such a concept of rights the initiation of physical force is abolished, and cooperation among people is achieved through voluntary trade rather than the forced transfer of wealth from one person to another. On a social and economic level, in a division-of-labor society, this right, the right to life, is exercised by selling one’s goods or labor (what one produces) for money to buy another’s goods and labor (what another produces). Applied to medical care, this means that the right to medical care is the right to all the medical care one can buy from willing providers. Such a right is exactly what is currently violated by medical licensing legislation and all regulations and legislations that artificially raise the cost of medicine, because all represent different forms of the government initiating, or threatening to initiate, physical force against producers and traders who themselves have not initiated physical force, and thus physically restricting their right to produce and trade.
In contrast to the concept of rights described above, which Dr. Reisman refers to as the rational concept of rights, is the concept of rights put forward by the Clinton administration, which Dr. Reisman calls the need-based concept of rights. It is, in simplest essence, based the premise that wealth is something that appears more or less causelessly as opposed to being produced by the effort of individual people who by that fact retain a right to such property and that the fact of any one person possessing a need for such wealth gives him a right to it.
There were three cornerstones in the history of medical care in the United States which have lead to the application of this premise in order to pass laws which produced the runaway medical costs we face today. They were (1) the government imposition of medical licensing laws starting in the nineteenth century, (2) the government imposition of wage and price controls during World War II, and (3) the government imposition of the Medicare and Medicaid programs during the 1960s.
Medical licensing increases the costs of medical care by lowering the supply of medical providers. Historically, it has been supported by doctors because it is a means of increasing their wages by virtue of creating a monopoly. As to the extent that it has actually raised the standards by which medicine is practiced (which is limited, since the qualifications imposed by licensing are largely arbitrary), it is through the means of reducing the number of options available to consumers. This is because instead of the market offering a full range of skilled practitioners offering various services at various prices, it essentially must now offer only a higher range of skilled practitioners offering this same range of services at a higher range of prices to fewer people. As a result, it primarily victimizes the poor, thereby playing into the hands of those who advocate socialized medicine.
The second step towards socialized medicine in the U.S. resulted from a string of events following the government imposition of wage and price controls during World War II. It occurred because the government made a single exception to its prohibition of wage increases during this period by allowing employers to pay for tax-free medical insurance for their employees. Because this was the only possible means of increasing wages (and therefore the only possible means of competing for employees), and because the individual employee’s alternative to this insurance was taxed by the government, the scope of coverage offered by this form of insurance, as opposed to the traditional private insurance offered up to that point, was artificially encouraged to be made comprehensive rather than to being limited to providing only for emergencies. (In current dollars this form of comprehensive insurance costs the equivalent of $5000/year per family, whereas in current dollars the cost of coverage limited to medical emergencies costs about $2000/year per family.) Following World War II, coercive labor unions made such insurance a standard part of their contracts. The effects resulting from such employer-provided comprehensive insurance are (1) a psychological mindset among employees, akin to that which exists in socialist countries, that medical care is a right of employees that can be provided essentially for free, and (2) an economic situation, akin to that which exists under socialism, whereby all costs are borne collectively by a group rather than by individual people.
Most significantly, the collectivization of costs resulting from such a system is the leading cause of the continuous rise in medical costs since W.W.II. This is because if one’s expenses for any commodity are covered by a huge anonymous group rather than by that individual, the individual has no incentive to contain his spending. When all the individuals within such a group are mutually relieved of responsibility, the result is a form of mutual plunder. Every individual within the group ends up spending more than he would have as an individual because he is able to pass along almost all of his costs to the others, while all the other individuals in the group similarly increase their spending because they are able to do the same. Thus, the amount of spending by each individual within the group increases much more so than it would if each individual was directly responsible for his own costs. In addition to this absolute increase in individual spending, it is the combined increased demand on a limited supply that leads to radically rising prices.
This increase in the prices of medical services resulting from the collectivization of costs following W.W.II led to the third major step towards socialized medicine in the U.S., the imposition of the Medicare and Medicaid programs in the 1960s. These programs were instituted to make the increasingly expensive medical care more affordable to the poor and the elderly. However, since such programs represent an even further collectivization of costs than collectivized insurance, drawing their funding as they do from the entire body of taxpayers rather than from a smaller body of insurance holders, they have led to the pricing of medical care beyond the reach of the uninsured middle class. As a result, their implementation has led to the current call for complete socialized medicine.
Ironically, of course, the problems that socialized medicine is supposed to solve are all problems stemming from the previous steps the government has taken towards socializing medicine. Specifically, there have been several consequences following from the concept of a need-based right to medical care and the collectivization of costs to finance it which have acted to raise the price of medical care.
First, of course, is the increase in prices which necessarily follows when one is able to bid on a limited supply of goods and then pass the expense off to an anonymous group. Such bidding on government-supplied goods leads inevitably to government-imposed price controls and rationing as the only possible means of controlling costs, followed thereafter by the government’s further refusal to allow anyone to bid the price up any further even using their own money.
Second is an increased demand for medical care, in the form of increased visits and increased services.
Third is the recent phenomenon of irrational standards for malpractice and radically increased malpractice awards. This follows from the notion that if medical care is a right, then a right to medical care as such means a right to the best medical care available. As a result, providing a patient with anything less than the best, most expensive medical care comes to constitute malpractice, whether or not the doctor is being compensated to provide such care. Fear of malpractice lawsuits has led to the new phenomenon of doctors practicing defensive medicine, i.e. conducting medically unnecessary tests to provide a record for their defense in the event of a lawsuit. Defensive medicine is estimated to account for more than one-third of the total cost of health care in the U.S. today.
Fourth is an intense demand created for prohibitively expensive new technology. Traditionally in medicine, as well as in any other field, new technology does not raise costs; initial buyers, who must pay out of their own pocket, are few, allowing the item to slowly develop a market as experience is gained in producing it, during which time its cost falls while its quality improves. Since costs for medical technology are collectivized, however, new, prohibitively expensive technology, which individuals would not be able to afford if they had to pay out of their own pockets, is demanded universally as a matter of right.
Fifth, prices are collectively bid up on patented drugs that need not fear competition, while at the same time prohibitions against price discrimination prevent lower-priced versions of the same drugs from serving the market of the uninsured. (In addition, of course, FDA regulations greatly increase the development time of drugs and further inflate their prices.)
Sixth, the lack of profit and loss incentives causes wasteful spending on expensive equipment. The government responds to such wastefulness by such means as requiring a certificate of need before it will authorize such expenditures. As a result, expenditures often end up being restricted on necessary as well as unnecessary equipment.
Seventh, government-imposed cost-controls on public patients leads to cost-shifting to private patients, which becomes necessary in order for physicians and hospitals to make up their losses. (Such cost controls include categorizing treatments into diagnostic related groups (DRGs), categories for which the government pays a flat fee, no matter what the actual cost of the treatment, which could be more or less than the fee according to the individual circumstances.)
Eighth, the bureaucratic controls imposed by the government in order to contain the costs increase costs by increasing paperwork and administrative costs.
Finally, government safety, environmental, and labor regulations increase the cost of medical care, probably even more so than in other fields, because of the separation of the buyer from the seller, which buyer is therefore less likely to be aware of and to protest such interference.
Most ironically, and above all, the need-based right to health care and the collectivization of costs required to pay for it eliminates the real, rational right to care in the instances where those who would be able to afford to buy medical care now cannot do so.
The Clinton Plan
The original, rational right to medical care, the right to buy the medical care one needs from willing providers, has become almost impossible to exercise now. Under the Clinton plan, it would be made completely illegal. The Health Security Preliminary Plan Summary imposes criminal penalties for the payment of bribes or gratuities to influence the delivery of health services and coverage. Under the Clinton plan dependence on the government would be made absolute, as everyone would be compelled to join a government-approved insurance plan.
Clinton’s plan envisions a National Health Board that would decide what kind of care would be provided by what methods. Regional alliances would tax away the employee-financed health insurance premiums from medical payroll taxes imposed on small companies to pay HMO-styled insurance companies. (Large corporations of 5000 employees or more would be allowed to constitute themselves as corporate alliances and pay these insurance companies directly.) The managed competition referred to by Clinton, which is essentially a form of government-controlled monopoly, refers to the choice, to be made by the regional alliances, of which insurance companies are to be allowed to compete in which markets. Consumers would then choose among these remaining companies. All these insurance companies would offer uniform benefits and operate under the guidance of the NHB.
As the 37 million new, presently uninsured individuals are brought under socialized medicine, demand for health care would increase correspondingly, and yet at the same time Clinton plans to cut current medical spending by $200 billion or more. The only possible outcome of this situation would be shortages and rationing. More expensive procedures would be performed less, fee-for-service practitioners would be controlled and monitored, and the patient’s choice of doctors would essentially be lost because the demand for their time will so greatly exceed their supply. The physician’s new protection against malpractice lawsuits, irrespective of the outcome on the patient, will be his adherence to Practice Guidelines, bureaucratic rule books provided by the government detailing minimum standards of treatment.
Areas of medical care likely to suffer would include medical technology (which bureaucrats would not be likely to encourage), and new drugs, whose profitability Clinton is already fighting to restrict. In addition, if the practice of other countries that have instituted socialized medicine is any indication, cutbacks for the aged would be likely, because they demand extensive care and have few years left as voters.
The reduction in administration costs promised by Clinton would essentially represent a reduction in service, and would itself be offset by the new administrative costs for the 37 million new individuals who would be joining the system.
Under such a system, the profit motive would be turned against itself because the source of profit under a flat fee system derives from the withholding of care. When combined with the fact that the patient is prohibited from offering his own money to pay for his own care, the result is that the doctor’s self-interest becomes set against the patient’s self-interest. As under Communism, security is lost because the right to buy what one needs is lost. In place of the individual’s calculations of self-interest are the government’s considerations of such things as the level of its spending on medical care in relation to its gross national product.
The Free Market Solution
The free market solution to the crisis of rising medical costs is the restoration of the rational right to medical care: the complete removal of government interference between the buyers and sellers of medical care and the complete removal of all government interference which makes medical care more expensive than it otherwise would be.
Under the free market, the cost of medical care would be determined by the prevailing supply of talent, the state of capital accumulation, the state of technology, the profit motive and the freedom to compete for patients, and the ability to practice price discrimination.
The elimination of licensing would result in the greatest possible supply of talent, while at the same time broadening the range of services offered. The lower end of the market could be served to a large degree by nurses, pharmacists or paramedics providing the particular services in which they are qualified but currently prohibited from performing. To the extent certification is desired, it would be provided by professional degrees, and by certificates which could be provided by private organizations.
In a free market, medical insurance limited to providing for catastrophic illnesses would out-compete collectivized insurance because it would be so much less expensive. Such limited insurance would include an annual deductible in excess of all routine medical expenses, thereby leaving the individual incentives to control cost. Always, the operative standard in a private system would be the benefits to the individual patient’s life, as judged by the patient himself by considering potential medical treatments in relation to his other needs.
Toward a Free Market in Medical Care
Of course, the simplest solution to establish a free market in medicine would be to abolish all government intervention in medicine in one stroke. Since such a solution is unlikely to be enacted, however, a gradual solution is the best alternative, provided that it uses as its standard the eventual goal of the complete abolition of government intervention from medicine.
The focus of such a solution would be on the plight of the uninsured, and would approach cost reduction from two mutually reinforcing sides: the elimination of the artificial increase in demand for medical care, achieved by income tax reform and Medicare reform, and the elimination of the artificial increase in costs of medical care, achieved by the liberalization of licensing laws and the reduction of hospital costs.
As an income tax reform, employees should be given a choice between employer-financed medical insurance (which is currently not taxed), and an equivalent tax-free increase to their annual income, which, matching the current cost of employer-financed medical insurance, would average around $5000 per family. Such a choice would create a strong incentive for individuals to purchase less expensive insurance with a high deductible, which would be limited to covering catastrophic illnesses, and which at current market prices would cost about $2000 annually per family. The difference in the costs of these two kinds of insurance could be used to pay the deductible in the event such a need arises.
As a second reform, wealthy Medicare patients could be made to pay a substantial deductible before their coverage would begin and a co-payment of costs beyond some maximum limit. Such a measure would not be unreasonable, as the amount of money those eligible for Medicare have paid into the program since it was inaugurated is substantially less than is typically drawn out.
Alternately, those over 65 should be given a choice of signing away their rights to Medicare and social security in exchange for exemption from all taxes (excluding sales taxes) such as personal, interest and dividend, and estate and gift taxes. Besides increasing personal freedom and personal revenues, such a measure would result in increases in government revenues, since government spending would be reduced, while people who otherwise would have been encouraged to retire would be encouraged to work and save (as well as pay sales taxes), which saving would act to increase capital accumulation and ultimately production.
As a measure to eliminate artificial increases in costs, licensing laws could be liberalized by the method of allowing those holding higher medical licenses to extend the benefit of their licenses to those holding lesser medical licenses, whom they could also train if they deemed such training necessary. As a secondary benefit, such a measure would also act to increase the incomes of all those involved by virtue of opening up a market previously not served.
As a second measure to eliminate artificial increases in costs, hospitals and the uninsured should be exempted from all government regulations and interference from such agencies as the DHHS, SSA, NLRB, EPA, OSHA, etc., and by granting them the right to agree to mutually binding standards of malpractice. Further savings could be realized by allowing physicians to open new hospitals serving such patients, by allowing existing hospitals to practice price discrimination toward such patients, and finally, by creating a Deregulation Agency, whose purpose and powers would be limited to repealing existing regulations.
The above represent strategies that should be used to oppose the Clinton plan. If, however, the Clinton plan is enacted into law, a different, two-tiered strategy should be applied. First, there should be a call for legislation introducing the unrestricted right to practice medicine outside of the government’s control for those who value that right. Then, after this is achieved, there should begin a fight to end all remaining socialized medicine on behalf of those who do not wish to be forced involuntarily to pay for the health care of others.
Such a fight on behalf of freedom in health care is what is needed immediately as part of the larger fight on behalf of freedom, individualism, and capitalism.