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The Relentless Process of Socializing Health Care

Mises Daily: Thursday, May 01, 2008 by

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[An MP3 version of this article, read by Dr. Floy Lilley, is available for download.]

The movement towards socialized medicine is strong but widely misunderstood. Many ordinary people see health care as a right and complain that it is too expensive. Some economists also see problems with the existing health care system and propose public-sector alternatives. One serious problem with those who want socialized medicine is that they fail to see the problems that already exist with governmental involvement in health care.

Economists Steven DeLoach and Jennifer Platania claim that employer-provided health care affects the economy adversely. The logic of the DeLoach/Platania argument is relatively straightforward. Since health insurance is a fixed cost per employee, employers have an incentive to increase output by increasing hours worked per worker, rather than by hiring additional workers. Since labor productivity declines as workers work longer, it would be more efficient to hire more workers, rather than to have the same workers work longer.

The internal logic of their argument might be plausible so far. What is their solution to the alleged problems of employer-provided health care? DeLoach and Platania claim that a single-payer-funded (by the federal government) health care system would permanently increase GDP and employment while reducing the average workweek. The current system also results in greater inequality. Employers now have a greater incentive to expand the working hours of high-wage/high-productivity workers relative to low-wage low-productivity workers. DeLoach and Platania want the results that supposedly derive from European social democracies: greater income equality, shorter hours, and higher living standards.

The primary problem with DeLoach and Platania is that they do not sufficiently account for the effects of existing governmental intervention. DeLoach and Platania mention that the government provides unemployment benefits to unemployed workers. This measure naturally encourages idleness because it changes the relative costs of labor and leisure. This alone "distorts the economy." It should also be noted that the federal government allows a business tax deduction for funding employee insurance. Businesses have an incentive to pay their employees partially through health because of the way the tax code is written, and because marginal tax rates are high, especially for high-productivity workers.

The main deficiency in the DeLoach/Platania study is that they "model the economy" with math equations that assume constancy in underlying conditions. Static mathematical models do not allow for proper analysis of either the private or public sector. Ludwig von Mises understood the dynamics of intervention. For instance, Mises argued that an initial price control would result in unintended effects that would require further controls, if the original goals of the initial intervention are to be realized. A second round of controls would lead to additional unintended consequences, and so on. Consequently, a program to regulate one specific area of the economy can easily spread to other areas. Taken to an extreme, such spread of regulation leads to comprehensive regulation of the economy.

Of course, regulation in the American economy has not become comprehensive, but we can see that it is spreading. The federal government granted a subsidy to American businesses by making employer-funded health insurance tax deductible. Health benefits are a tax dodge. If health care benefits were included as taxable income, then American employers would have no clear advantage to providing their employees with health insurance. Since federal tax law allows employers and their employees to avoid IRS and payroll taxes, there is an advantage in offering health benefits along with salaries, instead of offering no benefits with increased salaries. Seventy percent of American workers have employer-paid insurance. DeLoach and Platania are probably right about how the current system of employer-paid insurance creates some perverse incentives, but they ignore the role of government in subsidizing the employer-paid insurance system.

The federal government promotes employer-paid insurance in other ways. Were it not for the current level of federal payroll and income taxes, there would be little gain to entrepreneurs from offering insurance to their employees. If the Congress were to begin cutting unnecessary and wasteful spending, we might be able to see significant reductions in income tax rates some time in the not-too-distant future. Also, the payroll taxes created by Medicare and Social Security definitely cause "distortions" in the economy. Past federal interventions set the stage for the "distortions" that DeLoach and Platania blame on employer-funded insurance.

Ironically, DeLoach and Platania want to fund a single-payer government health insurance system through a payroll tax. Their healthcare payroll tax would eliminate any distortions that derive from employer-funded health care, but the existence of this new tax creates an incentive to avoid, along with further incentive to pay employees benefits rather than wages. How would employers and their employees react to their new health care payroll tax? Only experience can tell, as people react to changes in their environment by thinking and by innovating. As Hayek put it once, "the mind cannot predict its own advance."

There are additional reasons to blame the American government for the alleged distortions of employer-paid health insurance. Were it not for the expense of health care in this country, health insurance would be a small part of either an employer's expenses in an employer-paid system, or household expenses in a consumer-financed system.

Why is American health care so expensive? The federal government increases the cost of insurance by regulating insurance deductibles. Given the administrative costs of insuring routine health care, it would make more sense for consumers to pay out of pocket, instead of through insurance. Health care deductibles would enable us to economize on the administrative costs of insurance, but federal law won't allow this. Also, DeLoach and Platania also ignore the AMA monopoly on the supply of physicians. The American Medical Association has a history of restricting entry into the medical profession. AMA control on the supply of physicians has not helped health care affordability.

Finally, the court system and the Congress have failed to stem the tide of frivolous and fraudulent lawsuits in the United States. Excess litigation has affected the costs of health care. Doctors must carry expensive malpractice insurance. Also, doctors now practice "defensive medicine" by ordering unnecessary tests, so that, in the event of their being sued, juries will believe that they took every possible precaution.

Increased health care costs translate into higher insurance premiums. Higher insurance premiums obviously increase the distortions that DeLoach and Platania use to justify their plan for socialized health insurance and a new payroll tax. Alternatively, we could address the root causes of unnecessary health care costs (i.e., governmental causes) so as to reduce the distortionary effects of employer-paid health insurance.

DeLoach and Platania fail to understand the true nature of our problems with health care finance mainly because they think in static terms of general equilibrium. They overlook the tendency of governmental intervention to cause problems that lead to further calls for governmental intervention. Their plans for government-financed health insurance solves the most obvious problems of employer financed health insurance, but only by ignoring both the root causes of increasing health care expenses, and the yet unseen but inevitable distortions that their new payroll tax will create. They ignore the dynamics of interventionism (see Ikeda 1997 on this subject).

DeLoach and Platania also hold a static view of capitalism. In reality, the American capitalist system is a dynamic system, with new enterprises and new methods of business and products that emerge daily. Unlike government, the unintended consequence of private profit seeking tends to increase consumer welfare. Entrepreneurs, workers, and consumers are quite capable of arriving at reasonable solutions to the problems of financing health care, and the government's track record in these matters is hardly admirable.

While many people claim that the rising costs of health care and problems with employer-funded insurance prove the case for taxpayer-funded health insurance, this is not really the case. The real driving force behind taxpayer-funded health insurance is ignorance. Many people fail to see the role of government in increasing health care costs. Some economists analyze health financing with unrealistic and misleading general equilibrium models that ignore the dynamics of government intervention.

Unfortunately, nearly all economists are now schooled in general equilibrium theorizing. Few graduate schools focus any attention on the superior dynamic analysis of Mises and Hayek. The real solution for health care insurance is therefore better education, both in terms of the history of governmental intervention in health care markets, and the theoretical concepts of Austrian economics that are indispensable to our understanding of historical facts.

Sources

Berlant, J. 1975. Profession and Monopoly: A Study of Medicine in the United States and Great Britain. Berkeley: University of California Press.

DeLoach, S.B. and J.M. Platania. "The Macroeconomic Consequences of Financing Health Insurance." Elon, NC: Elon University Working Paper, 2008–04.

Goodman, J.C. "Health Insurance." In The Fortune Encyclopedia of Economics. New York: Warner Books. 684–88.

Ikeda, S. 1997. Dynamics of the Mixed Economy. London; New York: Routledge.

Kessel, Reuben A. 1970. "The A.M.A. and the Supply of Physicians." Law and Contemporary Problems, Vol. 35, No. 2, Health Care: Part 1. 267–283.

Mises, Ludwig von. Interventionism: an Economic Analysis.