The Free Market and Health Care

by Aug 16, 2013Health & Vaccines0 comments

(Image: SVLG.org)

One issue I repeatedly encounter when debating with people who oppose a free market in health care and want the government to manage this sector of the economy is that my interlocutors pretty much universally don't understand what it is they are actually opposing, or favoring, for that matter.
(Image: SVLG.org)

(Image: SVLG.org)

One issue I repeatedly encounter when debating with people who oppose a free market in health care and want the government to manage this sector of the economy is that my interlocutors pretty much universally don’t understand what it is they are actually opposing, or favoring, for that matter. (I put up one of my recent “debates” with a couple such individuals here, illustrating the point.)

In one recent discussion I had on Facebook, the guy I was trying to discuss the matter with kept trying to argue that the problem with our current system isn’t the government, it’s the free market. When I would point out that, actually, it was government interference that was causing this and that problem, he kept trying to argue, yeah, but that’s not the fault of government, it is free market corporations taking over government to use it for their purposes. I would then reply by pointing out that this kind of behavior was by definition not the free market, but I couldn’t convince him that such government interference in the market wasn’t the free market.

Perhaps related, another problem I encounter is that people confuse “private sector” with “free market”. Thus, if a business is private instead of public, they think, well, then, that’s the free market. Even if you point out that private businesses may not operate in a free market due to government interference in their industry, it still doesn’t seem to sink in. Another person I was discussing the matter with, for example, kept trying to argue that government can manage health care better than the free market. For evidence, he cited Medicare vs. HMOs, and said that Medicare is run more efficiently than HMOs. I said that comparison, even if we accept his statistics for their respective administration costs, is irrelevant to my point, since HMOs are not the free market. This seemed beyond his comprehension, and he just kept repeating this as evidence that government can do it better.

I didn’t know much about HMOs while I was having this discussion, but I knew enough that they don’t operate in a free market, the fact they are private organizations notwithstanding. I did a quick search to learn more, and found the following from CNN Money, for example:

Traditionally, when you hit 65, the federal government begins shouldering most of your medical bills through fee-for-service care that covers 80% of the approved charge for most “reasonable and necessary” doctors’ visits. Medicare HMOs, which began gaining popularity in the mid-’80s, also get Uncle Sam to pick up much of the tab. To hold down costs, the HMOs limit your choice of doctors and access to specialists. All Medicare beneficiaries, HMO members or otherwise, must pay Medicare’s Part B premium, which covers doctors’ bills and is now $525.60 a year.

The portions I’ve bolded illustrate how HMOs do not operate in a free market, but exist within a framework of government interventionism. HMOs for the most part operate within the Medicare system. Here’s some more useful information on the difference. More from Mises.org:

Health Maintenance Organizations (HMOs) were prepaid practices that began mainly on the US West Coast in the early 1900s. Western Clinic in Tacoma (1910) and Ross-Loos in Los Angeles (1929) were among the earliest. (Ross-Loos eventually became part of Insurance Company of North America [INA], which merged into CIGNA in 1982.) Kaiser Permanente began with a clientele of shipyard workers during World War II. After the war, it had hospitals and physicians, but no more worker clientele, so it started marketing to the wider public and by the 1970s had more than 3 million enrollees in five states.

Still, HMOs had limited appeal. By 1970, Kaiser was the only major HMO in the United States, with most of its enrollees forced to join through their labor unions.

Much more about HMOs will be covered in a forthcoming review in the Quarterly Journal of Austrian Economics. The purpose here is to emphasize that, despite some assertions to the contrary, HMOs are anything but free-market firms. The Health Maintenance Organization Act of 1973 made federal grants and loans available to HMOs, removed certain state restrictions if HMOs became federally certified, and required employers with 25 or more employees who offered standard health-insurance benefits to offer federally approved HMO plans.

(This is a tangent, but as for the administrative costs of Medicare vs. HMOs, the claim Medicare is more cost effective is dubious at best, and even if true is due in no small part to government regulations effectively outlawing efforts of HMOs to reduce cost, according to this MIT paper. H/t Marginal Revolution.)

John C. Goodman writes here about how the government is taking the HMO model and expanding it with Obamacare, another worthwhile read. Goodman blogs here about the perverse incentives of the HMO model. Goodman is the author of Priceless: Curing the Healthcare Crisis, which I highly recommend.

Another argument I keep encountering is that the free market is bad because corporations’ incentive is simply to make profits. I would reply that people acting out of self-interest is precisely how the living standards of society improve, since in a free market, the way to make profits is to provide a good or service to meet the demand of your customers, and to do so at a competitive price to bid away customers from your competitors. The counter-argument I kept getting was that I was naive for thinking that corporations’ incentive is to provide quality goods to their consumers at competitive prices, since their only incentive was profit. I kept trying to explain that these two things are not mutually exclusive, that providing goods in such a manner was how they profited, but to no avail. No amount of reason could penetrate that thick wall of ideology I keep running into. It’s been kind of like a trip down the rabbit hole trying to discuss this subject with people.

The best article I’ve read recently about this topic, of how there is no free market for health care, is by Vijay Boyapati on Mises.org. He discusses how government intervened to create the system of employer-provided insurance:

Perhaps the most important cause of rising healthcare prices in America is the employer-provided health-insurance system. The very existence of the system is itself a very strange occurrence and a big hint that government intervention played a key role in its creation. After all, employers do not pay for food or gasoline; why do they pay for healthcare?

Employer-provided health insurance has its origin in a tax policy passed in 1943, which made insurance provided by employers tax free. At the time the United States was engaged in World War II and had enacted wage and price controls, preventing employers from competing for scarce labor using the normal mechanism of offering a higher salary. Instead, businesses used the availability of newly tax-subsidized healthcare as a means of differentiating themselves.

The tax advantages were made even more attractive and fully codified in the 1954 Internal Revenue Code. Over the next few decades, the government’s subsidization of employer-provided health insurance lead to the dominance of that model of healthcare delivery….

As I’ve discussed elsewhere, this government intervention exacerbated the problem of people not being able to get insurance due to preexisting conditions, since employer-provided insurance isn’t portable, meaning you can’t take it with you from job to job. Boyapati discusses other problems, such as how this creates perverse incentives that result in costlier health care:

The most important economic consequence of the existence of the employer-provided health insurance is that consumers are much less likely to discriminate on cost….

[P]roviders of healthcare services have greater incentive to provide medical treatments that are only marginally more effective at much higher cost. This is the opposite of how the price mechanism works in a free market, where consumers (who are paying out of their own pocket) search for the cheapest prices and providers work hard to provide services that are equally efficacious but less costly….

On Medicare:

In 1965, Medicare was passed as part of the Social Security Act, essentially supplying employer-provided health insurance to all citizens above the age of 65. However, the “employer” in this case was the US government, which does not have the same economic incentives as a business, but rather has political incentives. Elected officials have a strong incentive to promise their elderly constituents an expansion in the range of treatments covered by Medicare, as well as to lower the deductible that Medicare consumers pay out of their own pocket. Both these factors further undermine a consumer’s desire to discriminate on cost when seeking medical treatments….

He also points out that in areas in the health care sector where some semblance of a free market remains, quality improves while costs come down:

LASIK is an elective procedure that is not covered by standard insurance, and consumers must pay directly for the service — which means that they are much more likely to discriminate between providers both on cost and reported quality of the surgeon. With these incentives in place, the LASIK procedure has been reported to have fallen in cost by over 30 percent during the last decade.

Even more importantly, the quality of the procedure has improved dramatically in that period as providers competed to deliver the most efficacious treatment.

He discusses how government is used to help certain special interests maintain a greater share of the market by limiting their competition through licensing laws:

Licensure is the practice of restricting entry into a market by forcing practitioners and providers to seek permission before doing so. A common fallacy is that medical licensure protects consumers — yet having a license is no assurance of the ability of a person to practice medicine….

From its inception, the practice of licensure has been motivated primarily by the control of supply by organized medicine — in particular, the American Medical Association (AMA) — to allow the increase of wages for members of the licensed group….

As Milton Friedman pointed out,

It is clear that licensure is the key to the medical profession’s ability to restrict the number of physicians who practice medicine. It is also the key to its ability to restrict technological and organizational changes in the way medicine is conducted.

Licensure limits the extent to which market forces — that is, forces that lead to the cheapest and most effective results for consumers — may determine the most efficient use of doctors, nurses, and technicians….

By regulating these clinics and reducing the supply of doctors and providers, the AMA has caused higher prices for American consumers of healthcare.

He also discusses how government intervention in other sectors of the economy, such as agriculture, affect the health care industry: “In terms of its cost, obesity is perhaps the largest medical problem in America”, he writes, elaborating on “the crucial role government policy has played in encouraging the production of unhealthy foods supplied to American consumers.”

[T]he growth of corn-based sweeteners is a direct result of the government’s farm policy, which subsidizes corn production. A basic consequence of economic law is that when something is subsidized, more of it will be produced….

The obesity epidemic in America has been exacerbated by the abundance and relative cheapness of high-fructose corn syrup. The growth of calories produced, and in particular the abundance of unhealthy calories, is not an outcome of the free market but rather the direct — if perhaps unintended — consequence of government farm policy….

Only by removing the subsidies available to corn producers, and allowing local and organic farmers to compete on an even playing field, will healthier calories become more economically attractive to consumers….

A patent is a government-granted monopoly on production. Holders of pharmaceutical patents are free of the strictures of competition when deciding the price at which to sell the drugs they produce. In practice this means that drug companies are able to charge significantly higher prices than they could in a market free of government intervention.

It’s an excellent article (h/t Tom Woods).

There’s a lot of cognitive dissonance encountered when one ventures to broach this subject with people who think that government should manage the health care industry. For example, one argument thrown at me by a supporter of socialized medicine was that the free market leads to monopolies, and monopolies are bad, so free markets are bad. I pointed out that this is not true, that monopolies don’t arise on the free market, but only through government interference, such as by outlawing competition (I offered the example of the Federal Reserve, a government-legislated monopoly over the supply of currency and credit given the power to engage in legalized counterfeiting). Moreover, consider that this opposition to monopoly was being used as an argument in favor of government monopolizing the health care industry. 

I saw another example of this kind of cognitive dissonance was in New York Times article I read earlier this week. It took the example of a hip replacement and discussed why the cost for this is so high in the U.S.  He explained how nearly all hip replacements are made by one of 5 major companies, which operate as a “cartel”. How so? Well, the government has outlawed competition by making it illegal to make generic implants or to import foreign-made ones. The government protects these companies’ monopoly over specific products by granting them patent rights for their exclusive use. And the FDA’s expensive approval process deters startups from trying to compete with the major players. With such government intervention eliminating any potential competition, these companies are able to enter into agreements with hospitals not to disclose their products’ prices, so that hospitals do not know what their competitors are paying for the same implants, thus effectively eliminating competition even between themselves (hence the “cartel” description). And then we come to the cognitive dissonance part:

The American health care market is plagued by such “sticky pricing,” in which prices of products remain high or even increase over time instead of dropping…. That is a result, economists say, of how American medicine generally sets charges: without government regulation or genuine marketplace competition.

Huh? So, we can see in an industry like computer manufacturing how quality improves but prices go down over time (even despite price inflation), but, gosh, for some reason prices are “sticky” in health care. Why? After just explaining all of the reasons costs for hip implants are so high, the author answers his own question by saying this is just how this sector of the economy operates “without government regulation”. So, if there’s no government regulation, does that mean it’s a consequence of the free market? But then, if its a free market, how can there be no “genuine marketplace competition”? What about all those regulations, such as from the FDA, that we just got done reading all about?

A representative from one of the companies is then quoted explaining that one of the reasons their costs are so high are because of “new regulatory requirements”. After all this, the author asks, “do Americans want medical devices priced like smartphones?” Um, yeesss…? You see what I mean about the cognitive dissonance.

Further on, we get a clue to understand what the author meant by writing that these companies operate “without government regulation”. What apparently meant this exclusively with regard to government fixing prices. Belgium is hailed as a model, and we learn:

While most Belgian physicians and hospitals are in business for themselves, the government sets pricing and limits profits. Hospitals get a fixed daily rate and surgeons receive a fee for each surgery, which are negotiated each year between national medical groups and the state.

The author’s own answer to his question about whether we want health care priced like smart phones seems to be: “No”. He seems to think that government should just dictate what the price of a product or service is. One wonders whether the author thought through the implications of this. If this would work so much better than a free market in health care, for example, then why shouldn’t government just fix the prices of smart phones the same way? Wouldn’t that be better? If not, why not? How does the law of supply and demand and market incentive to produce quality goods at competitive prices differ in the health care sector?

Again with the cognitive dissonance.

The bottom line I kept coming to in my discussions lately was that government bureaucrats making decisions at best arbitrarily, assuming good intentions, cannot know better than the free market and its pricing system, which instructs entrepreneurs and investors where to direct capital to meet consumer demand, how to more efficiently direct scarce resources to productive ends.

So far, I’ve received no coherent response to this argument.

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About Jeremy R. Hammond

About Jeremy R. Hammond

I am an independent journalist, political analyst, publisher and editor of Foreign Policy Journal, book author, and writing coach.

My writings empower readers with the knowledge they need to see through state propaganda intended to manufacture their consent for criminal government policies.

By recognizing when we are being lied to and why, we can fight effectively for liberty, peace, and justice, in order to create a better world for ourselves, our children, and future generations of humanity.

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