A Prescription for America’s Health Care Ills

In their desire for less expensive, higher quality, more accessible health care, Americans have accepted a false alternative: fully regulated, socialized medicine, as advocated by Democrats, or semi-regulated, semi-socialized medicine, as advocated by most Republicans. But if Americans want better health care, they must come to recognize that government intervention, great and small, is precisely to blame for America’s health care ills. And they must begin to advocate a third alternative: a steady and uncompromising transition toward a rights-respecting, fully free market in health care.

In order to see why this is so, let us first consider the unfree, rights-violating nature of American health care today.

Under our current semi-socialized health care system (which both Democrats and Republicans created), the government violates the rights of everyone who provides, purchases, insures, or needs health care. It violates the rights of doctors by forcibly subverting their medical judgment to the whims of government bureaucrats or to the heavily regulated insurance companies; it violates the rights of citizens in general by forcing them to buy insurance with a mandated set of benefits; it violates the rights of insurers by prohibiting them from selling plans of their design to customers of their choice at prices they deem economically appropriate; it violates the rights of pharmaceutical companies by forcing them to conduct trials that, in their professional judgment, are unnecessary; and it violates the rights of suffering and dying patients who wish to take trial medications but are forbidden to by law.

These instances merely indicate the numerous ways in which the government violates the rights of health care participants, but they are enough to draw the conclusion that Americans are substantially unfree to act in accordance with their own judgment—a fact that alone is sufficient reason to condemn our current system as immoral. But, as we shall see, the immoral nature of the current system is also precisely what makes it impractical. The system is in shambles because of these rights violations, a fact that will bear out on examination of the three aspects of health care of most concern to Americans: its cost, its quality, and its accessibility.

The Cost of Semi-Socialized Health Care

Whereas the prices of a number of other goods and services have been decreasing over time, the cost of health care has been rising at a rate two to three times that of inflation.1 Why? Consider first some relevant history of the health care insurance market.

Since World War II, the federal government has, via an income tax exemption for employer-paid health insurance premiums, distorted the market for health insurance and the way employees are compensated. Because of this exemption, a dollar paid toward an employee’s premium is a dollar’s worth of premium received by the employee, whereas a dollar paid in salary—after withholding for Medicare, Social Security, federal income, state, and local taxes—may be worth as little as half that to the employee.2 Further, health benefits are less costly to employers: Whereas employers must match an employee’s Social Security contributions and pay unemployment taxes on the basis of the employee’s salary, they incur no additional costs when providing the employee with health insurance coverage. Employers save money by offering health benefits rather than higher salaries, while employees save money by having less of their overall compensation taxed. Thus, employers and employees have enormous incentive to pour money into the modern-day high-premium, low-deductible health insurance plans that are themselves the result of government interference in health care.3

This situation has, in turn, created substantial incentive for a covered employee to opt for more health care products and procedures than he would if he were paying out of his own pocket. The employee—who pays the same co-pay whether his doctor orders one test or twenty, and who pays only a small price differential to see a top specialist rather than a family doctor for a routine matter—seeks more care because it costs him little extra. But there is no such thing as a free lunch—or free medical care. When government interventions distort prices such that a customer appears to be receiving a “free” or inexpensive benefit, someone, somewhere, at some point must still pay the difference. When employees, encouraged by these distortions, routinely demand health care services in excess of the cost of their premiums, insurance companies must regain the difference by charging higher premiums. In response to these higher premiums, employers have three options: to absorb the additional cost, to pass the additional cost on to their employees, or to decrease their health insurance outlays by reducing the amount and/or type of insurance benefits offered to their employees. One way or another, either in the form of higher premiums or in lost benefits, somebody ultimately pays for employees’ government-encouraged disregard for cost.

Because these government interventions encourage high-premium, low-deductible insurance and then subject insurance companies to suffocating billing regulations, the cost of administering insurance is reflected in health care, both in premiums and higher prices. For every two doctors in America, there is now one health insurance employee—whose salary is largely paid for by higher insurance premiums.4 Further, to handle regulation-strewn interactions with insurance companies, physician practices must hire extra staff and raise prices to cover their wages, which industry-wide amount to $23 to $31 billion per year.5 (One Wisconsin family physician estimated he spends fifteen to twenty hours each week filling out insurance companies’ or the government’s forms.)6 In short,
a significant portion of the money spent on health care today does not pay for medical care; rather, it pays for the government-necessitated additional administrative costs of insurers and doctors.

And such market-thwarting government intervention occurs not only at the federal level, but also at the state level. Even prior to the Congressional passage of a nationwide health insurance mandate, each state had already “experimented” with regulating the health insurance market. Massachusetts and New Jersey are two recent examples.

In 2006, the Massachusetts state government made health insurance compulsory for all residents and mandated that all insurance plans cover certain procedures and services, regardless of whether customers actually want them.7 Given that more-comprehensive policies are naturally more expensive than less-comprehensive policies, Massachusetts’ mandate has driven up the price of insurance for its residents. In fact, Massachusetts now has the highest insurance premiums in the nation, and premiums in the state are increasing at a faster rate than those in any other state. In 2008, the average annual family insurance premium for employer-offered plans in Massachusetts was $13,788—40 percent higher than it was five years earlier and 7 percent higher than the average increase among states. (The rise in rates nationally in that same period was 33 percent.)8

New Jersey provides another example of state intervention driving up the cost of health care. The state forbids insurers to deny coverage to any individual based on current or past health conditions and mandates that all “standard” plans cover a variety of services that customers may not want or need, including prenatal and maternity care (which men certainly do not need), prostate examinations (equally unnecessary for women), and substance abuse services (whether or not a customer thinks he may ever need them). The state even mandates that “basic and essential” plans—the least amount of coverage a New Jersey resident is permitted to purchase—provide coverage for 90 days per year of hospitalization (far more than many customers want or need) and for certain mental health and substance abuse treatments.9 As a result, the premium for a family policy in New Jersey is now $10,500 per year—whereas, in the relatively less regulated market in neighboring Pennsylvania, the premium for a functionally equivalent policy is $6,500 per year. Pennsylvania families can also, if they choose, purchase basic coverage, high-deductible policies for about $800 per year. Such policies are forbidden in New Jersey.10

On both the federal and state levels, government interference throughout the health insurance market has increased prices and constrained options by forcing Americans to select among artificially expensive alternatives.

Reduced Quality under Semi-Socialized Health Care

Just as government interference increases the cost of health care, so it decreases the quality. For instance, because Food and Drug Administration (FDA) regulations raise the average cost of developing a drug by tens, if not hundreds, of millions of dollars,11 pharmaceutical companies are less willing to take the financial risk involved in developing innovative new treatment strategies or to invest in drugs for which the potential market is too small to justify the cost of development.12 Despite increased automation in the process of discovering drugs and greater efficiency in producing them—developments that in most industries would have led to faster production, lower costs, and a greater variety of offerings—pharmaceutical innovation has lagged, with drug companies spending far more money than they did in the past to produce fewer new drugs.13 And the few new drugs that are produced tend to be of the “me-too” variety—that is, not groundbreaking treatments, but rather slight variations on existing treatments, which carry lower risks of failing to pass the FDA’s approval process.

Government interference also decreases the quality of care by creating an odd situation in which physicians are usually paid the same rate for a visit or procedure regardless of a given physician’s experience, the patient’s awareness and knowledge of his condition, how much time the patient’s case requires, and whether the patient is satisfied with the outcome. The insurance companies through which most Americans purchase their comprehensive health plans simply do not have the time or resources to investigate every doctor’s competence and to set his pay rates on that basis. Rather, they standardize their prices for services, paying the same for superb service as they do for subpar service. (In some cases, insurance companies even reimburse doctors and hospitals for the follow-up treatments necessitated by mistakes they made.)14 This ubiquitous standardized payment system, wholly the result of the government manipulating Americans to pay for their health care via third party, substantially reduces the financial incentive for doctors and hospitals to provide top-quality service, because making the extra effort renders no financial difference.

Under the current government-regulated system—regardless of whether a given patient is insured privately or by a government program such as Medicare—doctors and hospitals have to focus their attention increasingly away from the needs of the patient and toward the desires of government bureaucrats and insurance companies. This not only raises the cost of health care (because of the time and paperwork involved); it also directly interferes with the professional judgment of doctors and the vital communication between doctors and patients. Dr. Michael Burgess reported the following instance of this common occurrence. One of his patients was ill and severely dehydrated after a difficult childbirth and, in Burgess’s judgment, should have remained in the hospital to recover. But rather than discuss the merits of his recommendation solely with the patient and her family and let them decide whether the benefits of remaining in the hospital warranted the extra cost, Dr. Burgess had to argue his case with her insurance company—which wanted her discharged from the hospital in order to cut its costs.15 “Cost-effectiveness” guidelines—government “recommendations” aimed at reducing health care costs by reducing the frequency of treatments and screenings—make it similarly difficult for doctors to treat a patient without first considering the opinions of a third party, in this case a government agency backed by the implicit threat of force.16

Such is the quality of medical care when constrained by government interference in the marketplace.

Limited Accessibility under Semi-Socialized Health Care

Government interference blocks accessibility to health care as well. One example of thwarted accessibility in America’s current health care market is the inability—due to FDA regulations—of terminally ill patients to access experimental drugs that might extend or save their lives. Consider the case of Anna Tomalis, a seventh-grader who died of cancer after waiting months for FDA bureaucrats to decide whether to permit her to take an experimental drug that doctors believed could have extended her life.17 By impeding access to potentially lifesaving drugs, government interference in the health care market is effectively killing Americans.

And those Americans who are not directly deprived life-saving treatments by FDA bureaucrats suffer significant loss of accessibility to health care due to other government interventions. Consider again the cost of health insurance. Under our government-regulated system, rather than doctors, patients, and insurance companies mutually agreeing upon prices for medical services and health insurance, the government and heavily regulated insurers set the rates for both, which many people consequently are unable to afford. So the federal and state governments intervene yet again, exacerbating the very problem they are attempting to alleviate.

For instance, as noted earlier, Massachusetts forces insurers to offer policies that include more “benefits” than customers want or need, thereby driving up the cost of premiums beyond the point of affordability for many residents. In an attempt to ensure this coverage, the state government has provided “free” health insurance for many residents and subsidized the cost of premiums for many others. But in order to cover the costs of insuring and subsidizing these residents, the state has had to cut its reimbursements to the practices and hospitals that treat them. Because these cut reimbursements do not cover their expenses, practices and hospitals often refuse to see and treat state-insured patients.18 Advocates of mandatory health insurance insist that it ensures access to health care, but the facts say otherwise. Although the health insurance mandate in Massachusetts led to an increase in the number of insured—97 percent of Massachusetts residents now carry health insurance19—many patients, whether insured privately or by the government, wait months or longer for basic medical care.20 The law increased the number of people “insured,” but not their access to medical care. Access to health insurance is not the same thing as access to health care.

The recent passage of nationwide mandatory health insurance coverage will boost the number of insured people seeking health care, but unless health care is actually available—unless there are enough doctors willing to practice medicine under the conditions and rates set by the government—such coverage is worse than meaningless.

Even before the legislation goes fully into effect, it is demonstrating, once again, that government interference intended to increase accessibility actually thwarts it. An Investor’s Business Daily poll of more than 1,300 doctors, conducted prior to the bill’s passage, shows that 45 percent said they would consider quitting medical practice or retiring early if the health insurance mandate passed.21 After Congress passed the law, Dr. Jack Cassell, a Florida urologist, spoke for many physicians when he remarked that the new law “fatally compromises my ability or any doctor’s ability to uphold the Hippocratic Oath” and that the law has prompted him to consider retiring.22 Lest anyone think Dr. Cassell’s is an isolated case, a California financial planner has reported that well over half of his physician clients are arranging their finances in order to retire before the act’s most sweeping provisions take effect in 2014.23

Bearing in mind the nature and consequences of rights-violating, government interference in the health care market, let us turn to the nature and consequences of free (or freer) markets in medicine.

Health Care in Free (or Freer) Markets

Although government interference in medicine has, for the most part, increased over the past several decades, certain medical specialties, such as dermatology and plastic surgery, have substantially avoided the intrusion. Although some procedures in these fields—such as removal of a cancerous mole or reconstructive surgery after a mastectomy—are considered necessary and thus covered by most insurance policies, a substantial number of the services provided by dermatologists and plastic surgeons are considered cosmetic, and thus “optional.” Services such as Botox injections and face-lifts are not typically covered by health insurance, and thus are not (yet) targets for government mandates.24 Consequently, dermatologists and plastic surgeons—relatively free of the government-imposed obstacles placed upon practitioners in “essential” fields—are able to charge whatever rates they and their patients mutually agree on.

When patients spend their own money—not the government’s or that of a third-party insurer—they are more concerned to spend only the amount that meets their medical needs. When individuals refuse to pay for unnecessary tests or for expensive procedures and drugs that are beyond their budgets, the aggregate effect is reduced demand and thus decreased costs. Consider an individual shopping for LASIK, an elective procedure to remedy myopia and astigmatism. Because the patient will have to pay the full price of the procedure (rather than just a small co-pay), he has a strong financial incentive to seek the best value for his money, as well as the option to continue wearing glasses or contact lenses if he finds he cannot comfortably afford the procedure. LASIK surgeons must therefore compete with each other and with opticians to attract patients. They must seek to provide excellent value, either by offering top-quality at a particular price point, or by offering lower prices for less than top-notch service—or by outcompeting practically everyone in the market by offering top-quality service at extremely low prices. The aggregate result of these free-market forces has been constantly declining prices and constantly improving service. During the first decade in which LASIK was performed in the United States, the average price of the procedure declined nearly 30 percent in inflation-adjusted terms. In addition, the quality of the procedure has improved dramatically since its introduction in the 1990s.25

The same is true of cosmetic procedures. Unlike health care costs as a whole, which have risen far faster than inflation, the price of cosmetic surgery has risen slower than inflation—meaning its real price has fallen—while the variety of available procedures has substantially increased.26

Whereas a regulated market in health care reduces the incentive for people to become doctors, to remain in the field, or to accept more patients if they do remain—a freer market increases incentives for people to become doctors, provides good reason for doctors to remain in the field, and creates constant competition among doctors to provide excellent value to many patients.

So it should come as no surprise that dermatology and plastic surgery have become the most competitive specialties for medical students seeking residency positions. Only 61 percent of students who applied for a dermatology residency in 2007 received one, whereas 98 percent of students who sought a residency in internal medicine and 99 percent who sought a residency in family medicine received those. The best and brightest medical residents often choose dermatology and cosmetic surgery for the shorter working hours, higher pay, and relative freedom from insurance-company and government bureaucracy.27 When doctors are happier and more skilled, they provide better service.

Compared to more regulated systems, freer markets provide not only lower costs and better-quality care, but also improved accessibility. A recent survey of fifteen metropolitan areas in America shows that the average wait time to see a family practitioner is approximately three weeks—hardly ideal, but nowhere near the wait times found in more controlled markets.28 In Canada’s socialized health care system, patients frequently wait months and sometimes years for treatment, and according to the government’s own statistics 1.2 million Canadians are unable to make an appointment with a family doctor because of overbooked clinics.29 In the United Kingdom, the National Institute for Health and Clinical Excellence (a bureaucracy known, ironically, as NICE) rations Britons’ care by declaring which treatments the country’s National Health Service will cover and which are too costly to permit.30 No such rationing agency exists in America—yet.

The foregoing examples, although not indicative of fully free markets, demonstrate that those living in freer markets inevitably enjoy cheaper, better, and more accessible health care than those living in markets riddled with rights-violating government intrusions. This is no coincidence; it is a matter of economic principle.

Consumers in freer markets have a selfish incentive to educate themselves about the quality of goods and services available and to choose those of greatest value given their needs and budgets. Likewise, producers in freer markets have a selfish incentive to create quality goods and services and to price them so as to attract customers and maximize profitability. Doctors in freer markets profit to the extent that they offer services that customers deem in their interest to purchase. Insurers in freer markets profit to the extent that they provide insurance packages that make economic sense to customers. The net result of everyone being free to act on his own best judgment is a thriving, prosperous market.

Observe that in the current system, with its mixture of direct government controls and indirect government influence through regulations on third-party insurers, a surgeon with years of experience performing hip replacements receives no more reimbursement from an insurance company for his services than a surgeon fresh out of residency training receives for his. In other words, the inexperienced surgeon has no financial incentive to become better at his craft. In a freer market, in which more patients paid for their care directly and without restrictions set by government-manipulated third parties, doctors could expect to earn more money by providing higher quality medical care.

And just as doctors in freer markets have greater incentives to innovate and improve the quality of their services, so pharmaceutical companies in freer markets have greater incentives to enhance their offerings and reduce their prices. To see why this is so, consider the disincentives involved in today’s market.

Take, for example, HIV treatment. Over the past several decades, under heavy regulation, pharmaceutical companies have marketed more than thirty drugs in several drug classes to treat patients infected with HIV.31 In such a crowded marketplace, one would expect drugmakers to compete with each other on price—yet they do not. Why? Because, due to government intervention, patients with low co-pay, low-deductible, employer- or government-paid policies can choose among drugs without regard to price. As a result, HIV drug manufacturers generally compete on factors other than price, touting such advantages as convenience of consumption or decreased side-effects. In a free market, if drug manufacturers want to attract customers and thus profit, they must also compete on price at some point in a drug’s life cycle.

This principle applies to health care providers as well. Consider specialty hospitals. In today’s heavily regulated market, patients who want a procedure that requires hospital time, such as hip replacement surgery, typically must have the procedure done at a full-service general hospital—a hospital that treats every ailment from a broken toe to pancreatic cancer. Such a facility must be equipped with the instruments, machines, and space needed to handle a wide variety of ailments; thus its overhead is substantial. In addition, the physicians at such a facility are more likely to serve in multiple capacities, as a result of which they are less likely to excel at any. By contrast, a specialty hospital that performs only hip replacement can be outfitted with only the equipment needed for hip replacements (lower overhead) and staffed by surgeons who specialize in joint surgery, thereby enabling the hospital to charge patients less money for better service. Many people would quite reasonably prefer that latter option, but today such hospitals face severe governmental restrictions, including a ban on expansion that prevents them from meeting patient demand and further reducing their costs. In a free market, entrepreneurs would face no such impediments to creating these kinds of innovative and cost-effective facilities.32

Consider also retail health clinics, such as those found in many drugstores and big-box retailers. At these clinics, nurse practitioners and physician assistants offer basic medical care at low prices—making a profit for the store by offering services that make economic sense for patients. Currently, however, government regulations stifle these clinics by, among other means, restricting the conditions they may treat and the age of patients they may see. (These clinics also face the uncertainty of legislative opposition in several states.33) In a free market, such clinics would be free to offer whatever services they chose and to contract with whichever patients were willing to contract with them. Thus, they could thrive and expand, bringing even lower-cost routine medical care to even more patients on a budget.

Freer markets would also provide greater options for patients to finance the costs of their medical care. Doctors and hospitals would not only be free to offer installment plans and other means for patients to afford their care; they would also have great incentive to do so. Providers of LASIK surgery illustrate this point: Knowing that many patients may not have enough cash on hand to comfortably afford their services, these providers routinely offer no-interest financing and extended payment plans.

The specific improvements presented here are far from an exhaustive list of the benefits of freer markets in health care. In a free market, literally hundreds of millions of minds—from doctors to insurers to pharmaceutical professionals to medical device makers to each and every American purchasing health care products and services—are invested in making the market better, more accessible, and more cost-effective. No one can predict precisely what and how many innovative solutions so many minds would develop in a fully free market. But logic, economic principle, and historical example show that the freer the market, the better will be the quality of health care, the greater will be the accessibility to health care, and the lower will be the cost of health care.

Conclusion

The notion that we must choose between socialized and semi-socialized medicine is false. These alternatives vary in the degree to which they violate rights and thwart markets, but both violate rights and thus both thwart markets.

Americans who want to establish and maintain a healthy market for medical care must demand that their representatives repeal in full all recent federal and state health care legislation.34 We must further demand that our representatives commit to transitioning steadily and uncompromisingly away from our current, highly regulated system and toward a fully free market in health care. And, most important, we must demand this not only on the economic grounds that freer markets clearly provide better, cheaper, and more-accessible health care—but also, and more fundamentally, on the moral grounds that health care providers, insurers, patients, and customers have an inalienable right to make their own decisions about their own businesses, their own health care, their own lives.

About Stella Daily Zawistowski

Stella Daily Zawistowski is a copywriter at a pharmaceutical advertising agency, where she specializes in oncology drugs. She is also a prolific crossword constructor, with published puzzles in the New York Times, the Wall Street Journal, the Los Angeles Times, and many other major markets. She holds a bachelor’s degree in chemistry from Princeton University, and she writes about healthcare issues at her blog, ReasonPharm.

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