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The Medical Mess

Mises Daily: Tuesday, January 18, 2000 by

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The current Democratic Presidential debate between Vice President Al Gore and former U.S. Senator Bill Bradley seems to hinge on large part upon who has the "health care plan" that best appeals to voters. Both candidates apparently are claiming that a "crisis" exists and that their plan would "fix" whatever ails American medicine.

Good luck. To the extent a crisis does exist, their plans, like the others regularly introduced by representatives of both political parties, are a cure in the same way that feeding a flu patient cyanide would cure his illness. All of the details which politicians and their media allies like to publicize simply cloud over the real issue, that being how government truly distorts the practice of health care. Perhaps it is time for politicians to take the politics out of medicine, a novel idea.

Before going further, we need to address the argument that medical care belongs in a special, extra-market category in which the usual economic analysis does not apply. That notion, a favorite of politicians who endlessly appeal to voters with promises of providing something for nothing, is easily debunked.

Medical care is a scarce service that is provided for individuals who believe they need it. Proof of its scarcity is the fact that people historically have paid something for that service, regardless of whether the "doctor" is an M.D., a chiropractor, a homeopathic practitioner, or a shaman.

Because medicine is an economic service, rules of demand and supply apply to it as they do to anything else that is scarce. Individuals who seek medical care are guided by the marginal benefits they assume they will receive, their choices tempered by the marginal costs they incur while seeking that service.

As long as those choices are made in an unhampered market, and as long as people needing medical care can freely choose among alternatives, the system will work as smoothly as the market for bread or pork bellies.

The so-called crisis in medicine stems not from any peculiarities in the service itself but rather in the way that politicians have decided that medical care will both be produced and distributed. Led by the American Medical Association, one of the most powerful labor unions in history, governments at all levels have placed massive restrictions upon what can be considered "legitimate" medical practices.

By limiting choices through licensing and other regulations, the political classes have created a situation tantamount to an automobile market in which customers are permitted to purchase only Cadillacs, Mercedes, and BMWs.

Despite the claims by politicians, the medical profession, and their media allies that such laws "protect the consumers," they exist for one main reason: to protect doctors' incomes. In that regard, they have been breathtakingly successful, as doctors as a class are the highest-paid professionals in our country.

On the demand side, payment for services is skewed both by the presence of health insurance, which really is not insurance in the traditional sense, and vast government programs such as Medicare. Unlike automobile insurance, which is collected only in the case of an accident or unexpected breakdown, these programs actually encourage the activity against which they "insure."

Purchase of most products involves direct payment. When I buy groceries, for example, I go to the market, pick out what I want, then pay the clerk at the register directly from my own pocket. However, when I see a doctor, I may have to pay a portion of the fee, but the remainder is paid by a third party, which is my insurer.

As noted earlier, economic behavior is governed by both the buyer's perceived marginal costs and marginal benefits. In the case of medical insurance, however, the cost structures are thrown into chaos, leading to perverse incentives. The lion's share of payments made by insured individuals consists of up-front premiums, which means that the marginal costs will be either zero or lower than they would be otherwise.

Since marginal benefits of seeking medical care will almost always outweigh the marginal costs, individuals have the incentive to see a doctor even if less-costly alternatives exist - but are not covered by insurance. For many years, Americans have done just that.

Even the present private insurance system is a creation of politics. During World War II, when the U.S. Government ran an intricate system of wage and price controls, employers found they could give employees "raises" by offering tax-free health insurance that also passed under the government's radar screen.

For many years, insurers followed the prescription of "someone else spending someone else's money on someone else" and paid the bills as charged. Uncle Sam did the same through Medicare and its many other welfare programs. As money poured into the coffers of doctors and hospitals, politicians were shocked, SHOCKED, that increased demand for medical services was driving up their prices.

After many years of this foolishness, both insurance companies and the government began to limit what they would pay. Medicare has been especially stingy, and through misuse of the law has placed doctors and patients in a real bind. If an individual over 65--all senior citizens are required by law to use Medicare, whether they want to or not--wishes to pay a doctor out of his or her own pocket for medical services, then Medicare will ban that doctor from seeing elderly patients for two years.

Of course, politicians attack the private insurance companies while demanding more money for Medicare through higher taxes. Through misnamed legislation like "Patients Bill of Rights," the political classes are trying to force insurers to pay for medical care outside their contracts while at the same time politicians are trying to strangle the system through Medicare. It is cynicism at its worse, but, unfortunately, it plays to the voters.

The so-called experts quoted so often in the mainstream media continue the sophistry, as they claim that higher medical care costs are due to the influx of new equipment such as MRI devices and other machines that enable doctors to gain quick and accurate diagnoses of illnesses and injuries. That is like saying that the installation of robots on assembly lines drives up the price of automobiles.

Higher medical costs are due to one reason, as stated earlier: third party payments. It is interesting that no one speaks of crises in chiropractic or dentistry. That is because those two professions are dominated by paying patients. While insurance may cover some costs for some patients, many who receive chiropractic or dentistry services pay out of their own pocket.

So far, government has not managed to damage those professions in the way it has hurt the practice of medicine. The state has managed to sink its claws into both the supply of and demand for medical services. Given the record of government elsewhere, no one should be surprised when politicians make a mess of things. Medicine is no exception.

For all their nauseating details, the Gore and Bradley "plans" are exercises in pure foolishness. What is needed is not even more government regulation and third party payments, but a return to a free market in medicine.

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William Anderson teaches economics at North Greenville College.