Government Medical 'Insurance'

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This article
is excerpted from Making
Economic Sense
(1995; 2007), chapter 20, “Government Medical

One of Ludwig
von Mises’s keenest insights was on the cumulative tendency of government
intervention. The government, in its wisdom, perceives a problem
(and Lord knows, there are always problems!). The government then
intervenes to "solve" that problem. But lo and behold!
instead of solving the initial problem, the intervention creates
two or three further problems, which the government feels it must
intervene to heal, and so on toward socialism.

No industry
provides a more dramatic illustration of this malignant process
than medical care. We stand at the seemingly inexorable brink of
fully socialized medicine, or what is euphemistically called "national
health insurance." Physician and hospital prices are high and
are always rising rapidly, far beyond general inflation. As a result,
the medically uninsured can scarcely pay at all, so that those who
are not certifiable claimants for charity or Medicaid are bereft.
Hence, the call for national health insurance.

But why are
rates high and increasing rapidly? The answer is the very existence
of healthcare insurance, which was established or subsidized or
promoted by the government to help ease the previous burden of medical
care. Medicare, Blue Cross, etc., are also very peculiar forms of

If your house
burns down and you have fire insurance, you receive (if you can
pry the money loose from your friendly insurance company) a compensating
fixed money benefit. For this privilege, you pay in advance a fixed
annual premium. Only in our system of medical insurance does the
government or Blue Cross pay, not a fixed sum, but whatever the
doctor or hospital chooses to charge.

In economic
terms, this means that the demand curve for physicians and hospitals
can rise without limit. In short, in a form grotesquely different
from Say’s Law, the suppliers can literally create their own demand
through unlimited third-party payments to pick up the tab. If demand
curves rise virtually without limit, so too do the prices of the

In order to
stanch the flow of taxes or subsidies, in recent years the government
and other third-party insurers have felt obliged to restrict somewhat
the flow of goodies: by increasing deductibles, or by putting caps
on Medicare payments. All this has been met by howls of anguish
from medical customers who have come to think of unlimited third-party
payments as some sort of divine right, and from physicians and hospitals
who charge the government with "socialistic price controls"
– for trying to stem its own largesse to the healthcare industry!

In addition
to artificial raising of the demand curve, there is another deep
flaw in the medical-insurance concept. Theft is theft, and fire
is fire, so that fire or theft insurance is fairly clear-cut –
the only problem being the "moral hazard" of insurees
succumbing to the temptation of burning down their own unprofitable
store or apartment house, or staging a fake theft, in order to collect
the insurance.

care," however, is a vague and slippery concept. There is no
way by which it can be measured or gauged or even defined. A "visit
to a physician" can range all the way from a careful and lengthy
investigation and discussion, and thoughtful advice, to a two-minute
run-through with the doctor doing not much else than advising two
aspirin and having the nurse write out the bill.

Moreover, there
is no way to prevent a galloping moral hazard, as customers –
their medical bills reduced to near-zero – decide to go to
the doctor every week to have their blood pressure checked or their
temperature taken. Hence, it is impossible, under third-party insurance,
to prevent a gross decline in the quality of medical care, along
with a severe shortage of the supply of such care in relation to
the swelling demand.

Everyone old
enough to remember the good old days of family physicians making
house calls, spending a great deal of time with and getting to know
the patient, and charging low fees to boot, is deeply and properly
resentful of the current assembly-line care. But all too few understand
the role of the much-beloved medical insurance itself in bringing
about this sorry decline in quality, as well as the astronomical
rise in prices.

But the roots
of the current medical crisis go back much further than the 1950s
and medical insurance. Government intervention into medicine began
much earlier, with a watershed in 1910 when the much-celebrated
Flexner Report changed the face of American medicine.

Abraham Flexner,
an unemployed former owner of a prep school in Kentucky, and sporting
neither a medical degree nor any other advanced degree, was commissioned
by the Carnegie Foundation to write a study of American medical
education. Flexner’s only qualification for this job was to be the
brother of the powerful Dr. Simon Flexner, indeed a physician and
head of the Rockefeller Institute for Medical Research. Flexner’s
report was virtually written in advance by high officials of the
American Medical Association, and its advice was quickly taken by
every state in the Union.

The result:
every medical school and hospital was subjected to licensing by
the state, which would turn the power to appoint licensing boards
over to the state AMA. The state was supposed to, and did, put out
of business all medical schools that were proprietary and profit-making,
that admitted blacks and women, and that did not specialize in orthodox,
"allopathic" medicine: particularly homeopaths, who were
then a substantial part of the medical profession, and a respectable
alternative to orthodox allopathy.

through the Flexner Report, the AMA was able to use government to
cartelize the medical profession: to push the supply curve drastically
to the left (literally half the medical schools in the country were
put out of business by post-Flexner state governments), and thereby
to raise medical and hospital prices and doctors’ incomes.

In all cases
of cartels, the producers are able to replace consumers in their
seats of power, and accordingly the medical establishment was now
able to put competing therapies (e.g., homeopathy) out of business;
to remove disliked competing groups from the supply of physicians
(blacks, women, Jews); and to replace proprietary medical schools
financed by student fees with university-based schools run by the
faculty, and subsidized by foundations and wealthy donors.

When managers
such as trustees take over from owners financed by customers (students
of patients), the managers become governed by the perks they can
achieve rather than by service of consumers. Hence: a skewing of
the entire medical profession away from patient care to toward high-tech,
high-capital investment in rare and glamorous diseases, which rebound
far more to the prestige of the hospital and its medical staff than
it is actually useful for the patient-consumers.

And so, our
very real medical crisis has been the product of massive government
intervention, state and federal, throughout the century; in particular,
an artificial boosting of demand coupled with an artificial restriction
of supply. The result has been accelerating high prices and deterioration
of patient care. And next, socialized medicine could easily bring
us to the vaunted medical status of the Soviet Union: everyone has
the right to free medical care, but there is, in effect, no medicine
and no care.

N. Rothbard
(1926–1995) was dean of the Austrian School,
founder of modern libertarianism, and chief academic officer of
the Mises Institute. He was
also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report
, and appointed Lew as his literary
executor. See
his books.

Best of Murray Rothbard

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