People often suggest that our health-care system’s problems stem from the fact that we have a free market; hence, their solution is to move to socialized medicine, where everyone has a right to a certain level of health care. The problem with that assessment is that our health-care system is not a free-market system. Over 50 percent of health-care expenditures are made by government at various levels, and there is extensive government regulation and control. Most of the problems of health care can be directly connected to that fact.

But there is a much more important question, not given much discussion, that will be the focus of this article.

Do people possess a right to health care whether they can afford it or not? If you believe the 2008 presidential aspirants, the answer is yes. In a Wisconsin campaign speech Senator Hillary Clinton said, “I believe health care is a right, not a privilege. And I will not rest until every American is covered.” In a campaign speech in Iowa, Senator Barack Obama said, “I believe that every American has the right to affordable health care.” While Senator John McCain has not said health care is a right, he nonetheless proposes greater government involvement. Many Americans share the vision that health care is a right. Let us try to decide what is or is not a right.

Imagine that I meet an attractive young lady and ask her to date me. Suppose she refuses. Have my rights been violated? Or suppose I ask to live in your house, and you say no. Have you violated my rights to decent housing? Finally, suppose I knock on your door and tell you I am hungry and wish to share dinner with you and your family. If you refuse, have you violated my rights? I am sure that most Americans, including Senators Clinton, Obama, and McCain, would agree that I have no constitutional, human, or natural right to date someone, or to live in someone’s house, or dine with him. But why?

Rights and Obligations

True rights, such as those in our Constitution, or those considered to be natural or human rights, exist simultaneously among people. The exercise of a right by one person does not diminish those held by another. It imposes no obligations on another except those of non-interference. I have a right to ask a lady for a date, but I have no right to impose an obligation on her to actually date me. Similarly, I have a right to ask you to permit me to live in your house and dine with your family, but I have no right to impose such an obligation on you. Moreover, since I do not have these rights, I do not have a right to delegate authority to government to impose such obligations on another. In other words, from a moral point of view, one can delegate only those rights that one possesses.

To argue that people have a right that imposes obligations on another is absurd. This can be readily seen if we apply such an idea to my rights to speech or travel. Under that vision, my right to free speech would require government-imposed obligations on others to provide me with an auditorium, television studio, or radio station. My right to travel freely would require government-imposed obligations on others to provide me with airfare and hotel accommodations.

For government to guarantee a “right” to health care, or any other good or service, whether a person can afford it or not, it must diminish someone else’s rights, namely his rights to his earnings. The reason is that government has no resources of its own. Moreover, there is no Santa Claus or Tooth Fairy giving the government those resources. The fact that government has no resources of its own forces one to recognize that for government to give one American citizen a dollar, it must first, through intimidation, threats, and coercion, confiscate that dollar from some other American. In other words, if one person has a right to something he did not earn, it of necessity requires another person not to have a right to something that he did earn.

A better term for these new-fangled rights to health care, decent housing, and food is “wishes.” If we called them wishes, I would be in agreement with Clinton, Obama, McCain, and others. I also wish everyone had adequate health care, decent housing, and nutritious meals. However, if we called them wishes, there would be confusion and cognitive dissonance among people calling for socialized medicine. The average American would cringe at the thought of government punishing one person because he refused to make someone else’s wish come true.

For example, if I simply had a wish for a palatial house and a Rolls Royce in my driveway, and Congress told its agents at the IRS to take other people’s money to make my wish come true, I am sure the average American would be offended. Americans would find it easier to live with their consciences, and find congressional initiation of force against others more palatable, if it were alleged that I have a constitutional “right” to a palatial house and a Rolls Royce. After all the primary job of government is to protect rights.

We can evaluate the morality of rights versus wishes another way. Suppose someone initiated force to prevent another from exercising his speech rights and another stepped in to protect that person’s right to speak. Would the intervener be seen as a hero or villain? Most people would answer hero. Then suppose someone saw a homeless person in need of health care and did privately exactly what government does—initiate force to take someone else’s money to provide that homeless person with medical services. Would that person be seen as a hero or villain? Most people, at least I hope so, would see that person as a villain. That is, taking the rightful property of one person to give to another, to whom it does not belong, is considered theft, and it is theft even if the proceeds are used for selfless purposes. It is theft whether two people or 300 million people agree to taking another’s property.

Finally, charitable efforts to help one’s fellow man in need are noble. Reaching into one’s own pockets to help is praiseworthy and laudable. Reaching into someone else’s pockets to do so is despicable and worthy of condemnation.

Thanks to a steady diet of misinformation from teachers, politicians, and the media, most Americans believe a great many false ideas regarding the economy. Many believe, for example, that a “single-payer” health-care system would improve care and lower costs, and that the collectivist pitch line “the rich are getting richer while the poor are getting poorer” is true. Ideas like that incline people toward the acceptance of policies that increase the size and power of the state—to the detriment of us all.

In an effort to counteract economic misunderstanding, North Carolina State University economics professor Michael Walden has written Smart Economics: Commonsense Answers to 50 Questions About Government, Taxes, Business, and Households. It consists of 50 short essays, usually about three pages in length, each of which takes on a common misconception rooted in people’s lack of economic sophistication. The virtue of the book is that it so easily and clearly identifies the errors in reasoning that lead so many Americans astray. If everyone read and understood Smart Economics, politicians and interest groups would have a much more difficult time hoodwinking the country into supporting statist, interventionist measures.

Walden is not trying to promote any political agenda of his own. In fact, his chief motive in writing the book is to depoliticize economic thinking. He rues the fact that partisans on the left and right use deceptive economic arguments to advance their preferences for action by the state. Walden just wants Americans to be able to see through fallacious economic arguments.

Here’s a sampling from the book.

In one chapter Walden asks whether budget deficits cause interest rates to rise. Politicians and others who want an excuse to raise taxes often point to the massive budget deficits of the federal government and say, “If we don’t do something about that, government borrowing to cover the deficit will drive up interest rates, and that would be bad.” (Hardly ever do we hear the logical conclusion that the government should spend less!) Walden demolishes the supposed connection between budget deficits and interest rates with empirical evidence (sometimes rates go down when deficits are large and sometimes they go up when deficits are small) and with economic reasoning (federal borrowing is just one of many factors that affect interest rates).

In another chapter the author tackles the notion that war is an economic stimulus. Lots of Americans believe, for example, that it was the huge federal spending of World War II that finally brought the country out of the Great Depression. Walden explains the crucial concept of opportunity cost to shatter that myth. “Spending $1 million on artillery shells to blow up targets leaves nothing in return, whereas spending that same million on new factory technology can pay dividends to the business for years to come.”

Or consider this recent governmental fad—laws against “price gouging.” Most Americans think that such laws are good, allowing politicians to revel in the publicity that they have done something to “protect” people hurt by natural disasters from the added injury of greedy businesses raising their prices. Such laws, however, are actually damaging. “Higher prices,” Walden writes, “are like a bright light signaling to manufacturers and dealers that more money can be made by selling their wares in the disaster-ravaged region.” Exactly so.

What about profits? Many people are inclined to think that prices would be lower if only businesses didn’t try to make a profit. Their misunderstanding helps anti-market politicians when they propose “windfall profits taxes” and price controls. Walden does an excellent job in showing that the search to make the most profit in a free market actually keeps costs down and quality up.

Other topics covered in Smart Economics include corporate taxation, free trade and the imaginary harm of having a “trade deficit,” whether the United States should strive for energy self-sufficiency, the notion that American manufacturing is dying, the supposed inability of American workers to compete with low-wage workers in developing countries, the belief that under capitalism “the rich get richer and the poor get poorer,” and the myth that government intervention can lower health-care costs for people.

Only rarely does Walden fail to cut right to the heart of an issue, but I’ll cite one instance. In discussing the idea that more spending on public schools will improve student performance, he writes that it can “as long as that spending is done in the classroom.” Given the socialist structure of public education, I don’t think there is reason to believe that more spending anywhere necessarily leads to improvement. By failing to discuss the inherent flaw in government schooling, Walden missed the jugular.

Nevertheless, this book is a splendid effort. Get a copy for friends who need to be gently steered away from their economic myths.

Paul Krugman attributes “America’s Failing Health” to the lack of Canadian-style socialized medicine and thus to the persistence of a free-enterprise sector in American medicine (New York Times, August 27).

Because “interest groups are too powerful, and the antigovernment propaganda of the right has become too well established,” his prescription is a “modest step in the right direction,” rather than a one-step enactment of a Canadian system.

Let’s see now: the United States has been taking such “modest steps” toward socialized medicine since the 1940s. There was Hill-Burton, or federal aid to build hospitals, in 1946; Kerr-Mills, to provide federal aid to elderly who couldn’t afford needed medical care, in 1960; then Medicare in 1965, and Medicaid.

In the Clinton years, there were additional modest steps, notably the State Children’s Health Insurance Program (SCHIP). And George W. Bush brought us another try at a Medicare prescription-drug benefit, which is to be implemented in 2006—unless there’s a replay of seniors’ reactions to the last attempt to introduce a prescription-drug benefit in 1989, when the seniors assaulted Rep. Dan Rostenkowski’s car.

What has been the result of these incremental intrusions into American medicine? An ever-increasing number of uninsured? A noncompetitive automobile industry? An overall drag on the economy?

Why, no. Those are mere temporal associations. Correlation doesn’t prove causation. The real explanation is that there hasn’t been enough federal intervention, in Krugman’s view. The remnant of a private sector competing with the government for those scarce resources is, paradoxically, the cause of the problems.

Scarce resources? Not exactly. In the United States it is said we spend too much on medical care, but there is a misallocation of the resources. That’s because selfish people want too much medical care for themselves and their families, and greedy doctors and hospitals want to provide too much treatment to those who can pay for it.

What we need, Krugman apparently supposes, is an infallible government planning mechanism to divide up the resources and to put a rigid ceiling on spending, and nongreedy doctors and hospitals to allocate the available care in the fairest possible way. Public-spirited doctors and hospitals will replace the ones we have now as soon as all their checks start coming from the government.

And of course the government will allocate a lot of resources to providing health care to healthy people, whether they want it or not (especially mental-health care), to keep them healthy. If some people get sick before all ill-health is prevented and end up circling emergency rooms in an ambulance or parked in a corridor, that will keep the pressure on for more spending.

When the effects of socialized medical programs are measured in a way that controls for confounding variables (like educational level and drug abuse), it is hard to show any effect on any health outcome, such as low birth weight. If one compares infant mortality in Canadian and American Indians of the same genetic stock, however, the Americans do better.

But the big picture, Krugman claims, is lower infant mortality and longer life expectancy in a number of countries that have socialized medicine. In this case, correlation does prove causation, Krugman implies—even if the statistics aren’t comparable. (Since very low-birth-weight babies are considered stillbirths in some socialized countries, whereas they are counted as live births here, the United States looks worse—even though many more tiny preemies survive here.)

Krugman may call his proposal a “modest step.” But the incremental march toward socialism is the way to bring about revolutionary changes. It is hardly less modest than Jonathan Swift’s proposal to solve the Irish famine problem by eating babies. And if the Krugman Plan were presented honestly, it might provoke a similar reaction.

What to Look Forward to

This is what “single payer” Canadian-style socialism would mean:

• Everyone is forced to pay, through taxes, for other people’s “health care,” especially for their well-baby visits, mental-health screening, contraceptives, sterilizations, or other politically favored services.
• No one is permitted to pay for “covered” medical care for himself or a family member, unless the family member is a dog or a cat.
• No medical practitioner or facility is permitted to earn a profit by providing more sophisticated, more convenient, or more effective care.
• Doctors’ total earnings are capped, so that if they do more than the maximum permitted amount of work, it will be at their own expense.
• The availability of care is totally controlled by a political process.
• Employers and employees get to unload the entire burden of medical insurance onto taxpayers, dragging down the entire economy instead of individual industries that have succumbed to Big-Labor demands for unaffordable benefits.
• The Medicare Pac-Man will devour the entire federal treasury even sooner, unless there are massive cuts in promised benefits.
• The sick must compete with the healthy and the well-connected for a share of politically rationed resources.

Honest description, however, is not to be expected of socialists. Krugman, for example, says that the government “offers” insurance to the elderly. The fact is that the day Medicare took effect, Lyndon Johnson got all insurers to cancel existing health benefits for the elderly. One can decline to accept Medicare Part B (physician coverage), for which there is no private substitute, but the only way to avoid Medicare Part A (hospital coverage) is to give up all Social Security benefits. Thus a correct description would be: “The U.S. forces the elderly to depend on the federal government for health insurance.”

Krugman likes the idea of having the government “assume the risk” for catastrophic health costs, “thereby reducing the incentive for socially wasteful spending.” Translated, this means having the government take over all true medical insurance (which is meant to cover catastrophes, not routine expenses) and enabling the government to ration expensive care to the sick.

Krugman repeats the assertions that government health insurance—unlike the Post Office and the Pentagon—has less overhead than private enterprise. It is remotely possible that Medicare spends less on administration than some private insurers, although a 1994 study by the Council for Affordable Health Insurance showed that private insurers spend less. Nobody really knows because government accounting makes Enron’s look like a model of simplicity and honesty. But the threshold for investigating a Medicare carrier for fraud is about $200 million, as whistleblower Theresa Burr discovered. (See “Report from a Medicare Whistleblower,” Journal of American Physicians and Surgeons, Winter 2003; www.aapsonline.org/jpands/vol8no4/burr.pdf.)

Moreover, Medicare imposes tremendously costly burdens on “providers.”

Krugman is right in his assessment that there is much wrong with the status quo. The system of third-party payment is upside down and backwards. But instead of rebuilding the foundation, the Krugman solution would kick out the props, hastening the collapse of an unwieldy monster and crushing the best of medical care in the process.

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?

Notes

1. 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.
2. 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

The health-care system in the United States is beset by problems. After years of feeling shortchanged by managed care, doctors and hospitals are demanding and getting greater compensation; the elderly (under Medicare) have no prescription coverage; and many people find health insurance of any kind unaffordable. Managed care, which was hailed as the answer to spiraling costs, is under legislative and legal assault, while health-care costs are rising at double-digit rates. Proposed solutions range from a Canadian-style single-payer system to medical savings accounts to staying the course with managed care.

First, before discussing these issues, some characteristics of the health-care system that get little attention:

Inefficiency. In 1999, health-care costs in the United States totaled about $1.2 trillion (13 percent of GDP). One measure of the medical industry’s inefficiency can be gleaned from examining the experience of a 2,000-patient clinic in Renton, Washington. Using a concept known as SimpleCare, the clinic has been able to reduce the price of outpatient care by requiring patients to pay in full at the time they are seen. The clinic charges 30-50 percent less than what a regular clinic would charge for such things as office visits and X-rays. The savings come from bypassing the bureaucracy: No staff are needed to get managed-care approval, file endless claims, or coax payment from insurance companies. (Patients are encouraged to get low-cost insurance to cover catastrophic illness.)¹

Preventable Disease. Tobacco use, diet, obesity, and lack of exercise can be linked to nearly two-thirds of cancer deaths in the United States.² A proper diet can substantially lower high blood pressure.³ Sedentary habits account for a substantial portion of deaths due to coronary artery disease, type 2 diabetes, as well as loss of functional ability in older adults.⁴ Osteoporosis can be prevented by not smoking, consuming calcium and vitamin D, engaging in weight-bearing exercise, limiting alcohol and caffeine consumption, and (for some women) taking supplemental estrogen.⁵ According to Dr. Christopher Fanta, head of the asthma treatment program at Brigham and Women’s Hospital, “Asthma is considered the most common preventable cause of hospitalization.”⁶ Fewer than a third of women of childbearing age take the vitamin folic acid, which has been shown to prevent disabling birth defects.⁷

Although making lifestyle changes that prevent disease is not easy, the fact remains that consumers have neither the financial motivation nor the access to information that would allow them to select doctors who have a proven track record in educating and motivating their patients.

Unnecessary Treatment. Studies have shown that various medical procedures and regimens are overused. Examples include treatment for Lyme disease,⁸ back surgery,⁹ myringotomies (insertion of tiny tubes to prevent ear infection),¹⁰ hysterectomies,¹¹ and laparoscopic gallbladder and anti-reflux surgery.¹² A common assumption is that treatment is driven by medical necessity. However, in a series of studies, Dr. John E. Wennberg found that the amount of health care consumed by individuals is highly dependent on where they live, on the capacity of the local health-care system, and on the practice styles of local physicians.¹³

Poor Performance. A substantial number of physicians are falling short in the practice of medicine. Examples include poor control of hypertension,¹⁴ potential errors made by sleep-deprived interns,¹⁵ lack of cardiac stethoscope proficiency,¹⁶ under-use of beta blockers for preventing subsequent heart attacks,¹⁷ inadequate control of cholesterol,¹⁸ under-use of blood-clot dissolving therapy,¹⁹ inadequate pain management in cancer patients,²⁰ and poor communication with patients.²¹

Imperfect Knowledge

Medical Uncertainty. Standardized algorithms and guidelines based on scientific evidence have shown themselves to be successful in treating disease and saving lives. However, in a 1997 article Dr. David Mirvis made these points: Uncertainty remains a fact of life in medical practice. Physicians don’t know the full extent of a patient’s disease or the best single approach to diagnosis and treatment. Biological variability is a major challenge. The same condition may result in different outcomes in different patients due to genetic predispositions, co-morbidity, or other factors. Knowledge of the characteristics of disease and the effects of therapies is far from complete. Diagnostic tests are imperfect and many treatments are based not on scientific principles but on learned practices, assumptions, and other nonscientific formulations. Much uncertainty results from lack of knowledge of the outcomes of what physicians do. A consequence of the high level of medical uncertainty is the existence of a range, rather than a single point, of acceptable practice. This range is broad enough to allow substantial variations in practice patterns.²²

State Mandates. A 1989 study found that states have passed more than 700 statutes requiring health insurers to cover specific providers, diseases, or high-risk individuals. Mandated benefits run the gamut from hair-transplant and acupuncture coverage to mental health and maternity coverage.²³ A follow-up study, published in 1999, found that 20 to 25 percent of uninsured Americans lack coverage because of benefit mandates. The proliferation of mandated benefits has increased the cost of health insurance, disproportionately hurting employees who work for small businesses, which can’t afford to self-insure and thereby avoid the mandates.²⁴

Bone marrow transplantation, for example, is a complex, expensive ($60,000), and painful experimental treatment for late-stage breast cancer, which places the patient at high risk for infection. Beginning in the early 1990s, after preliminary indications of promising results, lawsuits and political pressure led to legislation in ten states, forcing insurers to cover the procedure. Such laws made it difficult to recruit women into clinical trials because women did not want to take the chance of being “randomized” into a control group. By 1999, 5,000 women a year were undergoing transplants nationwide. By the spring of 2000 it became clear that such transplants were no more effective than chemotherapy alone at standard doses.²⁵

Income Tax Distortion. Many writers have pointed out that for the 90 percent of people who obtain their health insurance through their employers, the tax-exempt status of employer-provided health insurance encourages a huge overconsumption of health insurance and hence overconsumption of health-care services, compared to how people would spend their money in the absence of tax exemption.²⁶ For someone in a 33 percent tax bracket, for example, $2 of taxable income turns into $3 of tax-free income, which can be spent on health insurance without any change in disposable income.

Stiffing the Piper. Health-care costs have risen dramatically in the last few decades, while patients’ out-of-pocket share of those expenses has declined: In 1960 patients paid, on average, 20.8 percent of hospital costs and 61.6 percent of physician costs. By 1999 those figures had dropped to 3.2 percent and 11.4 percent, respectively.²⁷

Failed Prescriptions

Managed care, which came into prominence in the 1990s, was initially successful at holding down health-care costs. However, doctors, hospitals, and patients were soon fighting back, and the inherent weaknesses of third-party control were revealed: By requiring patients to pay no more than a token copayment, managed care removes the incentive to economize and undermines patient control of health-care encounters. The central tenet of managed care is that consumers are ill-equipped to deal directly with health-care providers; managed-care organizations must act as intermediaries, handling the complexities of medical payment and quality assessment, leaving consumers to make their wishes known by choosing from a list of rival health plans provided by their employers. This is an anemic form of competition, which is as effective in securing cost-effective health care as a passenger would be in arriving at his destination by telling a blindfolded driver when to step on the accelerator, hit the brake, or turn the steering wheel. To achieve the goal of cost-effective care, consumers need to choose at the level of the individual provider and medical procedure, and face both the costs and benefits of their choices.

A more fundamental problem with managed care is that many medical decisions fall into a gray area where definitive scientific judgment cannot be rendered for individual cases. This gray area is the subject of a tug of war between patients and managed-care administrators. Patients, many of whom are being treated for diseases partly of their own making, want no expense to be spared in their treatment, since someone else is footing the bill. Managed-care organizations, on the other hand, make money (or stay solvent) by limiting the amount of care rendered to subscribers. This gray area is large enough to make the difference between financial success and failure for the organizations and large enough to give patients who are denied care plenty of ammunition when seeking legislative and legal action against those organizations.

A Canadian-style single-payer health care system is nothing more than a massive managed-care arrangement with government bureaucrats in control and without a meaningful appeals process for care denied or delayed. The same problems inherent in private managed care arise in a government-run system. Moreover, as a rule, government programs cannot satisfy consumer demand. Since all goods and services are finite and require human effort to produce, rationing is unavoidable. Only the method of rationing is subject to choice. The free market rations on the basis of income; the method of rationing is the familiar pricing system. When this system is circumvented by the government to provide a “free” good or service, all constraints on demand are removed, making inevitable the explicit rationing of supply by some government authority or the disappearance of the good or service altogether. Regarding universal access to health care, it should be noted that before government intervention in the health-care system, a variety of private organizations provided free medical care to the poor.²⁸

Medical Savings Accounts

Medical savings account (MSA) health plans were introduced at the federal level as a demonstration project in 1996. The central feature of these employer-provided plans is a savings account controlled by the insured individual and used to pay for routine health care. An accompanying low-cost catastrophic insurance policy covers health- care expenses that exceed the high yearly deductible. MSA plans enjoy the same tax advantage as other employer-provided health insurance. Although unspent MSA funds roll over from year to year, they can only be spent on health care.²⁹

The high deductible associated with MSA health plans leads to substantial savings in administrative costs because many low-dollar claims for routine medical care are never filed. In addition, having patients spending their own money on health care makes them more prudent consumers, which means less spending on unnecessary health care services.

However, MSA health plans have drawbacks. They perpetuate the income tax distortion of health-care spending (discussed above) and are subject to legislative manipulation: Under current law, MSA plans are hamstrung by limited availability and growth, unnecessary complexity, and design features that put them at a disadvantage in the marketplace.³⁰ Finally, MSA critics argue that the very idea of government direction or control of consumer spending is inimical to a free market.

The Solution

The solution to the problems discussed above is to treat health care more like other products and services. This means repealing all tax exemptions for health insurance and health-care spending, enacting a compensating tax cut unrelated to individual health-care consumption, eliminating all health-insurance mandates and other regulation, and letting the market sort things out.

The market would probably respond to such deregulation the same way it did before government intervened in health care: As early as the 1940s commercial insurers included deductibles and copayments in their sickness insurance offerings and excluded many elective treatments from coverage, all in an effort to restrain demand for unnecessary and costly medical services. Commercial insurers also used actuarial risks to calculate premium payments and paid individual subscribers, instead of hospitals.³¹ Giving patients a substantial financial stake in the cost of their care will make them interested in the cost-effectiveness of that care.

A second part of a market-driven solution would likely be giving patients access to information comparing the performance of competing physicians, just as consumer magazines provide information on competing products. To do this, independent organizations might determine what physicians accomplish in a clinical setting by measuring the health status of patients before and after treatment. To be cost-effective, such measurement would probably make use of electronic medical records.

Employees on expense accounts spend much more freely than when making purchases with their own hard-earned money. Similarly, patients consume medical services with little regard for cost when someone else is paying for them. In a climate of unnecessary medical care, preventable disease, and medical uncertainty, insulating consumers from the cost of choices they or their doctors make guarantees inefficiency and runaway costs.

Cost-sharing refers to the requirement that patients bear a significant share of the cost of all medical care rendered in their behalf. It does not refer to paying insurance premiums (which do nothing to constrain health-care consumption). The RAND health-insurance experiment showed that patients who have to pay for part of their care cut back substantially on the use of medical services.³² While the market will figure out the right mix of deductibles and copayments, it seems likely that as an individual’s yearly health-care expenses rise, his out-of-pocket share of new health-care expenditures will decline. However, from an economic point of view, it would be optimal if no one’s out-of-pocket share of medical expenses ever dropped to zero, giving every consumer a stake in the cost of every medical visit, test, procedure, hospitalization, or prescription drug he consumes. An immediate effect of such cost-sharing would be to give physicians a newly found interest in cost control for the benefit of their patients and as a means to attract business.

Measuring Physician Performance

In many cases, poor physician performance (discussed above) is due to lack of feedback; in the absence of evidence to the contrary, it is natural to assume that one’s performance is adequate or even superior to that of one’s peers.

In an attempt to control costs, managed-care organizations have been measuring the process of health-care delivery, rather than identifying physicians who keep their patients healthy. In a newly deregulated market, one can imagine managed-care organizations dropping their review and oversight functions in favor of collecting and disseminating (for a fee) information on the performance of physicians (and eventually hospitals). If such a service were to periodically measure a patient’s health status during the course of treatment, the change in these measurements, collected for a sufficient number of patients (and adjusted for severity of illness, co-morbidity, and patient demographics), could be used to measure doctors based on the results they achieve in their patients.

Assessing outcomes is appealing because of its narrow focus: As long as a patient’s health status can be objectively measured, none of the intervening steps that are part of medical treatment need be evaluated. Concern about the number and type of tests performed, improper use of high-tech equipment, medications prescribed, or the appropriateness of the treatment chosen would be superfluous. Poor choices by a physician in such matters would either be reflected in higher costs or worse outcomes than those of other physicians.

For preventive medicine and most chronic diseases the performance of physicians is inextricably linked to patient compliance and cooperation. As a result, the performance of physician and patient would probably have to be measured jointly. Nonetheless, in the context of a system controlled by any third party, measuring a physician based on the behavior of his patients would likely be unacceptable to the marketplace.

However, in a health-care system that includes patient cost-sharing, measuring the performance of physician and patient jointly makes sense. No third-party coercion would be needed; a patient’s financial stake in the cost of care would serve as a necessary and sufficient constraint on his behavior.

Doctors with performance scores showing a low-key approach to smoking cessation, for example, would attract patients with no intention of quitting. Such doctors would suffer no financial penalty other than that brought on by the indifference of smokers looking for a more aggressive approach to their problem. Moreover, doctors with low cessation scores who have high scores in other areas would attract nonsmokers who have no reason to care about quitting.

Meanwhile, patients with a desire to quit smoking, lose weight, improve their diet, or begin an exercise program could choose physicians with performance scores showing a successful track record in preventive medicine. And doctors who felt certain patients weren’t living up to their end of the bargain (regarding compliance with treatment plans) would be free to refer them elsewhere. Thus the goals of physician and patient would be in alignment.

Indicators to be measured would probably be those known to be closely related to good health and closely related in time to physician intervention. Examples of possible indicators are cholesterol levels, blood pressure, blood-glucose levels, and patient satisfaction.

The government would play an important role in establishing and enforcing a patient’s right to control his medical information. Beyond that, patient privacy would be protected because the measurement system would not need identifying information.

The health-care market has failed to produce high-quality, low-cost medicine for two reasons: Consumers are insulated from the cost of medical care by third-party payers, and information on the performance of competing physicians is not available. Fixing the incentives and providing consumers with physician performance data will cause unnecessary surgery to decline, physician performance to improve, disease prevention to increase, and health-care efficiency to rise.

Notes

1. See www.simplecare.com.
2. “Harvard Report on Cancer Prevention. Volume 1: Causes of Human Cancer,” Cancer Causes and Control, November 1996, Suppl. 1, p. S55.
3. Lawrence J. Appel et al., “A Clinical Trial of the Effects of Dietary Patterns on Blood Pressure,” New England Journal of Medicine, April 17, 1997, p. 1123.
4. Andrea L. Dunn et al., “Comparison of Lifestyle and Structured Interventions to Increase Physical Activity and Cardiorespiratory Fitness,” JAMA, January 27, 1999, p. 327.
5. “Osteoporosis: It’s Never Too Late to Protect Your Bones,” Mayo Clinic Health Letter (supplemental medical essay), October 1997, pp. 1-8.
6. Larry Tye, “Asthma Figures Double Since 1980,” Boston Globe, February 25, 1998, p. B1.
7. “Women Are Told Anew of Need for Folates to Stem Birth Defects,” Boston Globe (Reuters), August 3, 1999, p. A10.
8. M. Carrington Ried et al., “The Consequences of Overdiagnosis and Overtreatment of Lyme Disease: An Observational Study,” Annals of Internal Medicine, March 1, 1998, pp. 354-62.
9. “Needless Surgery, Needless Drugs,” Consumer Reports on Health, March 1998, pp. 1-4.
10. L.C. Kleinman et al., “The Medical Appropriateness of Tympanostomy Tubes Proposed for Children Younger than 16 Years in the United States,” JAMA, April 27, 1994, p. 1250.
11. M.S. Broder et al., “The Appropriateness of Recommendations for Hysterectomy,” Obstetrics and Gynecology, February 2000, p. 199.
12. “Keyhole Surgery: Promise and Pitfalls,” Consumer Reports on Health, February 2002, pp. 8-10.
13. See www.dartmouthatlas.org.
14. Dan R. Berlowitz et al., “Inadequate Management of Blood Pressure in a Hypertensive Population,” New England Journal of Medicine, December 31, 1998, pp. 1957-63.
15. N.J. Taffinder et al., “Effect of Sleep Deprivation on Surgeons’ Dexterity on Laparoscopy Simulator” (Research letter), Lancet, October 10, 1998, p. 1191; Steven R. Daugherty et al., “Learning, Satisfaction, and Mistreatment During Medical Internship,” JAMA, April 15, 1998, pp. 1194-99.
16. Salvatore Mangione and Linda Z. Nieman, “Cardiac Auscultatory Skills of Internal Medicine and Family Practice Trainees,” JAMA, September 3, 1997, pp. 717-22.
17. Harlan M. Krumholz, et al., “National Use and Effectiveness of ß-Blockers for the Treatment of Elderly Patients After Acute Myocardial Infarction,” JAMA, August 19, 1998, pp. 623, 627.
18. Richard A. Knox, “Heart Study at 50: New Goal,” Boston Globe, September 27, 1998, p. A1.
19. Harlan M. Krumholz et al., “Thrombolytic Therapy for Eligible Elderly Patients with Acute Myocardial Infarction,” JAMA, June 4, 1997, pp. 1683-88.
20. Charles S. Cleeland et al., “Pain and Its Treatment in Outpatients with Metastatic Cancer,” New England Journal of Medicine, March 3, 1994, pp. 592-96.
21. Clarence H. Braddock III et al., “Informed Decision Making in Outpatient Practice,” JAMA, December 22/29, 1999, pp. 2313-20.
22. David M. Mirvis, “Managed Care, Managing Uncertainty,” Archives of Internal Medicine, February 24, 1997, pp. 385-88.
23. Jon R. Gabel and Gail A. Jensen, “The Price of State Mandated Benefits,” Inquiry, Winter 1989, pp. 419-31.
24. Gail A. Jensen and Michael A. Morrisey, “Mandated Benefits Laws and Employer-Sponsored Health Insurance,” Health Insurance Association of America, January 1999, http://membership.hiaa.org/pdfs/jensenrpt.pdf.
25. Richard Saltus, “Last-Hope Cancer Treatment ‘Ineffective’” Boston Globe, March 4, 2000, p. A1; E.A. Stadtmauer et al., “Conventional-Dose Chemotherapy Compared with High-Dose Chemotherapy plus Autologous Hematopoietic Stem-Cell Transplantation for Metastatic Breast Cancer. Philadelphia Bone Marrow Transplant Group,” New England Journal of Medicine, April 13, 2000, pp. 1069-76.
26. “Subsidizing Employer Provided Health Plans Unfair to Individuals Who Don’t Have One,” National Center for Policy Analysis, www.ncpa.org/bothside/krt/krt012700a.html.
27. M.S. Eberhardt, D.D. Ingram, D.M. Makuc et al., Urban and Rural Health Chartbook: Health, United States, 2001 (Hyattsville, Md.: National Center for Health Statistics, 2001), Table 118, p. 333.
28. Marvin Olasky, The Tragedy of American Compassion (Washington D.C.: Regnery Gateway, 1992), pp. 82-83.
29. Victoria Craig Bunce, “Medical Savings Accounts: Progress and Problems under HIPAA,” Cato Institute Policy Analysis No. 411, August 8, 2001.
30. Ibid.
31. Susan Feigenbaum, “‘Body Shop’ Economics,” Regulation, Fall 1992, pp. 26-27; John C. Goodman and Gerald L. Musgrave, Patient Power (Washington D.C.: Cato Institute, 1992), pp. 187-88; Terree P. Wasley, What Has Government Done To Our Health Care? (Washington D.C.: Cato Institute, 1992), p. 49.
32. Emmett B. Keeler and John E. Rolph, “How Cost Sharing Reduced Medical Spending of Participants in the Health Insurance Experiment,” JAMA, April 22, 1983, p. 2220.

The ongoing battle over “health-care reform” may be portrayed as a war between the American Medical Association and the Good Guys. The AMA is supposed to stand for Corporate Greed, and the Ad Hoc Committee to Defend Health Care, headquartered at Harvard University, is supposed to be on the side of Social Justice and everything good. The latter group (called “Doctors Against Profits” in the Wall Street Journal) recently dumped boxes of annual reports from investor-owned hospitals and health plans into Boston Harbor.

In reality, the issue is Managed Care versus Single Payer, even though neither group openly acknowledges its ultimate political goal.

While the two groups appear to be at odds, it is interesting that the AMA gives the Ad Hoc Committee a lot of column inches in its publications. The truth is that the two have much in common–and they both have the wrong answer to the problems with American medicine. So do Congress and the Clinton administration, which are likely to pass still more bad laws that will push us further down the yellow-brick road to the Single Payer Wizard (despite their advertised intentions, as in the Patient Access to Responsible Care Act, sponsored by Representative Charles Norwood of Georgia).

To get it right, we have to change the focus from doctors’ incomes (and the politics of envy and class warfare) to patients’ well-being, both medical and economic. Yes, profits are involved in medicine–as in every human activity. But remember that government and managed-care bureaucracies (which are more similar than different) are both focused on the bottom line: their budgets and their concept of the collective good. The AMA is ineffective at fighting them because its bureaucracy has the same problem and is in bed with the others.

Medicine is supposed to serve patients. If patients are served well and at an affordable cost, then doctors should be well rewarded (and rewards are not all financial). If doctors are rewarded for reasons that are largely unrelated to good service to patients, as opposed to corporate or government masters, then patients will surely suffer.

Patients have succumbed to one terrific sales job by insurers and the government, which were aided and abetted by physicians out for easy money from third parties. They all want patients to believe that happiness is a rich insurance plan that covers everything.

Such “insurance,” with first-dollar coverage or minimal out-of-pocket expense, is really prepayment for consumption and is definitely not a good deal. As one consumer, who happens to be a doctor, said, “I have sent about $75,000 to Blue Cross in the past ten years and have absolutely nothing to show for it.” Had he had a serious illness, he might still have had nothing to show for it. These days the covered services are “covered” by a gatekeeper and layers of committees.

If this sounds like a pitch for medical savings accounts, it is and it isn’t. MSAs are a kind of gimmick, a partial answer to the basic problem, which is the abuse of the concept of insurance–in large part due to tax discrimination against true medical insurance and in favor of prepayment for consumption.

Faulty Insurance

Both the type of insurance and the payment mechanism are at fault. By “payment mechanism” I mean the “assignment of benefits,” or payment, to the “provider” rather than to the supposed beneficiary. This is an invitation to fraud and abuse. (Nonetheless, Medicare does everything to encourage it.) Moreover, it tends to disguise the wastefulness and absurdity of processing huge numbers of claims for trivial sums of money.

Bureaucracies with a lust for power, insurers with a lust for profit (they get paid for all that ridiculous paperwork), doctors with extravagant tastes (who know they get more from the third party than they could ever get directly from patients), and patients with a distaste for personal responsibility–they all have a vested interest in the status quo. Moreover, everyone fears, and with good reason, that the first one to get off this merry-go-round will take a financial beating.

Probably the only way out is to stop the merry-go-round, all at once, for everybody. No more tax preferences for employer-provided “health benefits”: pay the workers with real money, not HMO money, and give an across-the-board tax cut from which all profit (not just those with employer-provided “health benefits”). No more “assignment of benefits”: pay all claims directly to the beneficiary, with a dual-payee check if that is considered necessary. And no more government mandates that prevent insurance companies from offering low-cost benefits suited to what patients want rather than what special-interest lobbies demand.

If this is done, there will be winners: insurance companies that offer no-nonsense, patient-tailored coverage at a reasonable cost; employers who can offer workers the equivalent of a raise without sacrificing competitiveness; workers who can have more money under their own control (rather than that of an insurance bureaucrat); patients who can buy the medical care they want instead of insurance that they don’t want; and doctors who are best at satisfying their patients.

There will also be losers: Those who profit from managing or gaming the present system—whether they are managed-care or insurance executives, government bounty hunters, bureaucrats, overpriced doctors and hospitals, insurance salesmen, and even patients who are constantly demanding more medical care (often of dubious value) as long as it is at someone else’s expense. Some of these folks can better themselves by finding useful, soul-satisfying work. And the congenital thieves can go back to robbing banks.

Such a system would be correctly called a free market. The transactions that occur there would be peaceful and voluntary.

The system that we have now may be called a market, but it is truly anything but. It is best described as a system of legal plunder, marked by class warfare and increasingly draconian coercion.

The way out is to take back our freedom, not to turn back the clock to old methods rightly called fascism, serfdom, or mercantilism, even if dressed up in new names like managed competition or single payer, and even if advocates stage a perverted version of a stunt (the Boston Tea Party) once pulled by real Sons of Liberty.

Remember, that historic event was about throwing out British mercantilism. How ironic that the actors in the recent parody would destroy American free enterprise and import British or Canadian socialism.