“The debate over health care in this country has brought in many players with skin in the game. Your coalition of surgical organizations is one group among many. These many groups include other physician groups, insurance companies, patient advocacy groups, pharma, and the like. I would bet that the individuals in these groups, including yours, want our country to have the best health care system for themselves, their families, and their patients. But look back to the first line of this paragraph. Did the “players with skin in the game” metaphor rankle you at all? It should have. If it did, maybe there is hope that given enough time you could actually learn enough history and economics to understand what is really wrong with our system. I would submit that we do not have a health care problem in this country, but we do most definitely have a government problem in this country.”

Read the full letter.

Enough dithering! President Barack Obama says it’s time to act on health care. I agree.

But act how? Are we really going to be happy with the pussy-footing proposals floating around Congress? All the so-called reformers want to do is tinker with insurance regulations. But how effective would that be, considering that the insurance companies themselves support the changes?

We have taken our eyes off the ball, people. Let’s get back to first principles. Mr. Obama’s premise is that we have a right to health care. A right.

America was founded on the idea of rights — inalienable rights. No one can take them away. I assume that when people say that health care is a right, they mean that health care is an inalienable right. Mr. Obama apparently agrees. In his speech before Congress he called for free services, such as physical exams, colonoscopies, and mammograms. Free! You have a right to those things.

Well, OK. But why stop at free preventive services? Why not free treatments, free surgery, free drugs, and so on? We need those things as much as a physical exam. If we have a right to health care and if we are unable to obtain those services, our rights have been denied or violated. That is something the advocates of health-care “reform” say we must not tolerate.

Okay, let’s not tolerate it. Let’s make sure no one’s right to health care is violated. Let’s get serious for a change.

But how? I can think of only one efficient way to accomplish this. Let’s enslave the providers of medical services — doctors, nurses, paramedics, dentists, chiropractors, acupuncturists, psychiatrists, and the rest. My proposal may shock people, but I am confident that this feeling will wear off as we think about how logically it flows from the principle that we have a right to health care.

First, let me point out that there is no other good alternative. Any other system designed to deliver health care as a matter of right will have gaps through which the least fortunate inevitably will slip. Isn’t that the problem we’re trying to fix? Obama’s approach isn’t much better. He wants to force the insurance companies, with taxpayer subsidies if necessary, to insure everyone — healthy or sick, young or old — at the same price. He might even like a government insurance option, though he can’t make up his mind whether or not that is an essential feature of his plan.

Regardless, it’s a bad plan. Requiring insurance companies to pay for our medical care misses the point. Where do you think insurance companies get their money? From us! What kind of right to health care is it if we end up paying for it anyway? Obama means well, but his plan is a shell game.

On the other hand, enslaving the doctors and other providers would have none of the defects of the current system or the leading reform plans. It goes right to the source. We have a right to health care? Fine. Force the doctors to provide it.

Of course, this wouldn’t be free. I’m no pie-in-the-sky utopian. The doctors and the others would have to be fed, clothed, and housed. They’d need certain comforts. That’s understood. But it would be far easier to keep a lid on costs by enslaving the providers than by the patchwork system we have now, or would have under Mr. Obama’s plan.

The biggest problem I can see is that if doctors are going to be our slaves, no one will want to be a doctor. Most people don’t relish the idea of being slaves even in the national interest. They’re selfish that way.

We certainly can’t be a world-class country without doctors and nurses, so I have a solution to this problem: conscription. President Obama should direct the nation’s schools to look out for students with an aptitude for biology and direct them into medical studies. Then, at the appropriate time, the government should draft those young people into the newly created U.S. Medical Service Corps.

I know what you’re thinking: As word of this got around, the best students will play dumb. If that happens, we’ll have no other choice than to pick our doctors by lottery.

Right-wing opponents of reform would have you believe that President Obama is a wild-eyed socialist, attacking the free market. But unregulated markets don’t work for health care — never have, never will. To the extent we have a working health care system at all right now it’s only because the government covers the elderly, while a combination of regulation and tax subsidies makes it possible for many, but not all, nonelderly Americans to get decent private coverage.  (Emphasis mine)

Now, I hardly would be surprised to read such a comment from a politician or political science professor, but when a supposedly-august economist makes this claim, I believe the statement needs to be further analyzed before we can utter the phrase, “Not so fast.”

In doing this, however, we have to define our terms.  First, we have to define what an “unregulated market” is, and second, we then have to define the term “work” as he applies it.

Now, when Krugman refers to an “unregulated market,” he is describing a “market” in which the government does not set the terms of exchange, the prices, and govern the output.  In his view (expressed elsewhere) an “unregulated” market is chaotic, full of gaps, and generally operates out of control.  For example, he has described the turmoil on Wall Street as being the result of “unregulated markets” in finance.

I don’t know what academic world Krugman inhabits, but I would say that there is no such thing as an “unregulated” market.  Even a market in which government plays no role absolutely is going to be regulated by the Law of Scarcity and by profits and losses.  Indeed, markets exist precisely because of scarcity; non-scarce goods (like the air I am breathing right now) do not have to be allocated because my use does not deprive anyone else of using this good.  I give up nothing to breathe this air, and neither does anyone else in my house.

If a good is scarce, however, it not only must be produced, but also distributed, and markets are those entities that govern the process of production and exchange.  The only goods that can avoid some kind of market process are precisely those that are non-scarce, and no one, not even Krugman, is claiming that medical care is a perfectly free and abundant good.

However, that clearly is not true.  Krugman is saying that the medical markets cannot function unless government is directing the production and exchange.  What he means is that the medical market is different than the market for, say, cars or CDs.  From what I can decipher from his and other claims to support “universal” medical care, a “market failure” occurs when someone is not able to access immediately all of the medical care he or she “needs” immediately.

Now, if this is what he means by a “market failure,” then every market (including the distribution of government-produced goods) falls into that category.  If I cannot afford a Rolls-Royce, is that due to “market failure”?  Lest one think I am exaggerating, read on:

…government involvement is the only reason our system works at all.

The key thing you need to know about health care is that it depends crucially on insurance.

This is a non sequitur. There is nothing inherent about medical care that requires insurance or any other third-party payment for ordinary treatment.  In fact, health insurance first came about as a mechanism to deal with paying for catastrophic events, not routine care.  Government involvement in medical care, and especially the advent of Medicare with its third-party payments for nearly all medical care hastened the invasion of the modern mess.

From an economic point of view, a scarce good is a scarce good, whether it is medical care or sirloin steak.  The problem is that government has piled intervention on top of intervention, and driving up the costs and making care less available in the process.  The “failure” of the present system is a government failure, period.

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.

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.

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.