Nationalized Health Care Will Cut Costs? It Just Ain’t So!
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Tags: central planning • health care • health insurance • Physicians for a National Health Program • profit motive • scarcity • single-payer health care • socialized medicine • supply and demand
A group called Physicians for a National Health Program (PNHP) is promoting a government insurance plan to cover all Americans. In an August 13, 2003, Los Angeles Times report, the group claimed that their “single payer” plan would eliminate $200 billion a year in “administrative, marketing and other private-industry expenses.” This would save enough “to provide health care to the 41 million Americans who now lack coverage.”
Why then, we wonder, wouldn’t similar plans be in order for other consumer goods? Why shouldn’t Americans have a nationalized, single-payer plan for, say, food? If we could save $200 billion a year in health care, couldn’t we save billions in “private-industry expenses” for victuals? After all, if we visit the PNHP’s website, we learn that “[p]rofit seeking inevitably distorts care and diverts resources from patients to investors.” This argument should be just as applicable to other industries, for example: “profit seeking inevitably distorts feeding and diverts resources from diners to investors.” The logical conclusion of the idea is to nationalize the entire economy, saving trillions! We all know how well such ideas worked out in the Soviet Union, Mongolia, Albania, and North Korea.
As with most fallacious arguments in economics, the physicians’ concern with one particular magnitude—total health-care expenditures—ignores the true criterion of success: the health of Americans. If researchers discovered a very expensive drug that would guarantee an active, 150-year life, it is possible that total health-care expenditures would increase. But such an outcome would hardly be a sign of disaster.
The reasonable person might still conclude that lowering health-care “costs” is an important goal. But we must be careful: one can reduce the satisfaction derived from health care faster than the costs. For instance, the government might reduce expenses by severely restricting consumer choice. By cracking down on “frivolous” product variety, it might indeed be cheaper to provide the basics. But such reasoning fails to appreciate the function of advertising and other measures taken to differentiate products. Whether it’s health care or computers, the professionals in an industry need the freedom to experiment with new products and techniques, to see which best satisfy consumers. Of course, this freedom goes hand in hand with certain expenditures on “redundant” systems and “counterproductive” advertising, but the only way to encourage innovation is to allow the pioneers to benefit from their discoveries.
In any case, we are confident that we would never see the cost savings these doctors predict. Do they think the Pentagon’s single-payer system has kept down the costs of military hardware? The Times notes, “The system envisioned . . . would be built on the foundation of the current Medicare program.” But the costs of Medicare at the turn of the millennium were running about 700 percent above original estimates.
Plans that lower prices of a good will logically prompt consumers to demand more of it. Those of us who have been caught between insurance plans know that certain “indispensable” visits to the doctor or dentist can often wait until our coverage is restored and somebody else has to pay for them. But the PNHP attempts to deny basic economics: “Co-payments and deductibles are . . . unnecessary for cost containment,” its website states.
PNHP also denies its plan would restrict the freedom of consumers: “Compare [our plan] to today’s system, where doctors routinely have to ask an insurance company permission to perform procedures, prescribe certain medications, or run . . . tests.”
This, of course, is nonsense: a doctor does not have to ask an insurance company for “permission” to deliver any treatment he recommends. He may have to ask an insurance company if it will pay for it. The insurance company could decline, but that in no way prevents the doctor from delivering the treatment.
Do the PNHP doctors really think that all potential treatments will be allowed under their socialized plan? That’s impossible: scarcity cannot be repealed by legislative whim; even in health care, tradeoffs are inevitable. Whether they realize it or not, under the physicians’ plan doctors will have to ask a government official for permission to perform procedures, prescribe medications, or run tests. And under the PNHP plan, it will be a criminal offense to pay for the treatment oneself if coverage is denied. How is that supposed to help patients?
Canadian Waiting Lists
The Times cites an associate professor of medicine at Harvard University, Dr. David Himmelstein, who “conceded that Canada’s single-payer system has waiting lists for some medical services.” He makes it seem as if these are minor matters, only for inconsequential services. But waiting times have been increasing—growing from an average of nine to an average of 16 weeks during the 1990s alone1—and people have died while awaiting vital procedures.2
Himmelstein goes on to assert, “A single-payer system also would address the mounting billing and paperwork frustrations experienced by physicians.” We wonder if he can name any other activity where increased government involvement has reduced paperwork?
It is true that under current arrangements, the health-care situation of those who are not insured at work but who do not qualify for Medicare or Medicaid is quite difficult. Those with less wealth have more difficulty acquiring any good or service than those with more. But their particularly dire circumstances with regard to health care are almost entirely due to previous government interventions. The government-backed AMA severely restricts the supply of physicians and thus drives up the cost of doctors’ services. The special tax status granted to employers’ expenses for insurance further increases prices, as do Medicare and Medicaid subsidies.
Our preferred solution is a true free market in health care, one where anyone is permitted to provide any service he wishes, with consumers free to evaluate providers. But, indoctrinated with the notion that it is only government licensing that protects us from quacks, many Americans consider it absurd to argue that everyone should be legally allowed to practice medicine.
However, consumers are fairly adept at assessing suppliers of other products. A butcher who regularly makes his customers ill with food poisoning will soon go bankrupt. Similarly, in a free market an incompetent doctor will soon lose his patients. Undoubtedly, private certification and rating organizations would abound.
Curiously, interventionists believe consumers are (a) too ignorant to identify bad doctors on a free market, but (b) capable of voting for good politicians to improve health care. As PNHP declares, “The public has an absolute right to democratically set overall health policies and priorities.” Wouldn’t it be easier to pick a good doctor?
Author, Economics for Real People
Department of Economics, Hillsdale College
Notes
- Sally C. Pipes, “Lessons from the North: Bus Travelers Bring the Reality of Rationed Health Care and Price-Controlled Drugs over the Border,” Pacific Research Institute Briefing, October 2002, pp. 2–3.
- Pacific Research Institute, “False Promise of Single-Payer Health-Care: A Close Look Inside the ‘California Health Security Act,’” http://www.pacificresearch.org/pub/sab/health/single_ prayer/sphealth.htm
Comment by Ted on 21 June 2009:
This is a very well-written article, I enjoyed reading it and concur wholeheartedly!
Comment by John Anello on 26 June 2009:
“If private insurers say that the marketplace provides the best-quality health care, if they tell us that they’re offering a good deal, then why is it that the government — which they say can’t run anything — suddenly is going to drive them out of business? That’s not logical.” -President Barack Obama.
Statements like this make me cringe.
How did this happen?
We elected a man that to the presidency of the United States that does not even have a basic understanding of economics.
Clearly, he does not realize that the government holds a monopoly on coercion and can dictate prices to pharmaceutical companies, and health care providers. If healthcare was hunting the government would have an AK-47 while private insurers would have sling shots.
Or maybe he does realize how powerful government can be and would like to extend its reachers further into the private sphere.
Whatever the motives behind the madness are, Obamacare cannot be allowed to come to fruition.
Comment by Steve on 26 June 2009:
The PNHP’s notion of democratic rights is frightening. These are bright, supposedly educated people. I don’t find anywhere in the constitution any democratic right for government to set the cost, price or scope of health care in this nation. The cost of ignorance cannot be calculated.
Comment by IMVirulent on 2 July 2009:
If we must have nationalized healthcare (and after that ridiculous cap and trade law passed it seems inevitable), then the Singapore model is a lesser evil. Singapore offers nationalized healthcare for everyone but spends only 3.5% of GDP on healthcare. (In contrast the U.S. spends 15%+). There are two features in their system which seem key:
1. Each individual has a self-funded HSA (health savings account) so that healthcare ‘consumers’ have skin in the game;
2. Medical providers are required to publish prices to encourage consumers to comparison shop.
These two features alone would go a long way towards improving our very muddled system. Problem is that special interests have such a vice-grip on our crippled system of government, it will take chutzpah on behalf of politicians not to cave.
http://econlog.econlib.org/archives/2008/01/singapores_heal.html
Comment by John Anello on 2 July 2009:
Picking between different types of nationalized healthcare is like rearranging deck chairs on the Titanic
Comment by James Madison Fan on 2 July 2009:
John Anello wrote:
“Picking between different types of nationalized healthcare is like rearranging deck chairs on the Titanic.”
Two small problems with this sentiment:
1. As we agreed in the “Ranking” article, like it or not we already have defacto nationalized health care that is grossly inefficient and costly. If we’re going to pay for it, let’s get the most for our money. My discomfort resides in the fear that a national bureaucracy won’t be any better or even worse.
My hope is that while “arranging the chairs” in a more orderly fashion may not get us full fair on this particular ship it might get us to warmer water before we have to start swimming.
2. If we don’t have some kind of safety-net programs there is at least the potential for a whole bunch of unnecessary illness and death.
Some with more draconian beliefs than I might offer that’s not necessarily a bad thing but it is something to consider nonetheless.
Comment by RO in Reno on 3 July 2009:
It actually is very simple math that single payer coverage would greatly reduce costs. Insurance administration costs and profits are about 60% of health care premiums. Medicare for example operates very efficiently at about 10% which is a single payer system.
But more importantly the comment regarding a single payer system for food leads me to believe you are having difficulty distinguishing between a service and a product.
A distinction that I think is very important if the free enterprise system is to ever be resurrected.
A hint; Free enterprise or Capitalism if you prefer requires the production of products. in that regard services produce nothing but should facilitate the production of products if they are to be valuable.
The implications of this is of course the reason the economy of this country isn\’t working.
Comment by John Anello on 3 July 2009:
Medicare is currently running 700 percent higher than its initial estimated cost. Medicare, along with Social Security and Medicaid, has amassed $53 trillion in debt obligation. $53 trillion is more than double all the dollars currently in circulation. A single payer system is unsustainable as countless examples have proven.
Comment by James Madison Fan on 3 July 2009:
RO and John,
Services are subject to the laws of supply and demand and are as much a part of a capitalist model as manufacturing. The authors are pointing out the absurdity of the PNHP statement since the intent of any business model is to take money from the consumer to enrich the investors regardless of if it is medicine, a diner, a movie theater, a maid, computer repair, or the production of “widgets.”
Since we have a defacto national health care system the question isn\\\\\\\’t if we should have a national system, the question is if we can design one that works better than what we already have.
If I take these numbers as presented I have to wonder if 60% of the cost of a well run system is better than 10% of a bloated one?
Am I better off cutting a check for a million dollars to cover my employees with Cigna or Kaiser, even if 60% of this goes to administrative costs, or sending it to Uncle Sam?
It depends entirely on what happens to my taxes. If I end up paying less to the Government than I was to the insurance companies for the same level of service then I\\\\\\\’m better off, but if I\\\\\\\’m paying more for less it doesn\\\\\\\’t matter what percentage goes to administrative costs because I\\\\\\\’m still bleeding money for inferior coverage.
What I don’t understand is why we have to do this wholesale? It seems this country lurches back and forth between “Far Right” and “Far Left” like a drunken sailor. When the Reps are running the show we teach abstinence and when the Dems are running the show we teach free love. One minute we have private health care then with the stroke of a pen we’ve nationalized a seventh of the US economy. Does that make any sense? Must we either be on the shore or in the water? How about dipping a toe in first so we know if the water is cold then wading in calf-deep, then waste-deep, then chest deep before we get in over our heads? It would seem that “a happy medium” is anathema in Washington.
We should start with a system that allows anyone with a valid Social Security Card to get basic health care in the form of a doctor’s visit or emergency room visit.
There are schedules put out by the insurance companies that indicate what this should cost so we reimburse up to the average. This would take the burden of preventative medicine off of insurance companies allowing premiums to drop. It would ensure that people that are using our health care are citizens and we could enter into an agreement with other nations to reimburse us for treating their citizens. This would also shift the cost of the unfunded mandate requiring emergency rooms to treat foreign nationals that can’t pay to the Federal Government rather than burdening the hospital with scads of bad debt.
It would also make sense for the Government to cover prescription drugs since buying drugs in bulk makes them less expensive. That’s one of the reasons drug prices in Canada are so reasonable. I’m not a big fan of governmental programs but I’m also not a fan of pharmaceutical companies jacking up prices for no other reason than they can because they have a patent that makes them immune to competition. I find it offensive that these mega corps laud a free market when it is in their best interests but suddenly become the worst kind of socialists when it comes to protecting them from the ravages of competition.
If this lesser plan showed promise they could implement broader coverage later rather than jumping in entirely ignorant of the pitfalls ahead.
Comment by James Madison Fan on 3 July 2009:
Here\’s another idea. How about using Federal hospitals and doctors using the same model as the VA? That way people without \"real\" insurance could seek help at a federally funded clinic for free.
Private hospitals would still be required to treat ER patients but this would be reimbursed and the ineligible patient would be moved to a Federal Hospital once cleared for transfer by a doctor.
Comment by John Anello on 3 July 2009:
JMF,
You made some excellent points, having a valid Social Security card should be requirement to receiving medical care at an ER, with the exception of emergency treatment (e.g. heart attacks, strokes etc.).
I also agree that our current system is a de facto national healthcare, but government intervention (i.e. buying prescription drugs in bulk or paying out costs for ER visits) will only lead more egregious problems.
The only logical end to a government run prescription drug plan is rationing. If the federal government is the sole purchaser of prescription drugs than some government bureaucrat will be making decisions as to just what drugs one will be taking, how much they should have, if it is even worth giving someone drugs, and what drugs are available….Who? Whom?
The above outlined scenario would be funny if it was not so scary, could any of you imagine Barney Frank in charge of such a program.
Secondly, a government run prescription drug system would eliminate the individual’s power as a consumer. The individual would not be permitted to purchase drugs himself or discuss with his doctor or pharmacist what drugs he should or should not be taking; again he will have to plead to the government bureaucrat, and as anyone who has ever gone to a DMV knows they are compassionate people whose number one goal is customer service. A successful healthcare system, like any successful business, lies in benefitting the consumer and the government just does not do a good job at that,
I am no fan of pharmaceutical companies either, but the way to combat their greed is not by replacing it with government incompetence. Instead, the FDA’s arduous drug approval process could be altered as to allow for drugs to reach consumers much quicker. Patent laws could be eliminated to allow for a purer form of competition between pharmaceutical companies, instead of the government issued monopolies on drugs they now receive.
VA hospitals and services are the perfect examples of why the government should not be involved in healthcare. The atrocity that is the Walter Reed Army Medical Center is a testament to the abysmal failures of government run healthcare. I invite any blogger to do a brief Google search of VA hospitals and read about the disastrous states they exist in.
Comment by James Madison Fan on 7 July 2009:
John,
I agree but I’m left with a dilemma. I don’t think economic tyranny is preferable to governmental tyranny. I don’t see much difference between bending knee to the Marquis Des Sade and bending knee to Scrooge sans the happy effects of the spirits. My hope is to find a middle ground where Socialism and Capitalism can coexist rather than giving in to either one. I’ll buy the goose to save poor Tiny Tim but I’m none too fond of the remainder of the surplus population especially since it appears hell bent on infinite reproduction on a finite world. In other words, my philanthropic urges have limits.
I don’t think the government should be sole consumer issuing drugs as they see fit but at the same time drugs should not be so expensive that it bankrupts the patient or the insurance company that covers him. The cost of drugs is a prime issue for those in favor of nationalized health care. Cutting this Gordian knot would go a long way towards deflating the debate.
The pharmaceutical companies argue that Research and Development is so expensive that they need to recoup the lost investment in failed drugs by exploiting the success of the few that work. I can’t find any flaws in this logic except that I don’t think the reward is quite as disparate relative to the risk as they would like us to believe.
Some drugs end up costing hundreds of dollars per pill. In the case of AIDS and other communicable diseases it is in the best interest of the public to ensure these medications are as widely available as possible so they can be contained and eradicated.
Certain diseases have reached epidemic levels. Diabetes has increased by 600%+ since the 1960’s and the rate of childhood obesity suggests it will continue to climb. There is no reason for monthly prescriptions for that disease to be so expensive when the majority of these customers will be buying scads of pills for decades to come and this will continue until it is cured.
If someone is on three prescriptions to fight Diabetes (typical) it can cost $45 to $60 a month for the insured and far more for those without coverage. The secondary issues that untreated Diabetes can cause include stroke, heart disease, blindness, and kidney failure. It is in our best interest to ensure these drugs are cheap so we don’t have to pay scads more in the long term treating far more debilitating results but the pharmaceutical companies don’t care if it costs thousands dollars to treat these because all they see is the bottom line.
I can see a couple hypothetical cures for this problem, one of which is the government buying these drugs in bulk at a discount as I previously suggested.
Less savory “solutions” I’ve considered include the government taking on part of the risk for pharmaceutical R&D (via tax breaks perhaps?) or the government manufacturing low cost drugs for diseases that afflict X percent of the public. Both of these seem more invasive.
Comment by Falconer Thom on 18 July 2009:
RO in Reno misses the point when he says that services are not products and therefore not subject to the same rules of economics. Be it food or medical service, we are stil talking about scarce resources that people seek. This simple fact means that the same rules apply for food (products) and services (health care).
Price also is key. True price that represents the actual costs of a service or product. False prices created by government interference, muddles the whole system.
Capitalism, two people meeting to come to a mutually agreeable decision for trading good for payment, will keep prices low and services high. The desire for profit will assure that quality and the rate of innovation is high while costs and waste are kept to a minimum. Those who can’t or won’t provide a quality service for a reasonable price will soon be out of business. This only occurs where there in freedom from any government regulation.
Comment by Jason Shaw on 18 July 2009:
Falconer is right when he says that \\"price is key\\" and that \\"true price represents the actual cost of a service…\\"
Unfortunately our current system does not allow health insurers to utilize customer-specific information to determine price thus making the delivery of an efficient & properly-priced product impossible.
As a result the market only provides ill-suited health-insurance products and everyone suffers. It goes on for years and gets progressively more disconnected from reality. In time, people are so fed up with the \\"market failure\\" that they look to the government to fix their problem.
Ultimately though the government will fail too and the free market will have its way either with our health care system or in the aftermath of it.
Comment by James Madison Fan on 20 July 2009:
Falconer and Jason,
In theory you are correct but there is a difference between economic theory and economic practice, especially when the commodity can be the difference between life and death.
If you have the option of getting a particular drug in various places the cost of the drug will attain market equilibrium.
However this model does not take into account that companies are allowed to hold a monopoly on a drug for years allowing them to set the market price.
If the drug in question is a luxury, such as Viagra, this is not a problem because you have the option to take it or not. However, if the drug in question is saving your vision, vital organs, or life by keeping a debilitating or lethal disease at bay the company can charge whatever price they want.
The insurance companies are contractually obligated to treat these illnesses. If they do not show good faith they can be sued for a lot more than the cost of some outrageously overpriced pills and the pharmaceutical companies know it so there is no incentive for them to drop their prices.
So there are liability ramifications that influence the market.
The “free market” does not exist in a social vacuum either and these effects need to be examined before a proper curve can be drawn.
For instance, we, as a society, do not want to see a local much less a global pandemic. It is less expensive to pay to prevent an outbreak than it is to treat it (assuming a post infection treatment even exists). No one wants to gamble their lives by coming into contact with the untreated even if they themselves can afford the treatment.
We do not want to see an increase in the blind due to untreated diabetes, if for no other reason that it shifts the cost from one social program (preventative health care) to more expensive social programs (life saving health care and life-long welfare programs).
These are only a few of the issues that make a true laissez-faire market impossible as long as we allow cultural concerns to influence it.
Until we are ready to abolish social programs as a whole the question is going to be how to serve the most people for the least amount of money. It is better to treat a person for $100 a visit by sending him to a GP than it is to spend $500+ per visit paying for an emergency room visit. It is better to spend $200 a year to medicate a diabetic than it is to pay for the plethora of condition that will result if we do not.
Most Americans may be “Yankee Traders” at heart but I do not think most people are ready to sacrifice their better angels at the alter of draconian laissez-faire capitalism.