Deregulate Health Care, Bring Back
by Mark J. Perry
"Legal plunder can be committed in an infinite number of ways; hence, there
are an infinite number of plans for organizing it: tariffs, protection, subsidies,
incentives, the progressive income tax, free education, the right to employment,
the right to profit, the right to wages, the right to relief, ... etc.
And it is the aggregate of all these plans, in respect to what they have
in common, legal plunder, that goes under the name of socialism."
Frederic Bastiat, Selected Essays on Political Economy, (1845).
In our rush towards some form of socialized medicine, we should stop and
consider Bastiat's comments and look at six very serious questions before
we turn over 14% of GDP to the federal government. We should also consider
market alternatives to socialized medicine.
1. When the rest of the world is moving toward capitalism - free markets,
privatization, and deregulation - why are we embracing socialism in the form
of national health care? Why would our government be any more successful
at running a socialist enterprise than experienced socialist countries like
Russia and Cuba? Communist countries have spent years trying to make
socialism work and have been unsuccessful - why would socialism, in the form
of national health care, suddenly work here?
2. Do we seriously think that government-run health care will actually result
in lower medical costs and/or higher quality medical service? Is there
a single federal government program that is currently operating so efficiently
that it provides a model for allowing the federal government to administer
health care? If government programs like the Post Office, Department
of Motor Vehicles, public schools or public housing are any indication of
government "efficiency", we can expect higher costs and declining service
from socialized medicine, not lower costs and improved quality.
3. Given the dismal track record of insurance programs run by the federal
government in banking, do we really think that health insurance administered
by the federal government will be any different? FSLIC (Federal Savings
and Loan Insurance Corporation) failed and the FDIC (Federal Deposit Insurance
Corporation) is actuarially insolvent, largely because deposit insurance
administered by the federal government is based on 1) universal coverage
for all banks and 2) flat-fee insurance premiums not adjusted for risk.
Under any insurance program with fixed premiums, high risk parties pay artificially
low premiums subsidized by low risk parties who pay artificially high premiums.
Because high risk parties do not pay the full cost of insuring against losses,
they are encouraged to engage in risky behavior - these perverse incentives
are what economists refer to as the problem of "moral hazard".
If deposit insurance were priced correctly, banks with risky portfolios would
be penalized with high premiums and would be discouraged from accepting additional
high risk loans. However, in the savings and loan industry, banks with
the riskiest loan portfolios paid the same fixed rates for federal deposit
insurance as the safest banks. This system of fixed premiums encouraged
the weakest banks to accept the riskiest loans. The savings and loan
industry collapsed and taxpayers are now stuck with a $500 billion bailout.
Why would the results be any different under a national health insurance
system? A system where an aging, overweight, alcoholic chain smoker
pays the same flat insurance premium as a 22 year old triathlete will create
the same moral hazard problem in health care as it created for savings and
loans. Failing to properly price risk is a sure prescription for failure
in health care, just as it was in banking.
4. Why are people suddenly entitled to "free" health care anyway? If
national health care is truly a right to which we are all entitled to get
for "free", then shouldn't we also be entitled to free transportation to
the doctor, free telephone service to call the doctor, free clothing to wear
to the doctor, free food to ensure proper nutrition and free memberships
to spas and gyms?
We should stop asking the government for "free" goods and services, however
desirable national health care or other government programs seem to be.
They are not free. They are simply extracted from the hide of our neighbors
- and can only be extracted by force. If we would not confront our
neighbor and demand his or her money at the point of a gun to solve every
new problem in society, why will we ask the government to do it for us?
5. Why is nationalization of the entire health care industry seriously
being considered for health care when we wouldn't think of doing it to any
other industry? Although some Americans can't afford adequate food,
no one has ever proposed that we nationalize all farms and grocery stores
in the U.S. Instead, we give out food stamps and WIC coupons to make
sure no American goes hungry. And although homelessness is a problem,
no one has ever proposed nationalization of the entire real estate and construction
industries as a solution. Rather, we build public housing projects
and provide rental reimbursement through Section VIII vouchers. Those
who can't afford insurance could be given health insurance certificates or
vouchers, or be provided access to public hospitals like VA hospitals.
Why nationalize an entire industry to serve a small minority of uninsured
6. Why are we so willing to be conned into believing that there is a health
care "crisis" in the first place? 85% of Americans say they are satisfied
with the current medical system. Almost all of the 39 million uninsured
Americans are only temporarily uninsured; a mere 15% remain without insurance
for a period of more than two years. Where is the crisis?
Although we are moving full speed towards some form of increased government
intervention as a solution to rising health care costs, rising medical costs
were in large part created by government intervention and regulation in the
first place. The two most important government interventions in medicine
that have led to higher medical costs are 1) government enforcement of the
American Medical Association's cartel and 2) government price controls during
WWII that led to the proliferation of employer provided health insurance.
In his classic book Capitalism and Freedom, Milton Friedman describes the
American Medical Association as the "strongest trade union in the United
States" and documents the ways in which the AMA vigorously restricts competition.
The Council on Medical Education and Hospitals of the AMA approves both medical
schools and hospitals. By restricting the number of approved medical
schools and the number of applicants to those schools, the AMA limits the
supply of physicians. In the same way that OPEC was able to quadruple
the price of oil in the 1970s by restricting output, the AMA has increased
their fees by restricting the supply of physicians.
The difference between the AMA and OPEC is that the AMA has the coercive
power of the federal government to protect its medical cartel while OPEC
had no enforcement mechanism to protect its oil cartel. Cartels that
are not enforced by the coercive power of a government always disintegrate.
The OPEC cartel's agreement to restrict output quickly collapsed, and the
supply of oil increased causing oil prices to fall dramatically. Without
government enforcement, the AMA would also soon lose its monopoly power,
the supply of physicians would increase, and medical costs would decline.
A program to gradually deregulate medicine would put an end to rising health
care costs and solve the health care crisis. The AMA should continue
to certify and approve medical schools and hospitals but they should operate
privately without the coercive power of the federal government to protect
it from competition. Other medical organizations and other medical
professionals should be allowed to compete with the AMA for provision of
health care, certification of medical schools and hospitals, and licensing
Deregulation of medicine would encourage the use of lower cost alternatives
to physician-administered health care. We are currently forced to see
physicians, many with a quarter of a million dollars worth of medical education,
for even routine ailments. Using physicians assistants and nurse practitioners
for basic health care and allowing them to operate health care clinics would
dramatically reduce medical costs. Allowing midwives, chiropractors,
pharmacists and other physician substitutes to have a greater role in health
care would also help to lower health care costs.
A commonly held fear is that deregulating medicine might lower costs but
would lead to substandard hospitals, quack doctors and shoddy medical care.
Those same fears about declining quality were common prior to deregulation
of the airline and transportation industries and have been shown to be completely
For example, the Airline Deregulation Act of 1978 saves consumers about $10
billion each year and airline accident rates have fallen by 48 percent.
Deregulation of railroads has resulted in reduced shipping costs averaging
$4 billion per year and a decline in railroad accidents of 70 percent since
the Staggers Rail Act of 1980. The Motor Carrier Act of 1980 deregulated
trucking, resulting in annual savings of $8 billion per year and a 40% reduction
in the fatal accident rate. Why would deregulation of medicine be any
different? We could expect both dramatic cost savings and higher
quality medical care as a result of health care deregulation.
The second government intervention that contributed to rising medical costs
was price controls on wages that led to the proliferation of employer sponsored
health care and started the trend toward the elimination of direct payment
for health care services. Because of a labor shortage during WWII,
wage controls were put in place. Wages were therefore forced to remain
artificially low, and as economic theory would predict, price controls exacerbated
the shortage of labor. Employers, faced with a shortage of workers
but unable to offer higher wages, offered free medical insurance to workers
as a substitute for a higher salary.
After wage and price controls were lifted, it was no longer necessary to
provide medical benefits to attract workers - employers could just pay a
higher monetary wage. However, it had become a common practice for
employers to provide health insurance to employees. And because of
the tax code, it makes sense for the employer to provide health insurance
because it is cheaper for the company to buy health insurance with pretax
dollars than for the employee to buy it with post tax dollars. The
trend continues today whereby most Americans receive medical insurance through
their employers. Therefore, almost all (80%) payments for medical services
are made by third party payees - medical insurance companies.
As consumers of health care services have become less involved in direct
payment with doctors, clinics or hospitals, the incentive to monitor health
care costs by consumers has diminished. Users of health care
with third party payment arrangements tend to 1) demand more care and 2)
be less concerned about the cost than if they were forced to bear the full
cost and make direct payment. Both of these factors have contributed
to rising medical costs.
Re-establishing direct payment for medical services through programs like
medical savings accounts would restore cost consciousness on behalf of consumers.
When medical services are paid for directly, consumers behave much differently
than when payment is made by a third party. Direct payment encourages
consumer to: 1) ask about prices and shop around for the best value, 2) be
prudent about the amount of health care they purchase, and 3) seek medical
treatment from nurse practitioners, physicians assistants, midwives or other
low cost alternatives to physician care. Direct payment would
serve to control medical costs by making consumers fully aware of all costs
of health care.
In summary, it has been excess government intervention and regulation that
has created the current health care crisis. We need to decrease the
role of govment by restoring competition in health care with market solutions,
not increase the role of government with socialized medicine. Deregulation
of medicine, like deregulation of trucking, railroad, and airlines, would
result in lower prices and higher quality service. The health care
crisis would evaporate in the light of market competition.
How will we know when deregulation of medicine has gone far enough?
When medicine becomes so competitive that doctors are once again willing
to make house calls.