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A Free Market for Health Care

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Concerned about rising costs the number of Americans without medical insurance, nearly everyone is these days about a day goes by without a presidential or a magazine calling for something drastic to be done. Each advocate maintains that his plan will bring skyrocketing costs under control, make health care accessible to low-income people, and bring health insurance within the reach of the 34 million Americans who currently do without it.

But the American people are being handed a Hobson’s choice between a government takeover of the medical insurance industry and mandatory provision of insurance by the nation’s employers, with the government as insurer of last resort.

There is a real alternative solution that relies on competition in the open marketplace. That solution recognizes that the undesirable aspects of the current system are not the result of the free market, but rather are the outcome of decades of governmental intervention in the health-care industry. Elimination of that intervention would shift power and responsibility from impersonal bureaucracies to consumers. The resulting free market, characterized by prudent consumers spending their own money, would control costs and let the American people have the kind of medical care they want.

Those who call for greater governmental involvement are fond of comparing how much Americans spend on health care with how much is spent in other countries. For example, in 1989 the average American spent about 40 percent more on health care than his Canadian counterpart: $2,354 versus $1,683. The West Germans, French, Japanese, and Britons spent even less. The 12 percent of gross domestic product that the United States devoted to health care in 1991 ($650 billion) is double the portion so devoted in Great Britain. By the year 2000, total spending is expected to reach $1 trillion or 15 percent of gross domestic product. Costs are increasing at 15 percent a year, much more than the general rate of price increases. The cost of employer-provided medical insurance increased 21.6 percent from 1989 to 1990.

But these comparisons are misleading for many reasons. For example, the demographics of the countries are different. A younger population, such as Canada’s, would be expected to spend less on medical care than an older population, such as that in the United States. Moreover, the United States is the richest country in the world, and more affluent societies tend to spend more on health care than less affluent ones. There are many other reasons why those cost comparisons are deceptive.

Nevertheless, we can say that Americans spend too much on health care in this sense: identifiable government interventions raise costs higher than they would otherwise be. They do that by artificially stimulating demand and artificially constricting supply.

On the demand side, the problem is simply this: The government pays for about half the health care purchased in this country, through the national health insurance for the poor and elderly known as Medicaid and Medicare. In 1990 ft state and federal governments spent $280 billion on health care. The costs of these programs have exploded over the years. Since Medicaid and Medicare patients pay little or nothing for health care, they demand more of it than they would otherwise. They have no need to shop for the best value or to be prudent about elective procedures.

All of this puts tremendous upward pressure on prices, harming everyone who pays for his own care. Until 1983, Medicaid and Medicare reimbursed health-care providers on a cost-plus basis, meaning that neither patients nor providers had incentives to keep costs down. This escalated prices, which, in turn, pushed up premiums for health insurance. The government-paperwork costs alone help raise the price of medical care for everyone. As a result, many people and small businesses are priced out of the insurance market. Mandated coverage by the states for such uninsurable things as hairpieces and in vitro fertilization aggravates that process.

On the supply side, various governmental regulations enacted at the behest of the medical profession have constricted the supply of doctors and other health-care professionals. Medical licensing and the power to accredit medical schools were explicitly motivated by the medical profession’s wish to reduce competition and to increase the remaining practitioners’ incomes. Between 1910 and 1920, when accreditation power was granted, the number of medical schools in the United States dropped from 131 to 85. The cut particularly harmed women and minorities; by 1944 the number of medical schools which predominantly admitted blacks fell from seven to two. Thanks to government, the medical industry is far less competitive than it would be if left free of interference.

Most of the proposed solutions, however, ignore the causes of the problem and would even aggravate the situation. The most popular approach, the one taken by many Democrats, as well as a coalition of Big Business and Big Labor, is known as “play or pay.” Under this plan, the federal government would require all employers to provide health insurance to their workers or to pay a new payroll tax (over 7 percent), the revenue from which would provide insurance. The supporters of “play or pay” also favor regulations on insurance premiums and various methods of cost containment. Notice that this proposal would only make things worse. Government would insure even more people than now, and its control of costs — price controls — would bring all the distortions and bureaucratic rationing we experienced in the 1970s. Moreover, as the price of insurance continued to rise, the system would create incentives for small businesses to pay into the government fund, moving us closer to national health insurance. And when “play or pay” failed to improve the health-care system, the statists would inevitably say, “Private enterprise was given a chance and has failed; now it’s time for the government to take over.”

Some “reforms” go even further in the wrong direction and call for a Canadian-type system, which would make the government the sole health insurer in the land. But the results of the Canadian system are exactly what we would expect of government control. Bureaucratic planning has created shortages, rationing, and long lines for service. For example, Canada has 11 heart surgery facilities, one for every 2.3 million people. In the United States there are 793 facilities, one for every 300,000. The wait for a coronary-bypass operation can last from four months to a year in Canada. Bureaucratic strangulation has also prompted a significant number of doctors to emigrate or take early retirement. The system has failed to even control health-care costs; the growth in spending for Canada and the United States is almost the same. The Republicans offer no fundamental change in the current system, merely some crumbs to low-income people to buy insurance as well as a cap on malpractice awards. Medicaid and Medicare will continue to grow under President Bush’s administration.

It should be obvious that if governments at all levels were not confiscating close to half of the people’s wealth, medical care would be a manageable necessity of life. Without the onerous tax burden under which people now labor, they would be able to save for the medical expenses required during their working and retirement years. True, some people would not be able to provide for their own care — and they would have to rely on private charity. But the medical profession itself has always been generous in helping the indigent.

If the government did not dominate the health-care industry through its humongous “insurance” programs, costs would fall to the reasonable levels we would expect of a free market. That would enable even the lowest-income people to buy medical care and health insurance. (To the extent governmental tax policy distorts the private insurance industry, costs would fall even further.)

On the supply side, the repeal of medical licensing, governmental accreditation of medical schools, and restrictions on hospital construction would increase the amount of care available, lowering prices even more. This would expand individual liberty and introduce real competition into the medical marketplace. Quality assurance would be much better handled in the free market through private certification organizations, such as Underwriters Laboratory and Consumer Reports.

Governmental intervention is always dangerous. But nowhere is it more so than in the health-care industry. The sooner we get the government out, the sooner we can all breathe easier — and perhaps even live longer.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.