Hmmm … and union members?

FEE Timely Classic:
“Incentives and Disincentives: They Really Do Matter” by Lawrence W. Reed

The scariest word in that sentence is not something. It’s we.

The first-person plural form is not merely a convenience, as in “We’re in for a cold winter.” It indicates that decisions about “the healthcare system” are to be made collectively, with one decision binding everyone.

That’s collectivism.

So why is virtually everyone a collectivist when it comes to heath care? I do not exaggerate. Every prominent participant in the current debate over how to “reform” the medical and insurance industries — regardless of party — approaches the issue in collectivist terms. They have differences at the margin — tax increases versus tax credits, a government-run “public option” versus subsidized nonprofit cooperatives — but there is no disagreement that we must have a policy.

But why must we do anything about health care? Why can’t you do what you want, I do what I want, and he and she do what they want? Isn’t that what’s supposed to happen in a free society? Reformers would say that costs are rising too much and some people can’t afford insurance. But that is no answer. It tells us only that possibly ameliorable conditions exist, not that collectivism is a good approach.

When we see problems in other important markets, most of us don’t expect televised presidential town-hall meetings, congressional committees, and omnibus legislation to give us The One Answer. We individually adjust our behavior in the marketplace and anticipate that entrepreneurs will cater to us. Solutions are micro, marginal, and tailored to individual needs, not macro, holistic, and procrustean.  Out of this arises an orderly marketplace — without a conscious overall plan. That’s why it works so well. No one has found a better way to make masses of people at all income levels better off.

Health Care Is Different?

Why is health care different? Must we collectively and consciously reinvent it? The social knowledge problem that F. A. Hayek spelled out should make us wary of any such response. All of us together acting in the market are wiser than any group of congressmen. (Did I really need to say that?)

The reformers’ stock answer is that this is something only we, working through the “democratic process,” can handle. That’s an assertion. Where’s the proof? What if earlier collectivist decisions gave us rising medical and insurance costs?

In fact they did. Nearly every aspect of medicine and health insurance that the politicians say needs fixing is the result of politicians’ previous attempts to fix something. Much of the escalation of prices comes from consumer demand that is freed from normal cost constraints thanks to third-party payers: government-privileged insurance companies, Medicare, and Medicaid. While that intervention boosts demand by eliminating cost consciousness, others constrict supply: occupational licensing, insurance mandates and barriers to entry, patents on drugs and devices, FDA regulations, certificate-of-need requirements, and more.

Making Things Worse

With each so-called reform, we (in reality, they, the politicians) made things worse. It’s time we — collectively — stopped trying to reinvent the medical and insurance industries.  Instead that task should be left to us individually — acting, transacting, competing, and cooperating in the marketplace. Only then will solutions emerge from people’s — not politicians’ —  choices, as entrepreneurs (neither aided nor impeded by the State) pursue profit by producing goods and services that make us better off.

Notice that entrepreneurship is missing from the public debate over medical care. Typical of the politicians’ arrogance, they can’t appreciate the role entrepreneurs— without privileges of any kind — play in bettering our lives. In a free market they look for unmet or poorly met consumer demand and devise ways to meet it. To do that job well, they need price signals that convey accurate information about consumer preferences and resources — which means prices undistorted by government policy. The successful entrepreneur’s payoff is profit, the result of transforming lower-value inputs into higher-value outputs.

Profit is the key, but “profit” is a dirty word in the current debate, one more arrow against freedom in the demagogues’ quiver. Insurance company profits are condemned not because the corporate state bulks them up through anticompetitive regulation, but rather in principle. The politicians are always ready to exploit people’s deep suspicion that profit is added to the price rather than extracted from the costs. If government interferes with profit-making, it suppresses entrepreneurship, which in turn cripples the market’s ability to serve us. To paraphrase Hayek, profit-seeking is a discovery procedure. The government condemns profit at our peril — especially in the medical industry.

Let’s hear no more about what we — collectively and coercively — must do about health care. If government would get out of the way we — individually and cooperatively — would figure out what to do. Collectivism and government planning trample freedom and foster social stupidity. Individualism and free markets respect each person’s dignity and liberty while getting the most out of the “wisdom of crowds” in the marketplace.

To begin, the “reformers” want to compel insurers to cover people who are already sick for the same price healthy people pay. But if someone is already sick, no government plan to pay his medical bills can be accurately called “insurance.” Insurance is a voluntary way to spread risk. Risk comes from uncertainty. But someone already sick doesn’t face a risk that he might need medical attention for his ailment. He is certain to require the attention. There’s a reason you can’t buy homeowner’s insurance after your house has burned down or life insurance for a deceased person. Why should one expect to be able to buy insurance to cover medical treatment for a disease one already has contracted? When private donors voluntarily pay the bills, we call it charity or philanthropy or benevolence. When government pays them after extracting money by force from taxpayers or by requiring insurance companies to overcharge healthy people who are compelled to buy coverage, we should call it (at the very least) welfare.

If someone wants to defend medical welfare, let him do so. But don’t let him get away with calling it insurance. He not only does violence to the language; he also clouds the discussion. This is another application of the tacit premise that no one should have to pay for his own medical care. Bastiat’s line about the state being the means by which we all try to live at everyone else’s expense comes to mind.

President Obama says he will finance “reform” by shifting Medicare reimbursement decisions from Congress to an independent board of experts. Too bad he is unaware of the Austrian critique of central planning. Outside the marketplace, no one can know how much doctors and hospitals should be paid. Bureaucrats can’t tell what is too much or little compensation because they can’t have the relevant knowledge. Markets are good at setting prices because that knowledge is communicated through people’s buying and abstention from buying.

This is not just an academic discussion. Prices are information, and when they are “wrong” there are consequences. If the bureaucrats pay too little, costs will be shifted to others and providers will leave the market, creating shortages. If the bureaucrats pay too much, resources and labor will drawn away from other needed areas. With the collapse of the Soviet Union and the continuing examples of Cuba and North Korea, we should all know that government doesn’t know how to set prices.

Obama promises overall “cost containment.” But government has only two ways to accomplish this: rationing or price controls. The drawback to the first is obvious. People are forbidden to buy the services they want, even when they are willing to pay for them themselves. Bureaucrats — rather than individuals and their doctors — decide what tests and procedures are necessary. The drawback to the second is that services will disappear from the marketplace. Price ceilings create shortages.

On the other hand, the market has a method for containing costs. It’s called economizing, and people practice it naturally when they face the costs and consequences of their decisions. People are less likely to buy unnecessary services if they have to pay for them. And if they were buying their own insurance, they wouldn’t typically buy policies that covered smaller, routine expenses. The administrative overhead would make such policies a bad buy.

Conflicting Goals

The New York Times points out that the reformers have two conflicting ostensible goals: “to expand health coverage to nearly all Americans while reducing the growth of health spending.” How can they do both? Obama goes back and forth between stressing universal coverage and cost containment, but he doesn’t discuss one in relation to the other. Newly subsidized coverage will bring new demand for medical services and put  more upward pressure on prices. As noted, higher prices can be counteracted only by denying service (say, hip replacements for octogenarians) or by imposing price controls, overtly or covertly.

Why is it government’s business how much we spend on medical services anyway? Government’s only concern should be to eliminate the ways it interferes with and influences our choices. The aggregate cost of our freely chosen actions is our concern alone, not the government’s.

But of course, government interferes with and influences our choices in many ways, and by doing so raises the costs. As Obama said the other night, “[T]he biggest driving force behind our federal deficit is the skyrocketing cost of Medicare and Medicaid.”

For once Obama was conceding that the government is at fault. Medicare and Medicaid are two ways the government forces the taxpayers to pay for medical care. Those who obtain their medical care through those programs have no incentive to economize because it’s free to them. That’s why the budgets are out of control — people act rationally according to the incentive system they are in — and why Obama is looking for ways to control costs. As long as those programs exist, he won’t be able control costs without bureaucratic rationing of services one way or another.

If the “reformers” get their way, something much like this failed system will be extended to the general public.

Ending Waste

Obama says two-thirds of the estimated cost of “reform” — at least $1.5 trillion over a decade — will be paid for “by reallocating money that is simply being wasted in federal health care programs.” I wouldn’t take seriously any of the reformers’ numbers. The safe bet is that cost of the program will far exceed what they project, and the most of the savings will never materialize. When Medicare was being put together, the pooh-bahs projected that by 1990, hospitalization coverage would cost only (!) $9 billion. When 1990 arrived, the price tag read $66 billion.

The final third of cost would likely come from surtaxes on upper-income earners. Are high earners likely to stand still when targeted for new taxes? No. They will adjust their income-earning activities to minimize the tax take, and that will mean lower-than-projected revenues. Then what? Taxes on the middle class, perhaps. Or more debt and inflation.

Competition and Choice

Does anyone else laugh when politicians promise that government will bring competition, choice, and efficiency to the medical industry? Government routinely can’t account for millions, even billions, of dollars. And competition and choice? As a compulsory monopoly, government is the enemy of those things.

Competition and choice are what you get when the government backs off. You don’t get them by having government interject itself even further in an area of life.

Finally, the way to rig a debate over public policy is to never acknowledge the only genuine alternative to your proposal. Obama says, “I’m confident that when people look at the costs of doing nothing they’re going to say, we can make this happen.” Why is “doing nothing” the alternative to a conscious attempt to reinvent the healthcare industry? While it is true that doing nothing would be preferable to what Obama and his congressional allies want to do, it is not the best alternative. The best alternative is the free market. But have you ever heard the advocates of government control offer an argument against the free market? The answer is no, and the reason is that to argue against it would be to acknowledge it as an alternative. And that they cannot afford to do. Better to have the people think we already have a free market in medicine and that it has failed. That way they will be more likely to win support for government control. The “reformers” task would be more difficult if people understood that what has created the problems is government, not the free market.

This effort to ignore the market solution is abetted by an alleged limited-government party that is unwilling or unable to speak the truth. That helps explains the predicament we are in.

Should we assume the definition of “competition” is also negotiable?

FEE Timely Classic
“Monopoly Government” by Thomas DiLorenzo

President Barack Obama recently expressed faux surprise that anyone would oppose his latest proposal, a government-run insurance company that will offer coverage in competition with private insurers. The president’s surprise came in the form of asking why people would claim that government cannot operate efficiently, yet simultaneously run an insurance company that would be a lower-cost producer than private firms.

While seemingly clever, President Obama’s point is irrelevant. The question is not about the “efficiency” of insurance plans, but rather the simple fact that government schemes are responsible for driving up the cost of medical care to consumers. From the huge regulatory burdens (with accompanying paperwork) on medical people to the third-party payments, government actions on all fronts have turned medical care into something akin to a Rube Goldberg cartoon.

Talk to any doctor and he or she will tell you that they spend many hours per week doing paperwork, almost all of it required by government and insurers. The government paperwork is especially pernicious because errors or disagreements on billing – even innocent ones – can lead to criminal charges. The legal aspect of medical care has turned into a minefield for the providers, and that has to impact overall costs.

The main issue, however, is quite simple, yet also profound: Medical care is a scarce good and thus is subject to the laws of economics. All too often, we hear that medical care is not like other goods and services and is set apart from economic laws. All we can say in return is, “Not so fast, my friend.”

Application of economic theories does not discriminate between the kinds of goods and services rendered. If something is scarce, the same laws apply whether we speak of brain surgery or pork bellies. Such words are disconcerting to people who believe that medical care should be a right that should be provided to everyone regardless of one’s personal wealth. Unfortunately, all government interventions – all of them –carrying out this “rights” mandate only serve to make medical care less available (and less effective) for everyone.

Think of a simple supply-and-demand example. If anything increases the cost of providing something, the supply curve shifts to the left, making the good less available and higher-priced. There is no exception to that point for anything that is scarce.

So, let us think of the ways that government makes it more difficult to provide medical care. First, and most important, government sets huge barriers in the path of people seeking to engage in medical occupations, especially through licensing and strict regulations. In other words, government purposely limits the supply of medical providers to protect the incomes of doctors.

It is the equivalent of the government’s forcing all of us to purchase a BMW or Cadillac instead of letting us choose between a high-end and lower-end vehicle. If such restrictions existed in the auto industry, we would have demands for “cost containment” in autos.

Second, as previously noted, the legal side of medical care forces doctors and nurses to spend time doing paperwork rather than providing care. Furthermore, the constant threat of criminal and civil action forces medical care providers to play defense, which further limits the supply of their services.

Last, the third-party payment system that dominates medical care further separates the consumers from their choices. If we had the same system to pay for food and automobiles, we would have “cost crises” in those markets as well.

Most people cannot fathom decoupling government control and medical care, as though cost-raising controls actually improve medical service. Yet if we wish to have innovative and affordable medical care, that is precisely what must be done.

Yet Catherine Rampell, economics editor for nytimes.com, reports there has been “no sea change in public opinion” about healthcare reform. She cites Nolan McCarty of Princeton University, who shows that public support for a government overhaul of the medical industry was higher in 1993, when the Clinton plan failed, than it is today.

Of course, we always have reason for suspicion about public opinion polls, since pollsters can get the results they want by how they frame the questions, especially the all-important preliminary questions. People aren’t laboratory rats, and some respondents may be as interested in impressing the pollster as in speaking their minds. Definitive proof of the case for suspicion was provided some years ago by an episode of the satirical BBC television program Yes, Prime Minister, the key scene of which is here.

So What?

But let’s not stop there. We may grant that “the public” want (as the British would say) the government to set up an insurance program to compete with private insurers and are even willing “to pay higher taxes so that all Americans have health insurance that they can’t lose no matter what.”

So what? By asking this question, I am not displaying naïveté. Politicians of course will use a favorable poll for cover when they do what they want to do anyway.

I mean something else: Why should the people get something through government–that is, at the point of a gun–simply because they want it? We make that assumption reflexively, but why? Fifty-seven percent may be willing to pay higher taxes for universal health insurance, but let’s not overlook what else they are willing to do: tax the 37 percent who aren’t willing to pay higher taxes. (Six percent don’t know if they are willing or not. Sigh.)

H. L. Mencken long ago defined democracy as the “the theory that the common people know what they want, and deserve to get it good and hard.” The problem is that those who don’t want it get it, too. When it comes to government programs, there’s no opt-out provision. Alas, what distinguishes “free” from unfree countries is the freedom to speak out, not to opt out. In the latter respect, all are unfree.

What about that 37 percent who would be ignored? If they don’t count, they needn’t have had their time wasted by the pollster. As Bruno Leoni wrote, “[I]n assuming that 51 voters out of 100 are ‘politically’ equal to 100 voters, and that the remaining 49 (contrary) voters are ‘politically’ equal to zero (which is exactly what happens when a group decision is made according to majority rule) we give much more ‘weight’ to each voter ranking on the side of the winning 51 than to each voter ranking on the side of the losing 49.” (See my article  “The Crazy Arithmetic of Voting.”)

Well, it might be said, in our system the majority rules. Standing alone, this principle sounds rather ominous, so the speaker usually hastens to add, “but the rights of the minority are protected.” But really now, which is it? Do the majority rule or are the rights of the minority protected? I really don’t see how you can have it both ways.

Misrepresentatives

Our “representatives”–more aptly, our “misrepresentatives”–are supposed to sort out all this complicated stuff, but don’t bet on their squaring the circle any time soon.

The upshot is that they will decide what kind of healthcare system we will have. To the extent they take into consideration what some of the people whom they “represent” want, it is only because they are looking to the next election.

All of which leads me to the question of why we even see these decision-makers as our representatives rather than as our rulers. Think about this: The average congressional district has a population of well over 600,000 people. In Montana, one congressman allegedly represents the state’s entire population of 967,440. The populations of the states range from about half a million (Wyoming) to 36.7 million (California).

Honestly now, who really believes that anyone can actually represent such large and diverse groups of people? (Credit the Antifederalists, or anti-Rats, with another legitimate concern about centralized power.) Are we playing games when we talk about representation under those circumstances?

The Fiction of Representative Government

What got me thinking about this the other day is an essay by the highly respected historian Edmund Morgan, emeritus professor of history at Yale University and prolific author of books on America’s colonial and revolutionary era. His latest book is a collection of previously published papers with the self-explanatory title American Heroes: Profiles of Men and Women Who Shaped Early America. (Hat tip: Jeffrey Rogers Hummel.) But Morgan departs from that theme in a couple of chapters, including Chapter 15, “The Founding Fathers’ Problem: Representation.”

Morgan begins by noting that all governments rest on consent; specifically, the governors are few and the governed are many and thus potentially more powerful than the governors. Therefore the governed must be persuaded to believe that obeying the government is the right thing to do. This is the role ideology plays: It constitutes “opinions to sustain their consent.”

“The few who govern take care to nourish those opinions, and that is no easy task, for the opinions needed to make the many submit to the few are often at variance with the facts,” Morgan writes. “The success of government thus requires the acceptance of fictions, requires the willing suspension of disbelief, requires us to believe that the emperor is clothed even though we can see that he is not.” (Emphasis added.)

In democratic countries such as the United States, those fictions include the idea of representation, as well as the idea that our “representatives” are mere members of the governed like the rest of us. It doesn’t take a lengthy visit to Washington, D.C., or even a state capital, to be disabused of that latter fiction.

Fictions endure only as long as they are useful, and the one regarding representation is quite useful. Morgan writes, “And just as the exaltation of the king could be a means of controlling him, so the exaltation of the people can be a means of controlling them. …In locating the source of authority in the people, they ["the men who first promoted popular government"] thought to locate its exercise in themselves. They intended to speak for a sovereign but silent people, as the king had hitherto spoken for a sovereign but silent God.”

Morgan is unequivocal: “Representation from the beginning was a fiction. If the representative consented [to the king's taxes or laws], his constituents had to make believe that they had done so.” The problem was not only that often a perfect stranger deigned to represent individuals he knew little about, but also that he had a conflicting mandate: to represent his district while also looking out for the welfare of the whole country. This second part was useful in making representative bodies into modern aristocracies. (We leave aside the further problem that for much of the history of representative government, many people were not allowed to vote.)

“The sovereignty of the people was an instrument by which representatives raised themselves to the maximum distance above the particular set of people who chose them,” Morgan adds. “In the name of the people they became all-powerful in government, shedding as much as possible the local, subject character that made them representatives.”

Morgan connects these considerations to the American Revolution, the Articles of Confederation, and the goals of the Constitutional Convention. But bear in mind that he is not a radical critic of the American political system. He’s no anti-Rat. Yet he concedes that centralization of power under the Constitution was intended to restore representation to its fictive status, since it had become more real in the small legislative districts within the states during the Confederation period. As he writes, “The fictions of popular sovereignty embodied in the federal Constitution may have strained credulity, but they did not break it.”

Alas, that topic must be left for another time. For now, as the Senate and House of “Representatives” deliberate whether to give even more control over your health care to bureaucrats, ask yourself what taxation with representation has wrought.

Knowing the details of this latest plan is not necessary to conclude it is bad. The reason it is bad is because it operates on the impossible premise that government can force up real costs of medical care while making it cheaper and more available. In other words, President Obama and his supporters are claiming that government can lower costs when it actually is increasing them.

Normally, this is known as a fraud, but today it is politics. Let us understand what is happening and, more important, why it is happening so that we can better realize just why such fraudulent ideas gain any traction in the first place.

For politicians, it is easy. Medical care “costs” too much. Thus, the government either should establish price controls or simply control all payments to medical personnel. Krugman and other economists have been parroting that line for years, and they are correct in that medical care is more costly than it should be. However, there is a problem in the typical analysis, and that is this little issue of just what is a cost.

To the political classes and their court economists, a “cost” is a payment to individuals and organizations in the medical field. For example, if one pays $50 for a doctor visit, that is a “cost” to that person. If one pays $1,000 for a particular test, that is the “cost” to the patient.

However, that is superficial analysis. For example, Krugman has claimed that devices like CAT scans and MRIs “drive up” the cost of health care. If that were true, then it would be the first time in history that a labor-saving capital device would be responsible for making goods more costly. In both cases, a patient can quickly and bloodlessly be examined and doctors generally can gain near-pinpoint evidence of the problem.

For example, my father had knee surgery in 1966, and he was in the hospital for a week. The doctor cut a huge incision in his leg, took back a large flap of skin, and then went to work. It took Dad many months to recover.

When I had knee surgery in 2003, I came to the hospital in the early morning and left by noon. Instead of a huge scar, I had two tiny, pinprick marks on my knee, and I was at work four days later. Within a few weeks, I was hiking on a nearby mountain. Yet, according to Krugman’s logic, my father’s operation was a “lower-cost” affair. To an economist, however, my opportunity costs were much lower.

To someone like Krugman, the “cost” would be reflected solely in the medical bill, with the MRI costing one thing and the surgery something else. Somehow, had we eliminated the MRI, then the whole thing would have cost less. However, that test had shown the doctor exactly what he needed to do, which was why he was able to do it quickly, efficiently, and have me working within a few days.

The problem is not the presence of medical capital; the problem is that government has forced the use of resources when they are not needed (either for doctors to avoid lawsuits or because political authorities are demanding their use). The so-called “cost crisis” did not come about until after the passage of Medicare in 1965.

From that point on, more and more medical decisions have been made by bureaucrats, which means that medical people must devote more and more resources to filling out forms and satisfying the government. Apologists for government insist that such actions somehow lower the cost of healthcare, but “not so fast, my friend.” When government forces people in the medical fields to expend resources in areas away from medical care, it makes care less available and more costly.

So he must persuade us that this freedom will be safe under his plan.

But can he make a truly persuasive case? No, he cannot, for reasons I will outline. Either Obama knows this and is lying to the American people, or he does not know it because he is shamefully ignorant of economics. You decide.

First, here’s what he said in his speech to the AMA this week:

We know the moment is right for health care reform. We know this is an historic opportunity we’ve never seen before and may not see again. But we also know that there are those who will try and scuttle this opportunity no matter what – who will use the same scare tactics and fear-mongering that’s worked in the past. They’ll give dire warnings about socialized medicine and government takeovers; long lines and rationed care; decisions made by bureaucrats and not doctors. We’ve heard it all before – and because these fear tactics have worked, things have kept getting worse.

So let me begin by saying this: I know that there are millions of Americans who are content with their health care coverage – they like their plan and they value their relationship with their doctor. And that means that no matter how we reform health care, we will keep this promise: If you like your doctor, you will be able to keep your doctor. Period. If you like your health care plan, you will be able to keep your health care plan. Period. No one will take it away. No matter what. [Emphasis added.]

Obama will not be able to keep his promise if he gets the “reform” he wants. He favors a “public option,” which is a euphemism for a government insurance plan. Obama says a government plan will keep private insurers “honest” through competition. But what will keep it from being a predatory competitor? After all, it will have a guaranteed source of revenue that no private insurer has: captive taxpayers. So the public option would be able to price its policies below market level and put the squeeze on the private companies.

It is strange that those folks who are always warning about predatory pricing and cutthroat competition in the free market never fret when the government provides services in “competition” with private firms. (See the “public” schools, for example.) But government is the only entity that can truly price predatorily because it can hold down explicit prices to consumers while recouping its costs implicitly through taxation or Fed-monetized debt.

Let’s not forget that Obama favors having a government bureau define the contents of the basic insurance coverage — that is, the state will dictate to insurers what services they must sell to their customers. Plus, the emerging reform plan would outlaw a premium schedule based on risk or existing illness. People who are sick or more likely to get sick could not be charged more than healthy people. (By that logic, the owner of a simple wooden house would pay the same fire-insurance premium as the owner of a brick house.)

Moreover, people would be compelled to have insurance (and then pay taxes on their employer-originated coverage). This will give the government the incentive to impose price controls — “guidelines,” no doubt –  to keep insurance “affordable” and “universal.”

If the private insurers protest that these terms make profitable operations impossible, Obama and his allies will accuse them of profiteering and proclaim that the free market has once again failed to deliver medical care.

At that point insurers may choose to leave the medical policy market. Meanwhile, when reimbursements to doctors and other providers shrink in the name of cost-cutting and red tape mounts, doctors may choose to take early retirement or find other ways to make a living. (Some doctors have stopped accepting Medicare patients.)

But when that happens, what about all those people who are “content with their health care coverage”? Despite Obama’s solemn pledge, they will not be able to keep it. What recourse will we have for the broken promise? A vote at the polls in 2010 and 2012?

Inject Competition

Obama says the public option is needed to “inject competition into the health care market so that [we can] force waste out of the system and keep the insurance companies honest.” But who is limiting insurance competition today?

Government, of course.

Interstate competition in medical insurance is illegal. There is no national market. Americans living in Texas are not free to buy coverage from a firm operating in Maine. (When John McCain proposed legalization during the presidential campaign, he was pilloried for wanting to do to medical insurance what was done to banking.)

One reason interstate competition is not allowed is that states throughout the country, to different degrees, force insurers to provide coverage for all kinds of services that most people might never buy on their own. Mandated coverage results from service providers’ lobbying state legislatures – a truly corrupt rent-seeking system. (See John Seiler’s Freeman article here.) Interstate competition could nullify the mandate system, as people bought policies from companies in states with fewer requirements. Opponents of interstate competition say this would set off a race to the bottom. What they mean is that it would permit people the freedom to tailor policies to their personal requirements.

That the government is the biggest obstacle to full competition in health insurance is also the rebuttal to another idea emerging from the “reform” factory: state exchanges, or federally subsidized insurance “marketplaces.” Imagine that! The government would set up markets. As though there is no market now, hampered as it is by idiot rules from the brains of clueless politicians.

When Obama promises to  make health care and insurance “affordable,” he means he will impose price controls, overt and covert, on providers and insurers. Promises of cost-cutting should get the same credit as past such promises: exactly none. Cost-cutting is not a bureaucracy’s strong suit.

We know where price controls lead: to shortages, decline in quality, queues, rationing, and regimentation. Welcome to healthcare reform.

Obama and John Stuart Mill

Obama’s belief that government can control the distribution of health services according to his personal preferences without effecting production of those services brings to mind John Stuart Mill’s fatal move in his famous economics treatise, Principles of Political Economy (1848 and beyond). Driving a theoretical wedge between production and distribution, Mill wrote:

The laws and conditions of the Production of wealth partake of the character of physical truths. There is nothing optional or arbitrary in them. Whatever mankind produce, must be produced in the modes, and under the conditions, imposed by the constitution of external things, and by the inherent properties of their own bodily and mental structure.

It is not so with the Distribution of wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively, can do with them as they like. They can place them at the disposal of whomsoever they please, and on whatever terms. [Emphasis added.]

Obama and Kennedy et al., like Mill before them, foolishly believe that government intervention in the distribution of medical services will have no effect on their production. “The thing once there, mankind …. can do with them as they like.” How absurd. Goods and services are never “there” once and for all.  They must be continuously produced — but the producers could decide to stop producing. Didn’t Ayn Rand write a novel about this?

Contrary to the brain trust running Washington and attempting to run the economy, distribution affects — can discourage or render impossible — production. That’s what the American people need to realize as they listen to Obama’s sugared — but fundamentally misleading — words. The people are right to be concerned.

None of this is meant to sanction the system of privilege that the medical and related professions enjoy through licensing, patents, and other interventions. On the contrary, that system must be dismantled if we are to have a free and competitive healthcare system — for that is the only way to make medical care really universal and affordable.

Articles on Single Payer Health Care

• Nationalized Health Care Will Cut Costs? It Just Ain’t So! by Gene Callahan and Robert Murphy
• Medical Misunderstanding by Sheldon Richman
• What NBC Didnt Tell You About Health-Care Reform by Dr. Jane Orient
• Let’s Not Throw American Medicine into Boston Harbor by Dr. Jane Orient
• Socialized Failure by John Goodman
• Health-Care Demagogues by Doug Bandow
• Free-Market Medicine by Larry Van Heerdan
• Health Care: Over the Canadian Cliff? by Doug Bandow
• Single Payer: Neither Simple Nor Smart by Dr. Michael Glueck and Dr. Robert Cihak
• Twenty Myths About National Health Insurance by Mr. John C. Goodman and Mr. Gerald L. Musgrave

Audio on Single Payer Health Care

• Healthcare Policy: The Case for Freedom, not Government by Jane Orient, M.D.

Barack Obama says, “[T]he most significant driver — by far — of our long-term debt and our long-term deficits is ever-escalating health care costs. If we don’t reform how health care is delivered in this country, then we are not going to be able to get a handle on that.”

Very clever, indeed. Enlist the budget-deficit hawks in the effort to further bureaucratize decision-making in medical care. Obama has already recruited the competitiveness lobby, claiming that more centralized control of medical care will lighten (!) the burden on American business, enabling it to better compete against companies in countries with socialized medicine.

Another strategy is to blame “private”-sector medicine for the out-of-control Medicare program, which has a $35 trillion unfunded liability and is helping to break the federal budget. In the 1960s the national government took over funding of medical care for the elderly. Critics warned that, as a welfare program, Medicare would explode beyond all official budget estimates. When it did so, the advocates of Medicare (and fully nationalized medicine) blamed the (semi-)private providers of services, and now Obama threatens more control than they already endure.

Once again, we see an important principle at work: No matter how much the government controls an industry, when something goes awry, economic freedom will get the blame.

If the price of a particular set of services rises faster than other prices year after year —and there is no free market in those services—there are two things you can do: 1) give bureaucrats greater power to control costs—this is called “reform—or 2) look for the ways that existing policies create price inflation, then repeal those interventions.

For medical care the juggernaut is heading toward option 1, with the insurance companies and providers climbing aboard fast in order to cut their deals early.

This is too bad, because the solution lies with option 2.

Prices in the medical industry today, no matter what the advocates of government control believe, are not arbitrary numbers plucked out of the air, or the result of sheer profiteering and greed. Rather they are the product of a government-manipulated, semi-competitive, supply-and-demand process. Prices emerge from this tangled system that is result of decades of government intrusion. If the planners ignore the real determinants of rising prices and attempt to get them “under control,” it will make things worse by creating shortages and other problems. If, for example, price controls are imposed, supply will shrink relative to demand, and when the shortages become acute, the bureaucracy will step in to ration medical services.

Or the policymakers might go directly to rationing as a way to control costs. The easiest way for the government to lower society’s overall medical bill would be for it to engage in triage, dictating who gets what kind of service. In some ways, this already happens in Medicare, which refuses to cover certain services out of budgetary concerns. It could also license medical technology to avoid “wasteful duplication,” another form of rationing. Such an approach might lower total money expenses, but so what? The point shouldn’t be to cut the total bill regardless of the consequences. Waiting months for surgery or doing without because the government won’t pay for it is a cost, although it doesn’t show up in the budget. This in part is how other countries seem to spend less on medical care than we do. In fact, our semi-statist system uses resources more efficiently than fully nationalized systems in other wealthy countries—with equal if not superior results. U.S. per capita spending growth is below the OECD average, writes John Goodman of the National Center for Policy Analysis.

Savings through Modernization

The Obama administration promises savings will come through modernization not interference with consumer choice. Imagine government modernizing a sector of the economy! The grounds for skepticism are abundant. We can be confident that when the benefits don’t materialize, the politicians will resort to more draconian methods—while blaming greed and profiteering for the policy failure.

You know an industry is heavily regulated when politicians exhort providers to lower costs and they pledge to do so. No competitive industry would require exhortations or pledges. Competition would drive innovative providers to minimize costs while maximizing quality and making even exotic services more and more accessible.

It is not the free market that has failed. It is government.

Therefore, the second approach to cost-cutting is in order: Eliminate all the ways that government causes medical price inflation. These range from supply-side interventions—including occupational licensing, certificates of need, the FDA, and patents—to demand-side interventions—including tax favoritism toward employer-based insurance, Medicare, and Medicaid. Third-party payment that makes medical services appear free or nearly so encourages overconsumption and raises costs indirectly for everyone, with particular hardship to those not participating in the programs.

To set things right, consumer prices and true costs must be aligned through the market process. People would then become cost-conscious buyers of services and would most likely reserve insurance for truly insurable catastrophic events. Of course, some who need medical attention wouldn’t be able to afford it. That would be less frequent in a real free market, but when it occurred, the answer would be voluntary charity rather than clumsy bureaucratic intervention.

For decades government policy has conveyed the message that no one should have to pay for medical care. Bastiat’s aphorism has never been more true:

The state is that great fiction by which everyone tries to live at the expense of everyone else.

But of course medical services and products are not really free, and we can’t all live at everyone else’s expense. Someone has to pay. There are only two choices: free exchange (including mutual aid and charity) or bureaucratic diktat— and all its negative externalities.

The government should get out of the way. How much we spend on medical care is none of its business. The medical industry is not destroying the government and the country. On the contrary, the government is destroying the medical industry and the country.