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The Medical Mess

January 18, 2000

Tags Health

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.

* * * * *

William Anderson teaches economics at North Greenville College.


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