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.

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.