Socialism and Medicine

by William L. Anderson
by William L. Anderson

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If the financial popularity of Michael Moore’s latest “documentary,” called Sicko, is an indication of popular sentiment in this country, then the United States seems to be ready for what once was called socialized medicine, but today is better known as “single-payer medicine.” All of the candidates running for the Democratic nomination for president of the United States this year promised programs similar to what exists in countries such as Canada, France, and Great Britain. The Republicans are promising “socialism lite.” Both parties promise that the government will be paying much, much more.

Any discussion of medical care and its availability can stir emotions like nothing else. Any time I write on this subject in a public venue, I am assured of receiving strong hate mail from people who are convinced that I want only the rich to receive health care. Other people try to defend what exists in the United States today, which is not easily defended, at least not from a free-market point of view.

As I see it, the subject of medical care is extremely complex, not because of the nature of health care, but rather because of the vast number of government regulations and policies that already govern what currently exists. Government intervention into nearly every aspect of our lives is so common that people often lose sight of how things would operate absent the intervention. Furthermore, people seem to be convinced that government really is the answer when it comes to medical care.

Since the country seems to be barreling headlong to full government-run medical care, I find it necessary both to explain why such a system is and will continue to be disastrous, resulting in costly, substandard care, and to explain the virtues of something that no longer exists in this country: free-market health care. It does no good to criticize the former but ignore the latter, especially since most people are led to believe that the current system of intervention plus “private” employer-based health insurance somehow is free-market medicine. Nothing could be further from the truth, but since there are few people speaking up for free markets these days, we should not be surprised when people confuse a thoroughly interventionist market with free exchange.

In this article, I first will explain what exists in this country today and why the “horror stories” that Moore showcased in Sicko have occurred. I also will point out how we have come to the current situation and why government intervention is the reason. Second, I will examine socialist medical care, both the “single-payer” socialism (such as that which exists in Canada) and the more “traditional” socialist model that exists in Great Britain, where the government owns the medical facilities and employs medical personnel.

Third, and last, I will explain how a free-market health-care system would operate and, more important, why it would provide the best care for people. Although the present political climate does not bode well for free-market anything, let alone something as government-controlled as medical care, nonetheless it is important that we understand why free markets are the best solution.

Earlier this week, I visited a local chiropractor to have treatment on my ailing back. My insurer covers chiropractic care, so I did not pay the doctor directly for services. In fact, the vast amount of medical care in the United States is paid by third parties, be they insurance companies or governments, and that is the root of the problematic situation that exists today in medical care.

Keep in mind that the “solution” that always is touted is the “third-party” system, but that the third party must be the central government and no one else. However, that arrangement simply transfers the problems that already exist; it does nothing to deal with the central problems in health care.

Third-party payers were not always dominant in medical care. Until the post–World War II era, medical services were pay-as-you-go affairs. Those who could not afford the best care depended on charity hospitals or doctors who were willing to stretch out the payment structure. In other words, people purchased medical care the way that they purchased most other goods: directly and in close relationships with those people who provided the services.

The first real break in that system came during World War II, when the government had strict wage-price controls. Employers making war goods (the only real game in town) were faced with chronic labor shortages, yet could not offer higher pay in order to attract workers. Thus, they turned to providing tax-free “benefits” such as health insurance.

I have talked to people who were involved in those early programs. For the most part, employers offered insurance plans to employees in order to provide protection from catastrophic illnesses or accidents. The idea at that time that an insurance company would pay for regular doctor visits and the like was seemingly far-fetched.

However, the social effects of the Great Depression and World War II would have an enormous impact on medical care in this country and elsewhere. First, following the war, Great Britain embarked upon an ambitious program of socialism, not only “nationalizing” the railroads and many businesses, but also creating the British National Health Service in which all medical care, from doctor visits to other medical procedures, would be provided free of charge to anyone living in Great Britain. Other Western European nations quickly followed, urged on by social reformers who said that socialization of medical care would serve as a powerful antidote to the lure of communism on the eastern side of the Iron Curtain.

Intellectuals in this country latched upon the medical socialism across the Atlantic Ocean and soon became a background political force that kept this issue in the public eye. At the same time, American labor unions (and especially the United Auto Workers) were pushing the corporate welfare state as an American example, and health care was front and center.

Insurance plans that once were employer-paid and meant to ward off catastrophic illness expenses became a means by which employees had all of their medical expenses paid. Granted, only a minority of American workers had this privilege, but health insurance as a means of increasing de facto income without increasing tax liability became increasingly popular.

(As employers turned to benefit packages such as health insurance as a means for giving raises without placing employees into higher income-tax brackets, the Internal Revenue Service began to look more closely at health insurance as a source of new revenues. However, every time the IRS has tried to move in this direction, a public outcry has beaten back the agency. Even today, medical benefits are not taxable.)

Furthermore, the welfare state “ideal” was growing quickly, and in 1965 Congress passed a number of welfare measures as part of the Great Society package that Lyndon Johnson was demanding. Among the measures that passed was the Medicare Act, which made the government the “single payer” for health-care services for persons 65 and older.

At the time, I recall vividly that many doctors complained of “socialized medicine,” and predicted Medicare would doom their profession. However, in at least the short term, Medicare has been an income boon to physicians, who quickly found out that the government would pay almost anything doctors charged for their services. Thus, instead of the dreaded “socialized medicine,” doctors were given the Great Sugar Daddy, and the race was on.

In 1965, the U.S. economy was unquestionably the most productive and vibrant in the world. Doctors and hospital administrators were enjoying high revenues, and at that time health insurers generally did not worry about such things as “cost containment.” Life in the medical field was a big party, and people were paying the bills without asking, especially those with deep pockets.

It is no surprise, then, that all of this new-found largess would attract a number of new entrants into the medical field. Doctors discovered their incomes rising, but a number of other people also discovered that the lure of profits into the field was a big draw for drug companies and creators of medical devices. The once semi-sleepy world of county hospitals and quaint doctors who made home visits with their medical bags had leaped into the modern age.

There are two aspects of new potential profits that one must recognize. First, as more entrants come into a particular field of business, they compete for the existing resources, which drives up the prices of those resources, or what we in economics call factors of production. This is a fancy way of saying that in the short term new entrants will drive up the costs.

Second, entrepreneurs do not simply do business the way everyone else does; instead, they find new resources or take existing resources and change them to create new goods or to enhance existing services. Over time, in a free-market setting, entrepreneurs lower real costs to customers, especially when one examines the entire picture.

Consider the MRI (magnetic resonance imaging) device by which doctors are able to “take pictures” inside the human body without invading it. This device is much more versatile than an X-ray machine, which is far more limited in what it can detect.

Thanks to the MRI, doctors can engage quickly and painlessly in exploratory surgery to find damaged tissues without having to engage in “invasive” procedures (i.e., cutting someone open). While the MRI is expensive both to purchase and to maintain, nonetheless it is a cost-saving device because it shortens the time for critical examinations and requires fewer people to perform more medical assessments.

The genius of this machine is not simply in what it does, but rather that someone had the foresight to recognize its medical potential. That is the heart of entrepreneurship, and it is as active in the health-care field as it is elsewhere.

When people make economic decisions, they weigh costs and benefits, something that is hardly profound. However, the ability to accurately examine costs and benefits depends on having accurate information, and the presence of third-party payers changes that situation considerably.

For a simple example, let us assume that I am purchasing a house. In one scenario, I must make the payments myself, with no help from anyone else. In the other scenario, someone else is making all of the payments for me, and no hard-and-fast cost constraints are given. It is obvious that I would be much more careful in the first scenario than in the second. In both situations, I would be purchasing a house, but the economic calculus in the two cases would differ greatly.

If I were building the house, it is obvious that in the different scenarios I would approach all of the various factors that go into the house differently. If I had unlimited funds, I could purchase all of the finest materials, hire an architect, and generally build a luxury villa. However, if I am paying for it, I will go with what I can afford, given my other obligations in life.

It is clear that economic calculation is much clearer and more exact if one is not depending on third parties for payment, so it is not surprising that when insurance companies and government officials realized they did not have bottomless pits of cash to pay to medical professionals, they began to limit what they were willing to pay. Despite the claims of economist Paul Krugman, who writes a column for the New York Times, and others who advocate socialist medical care, all third-party payers, be they insurance firms or governments, face cost constraints and have sought to limit their own exposure.

At the same time, the system has worked to make things more costly on the supply side. For example, state legislatures are fond of mandating new programs requiring all private insurers to provide certain benefits, such as yearly mammograms or mental-health coverage. Invariably, as health care becomes increasingly politicized, politicians seek to force insurers to carry the programs that are politically popular, even if they drive up costs and make insurance less affordable for private customers.

Third-party dependency has another drawback, and that is that the entities paying the bills also try to narrow the choices to familiar practitioners and treatments. Ordinarily, the presence of more choices also means more competition and lower costs, but in the heavily regulated field of medical care, things often are turned upside down.

To give a personal example, in the summer of 2004 doctors found three 90 percent blockages in my arteries. In a normal situation of choice, I could have gone with stents (what my doctor wanted to do) or tried alternative remedies, such as chelation therapy or taking vitamins. However, my insurer would pay for only one remedy, and that was the placement of stents. Thus, my insurer ultimately was billed for $31,000 (stents placed in July and December 2004). I paid nothing. Had I chosen a different treatment, it would have meant thousands of extra dollars from my pocket. Free was better, even if it might not have been better, medically speaking.

Was that the most cost-effective treatment? Who knows? Was it the correct treatment? Again, who knows? Between the political pull of the American Medical Association and the various state and federal regulations that govern nearly everything that doctors, nurses, and hospitals do, it is difficult to know which treatments work and which do not work. (The doctors’ lobby historically has referred to any kind of alternative medicine, be it homeopathy, chiropractic, or the like, as “quackery,” and insurers do not like to pay for “quacks.”)

Likewise, I, like other patients, do not find incentives for making cost-effective decisions. In fact, it is safe to say that in medical care, I and other direct health-care consumers do not make many choices at all. I pay a fixed amount to the insurer and, while there are some co-pays for doctor visits, there is no incentive for me to spend less than what I have paid in premiums. The incentives in such a situation obviously are skewed, creating a situation that is ripe for abuse. Moreover, when economic calculation no longer makes sense, we then see situations in which someone has to choose between which fingers to have sewn back on his hand, as Moore points out in his documentary Sicko.

This is the world of insurer-led medical care that Moore calls “free-market.” It clearly is not. American medical care is heavily regulated on all fronts, and is dominated by third-party payers who are under pressure to keep from giving away the store. (That includes government payers and providers of medical care, which also face real cost constraints and often are stingier than private insurers.)

Given the frustration that people have with the present third-party system, some are declaring that it is the fault of private enterprise. Give government the full reins of medical care, and we will see an improvement both in quality of care and overall costs, a message that Krugman has trumpeted from his position at the New York Times and Princeton University, where he serves on the economics faculty.

If we wish to gain a sense of what to expect with government-sponsored medicine, we should look to Canada to see why the system there has its detractors – and defenders. However, before looking at our neighbor to the north, perhaps we should look at the United States, especially since government payments account for nearly half of all medical expenditures in this country and governments at state and federal levels strongly regulate all facets of medical care.

In other words, while we can draw comparisons with Canada, we are not comparing a free-market system of care to “socialized medicine.” Instead, we are comparing two systems dominated by third-party payments, the Canadian being 100 percent tax dollars, and the American system a combination of taxes and private dollars. The heavy regulation of private insurers, including the many mandates that are placed on insurance companies by all levels of government, guarantees that the medical system in existence here will be semi-socialistic – and costly.

The last statement will come as a shock to people who are convinced after reading Paul Krugman’s New York Times columns that medical care in this country is pure free enterprise and that it is free enterprise that is driving up the costs. In a recent column, Krugman declared that medical care in the United States is costly because of high-quality medical capital such as MRI and CAT scan devices. His reasoning goes as follows:

• Those devices are expensive.
• Doctors charge a lot for tests from those machines, since the devices are costly.
• Because the tests are expensive, they drive up health care costs.

If Krugman were not an economist, perhaps he could be forgiven for constructing such a faulty chain of economic logic. First, and most important, he is not examining what the CAT scan and MRI devices replace. They permit doctors to quickly engage in exploratory surgery in which they are able to quickly diagnose different disorders. Before the advent of these devices, doctors had to perform invasive procedures for which there was a recovery period; today, they are able to quickly diagnose problems at a fraction of the total costs that once were involved in such examinations.

In other words, when one factors in time, as well as the fact that the devices ensure more-accurate diagnoses, as well as increase survival rates from certain kinds of illnesses, one can see that they are not the source of high-cost medical care. Instead, they improve the quality of medical care and, when one looks at the big picture, actually lower real medical costs.

Second, Krugman wrongly appeals to the discredited cost-of-production theory of value, which dominated economics until “marginalists” such as William Stanley Jevons and Carl Menger in 1871 independently produced path-breaking works that demonstrated conclusively that demand for the final product is what gives value to the factors of production and capital goods, not the other way around. While this may look to be “technical” economics talk, it actually is something that is very important in explaining why Krugman and others like him are so wrong when they advocate government medical care.

Capitalism and socialism

According to Krugman and others, medical care in the United States is expensive because it costs a lot of money for people to have tests done by means of MRI or CAT scans. Thus, if you wish to have less-expensive medical care, then you do away with such expensive items or more strictly ration them.

For example, I work in Allegany County, Maryland, and we have three MRI devices in this county of about 80,000 people. I have had two MRIs done, which were performed the same week my doctor scheduled them for me. Montreal, Canada, on the other hand, has about 3.6 million people in its metropolitan area, and there also are three MRI devices, one for more than a million people. Anyone needing an MRI there has to wait at least six months.

Why the difference? The answer lies in the somewhat obscure fact that under a socialistic system, capital becomes a liability rather than an asset. The reason is that under a system of private profit, capital is used by its owners to provide an income; in socialism, capital does not provide an income to anyone. Rather, it is an expense item and nothing else.

The owners of the MRI devices in Allegany County charge a fee for their use. In my case it was $1,200. The alternative would have been for doctors to open my knee and look inside and then decide whether or not to do surgery. Such a procedure not only would be invasive and have resulted in my being laid up for several weeks, but it also would have been much more expensive in total costs that would be paid, including costs my employer (and I) would have had to bear, since I could not have been in a classroom for several days.

As it was, I missed no time from work to have the MRI, and when it showed a tear in the medial meniscus, my surgeon was able to home in immediately on the problem. When I had surgery, I was out of work for just a couple days. If one looks just at the cash outlays for the surgery (paid by my insurer, of course), there is no doubt that the entire procedure was more expensive than it would have been in Canada. If one looks at the opportunity cost of waiting, of invasive surgery, and of time off from work, the numbers no doubt are much closer together.

The owners of the MRI devices in Allegany County earn an income from those devices, which obviously cost more than a million dollars apiece. Thus, as long as it is profitable to the owners to purchase and employ them, they will do so.

Take the sets of incentives faced by a hospital administrator in Canada, however. Because he cannot charge for any services, an MRI device will not provide any income for his hospital; thus, it represents only an expense. Furthermore, such capital expenditures would serve to take money away from other expenses, such as increasing salaries for unionized nurses.

In a capitalist system, such decisions are made within the nexus of economic calculation, in which one makes economic choices based on the prospect of profit. For example, if it could be shown that a new MRI or CAT scan could have a good return on investment, it would make sense for a medical center to purchase such a device. However, in a system such as those that exist in Canada and European countries, other factors govern whether or not such devices are purchased, and the factors almost always are political.

It has long been understood that politically connected people are moved to the front of the line for special medical procedures, which causes no small amount of envy among Canadians who might have to wait six months for an MRI and more than a year for knee or hip replacements. (Even supporters of Canadian medical care acknowledge that there are long waiting times, but insist that government “is doing something about it.”)

Jane Orient, a practicing physician who has written volumes on socialism and health care, writes,

It [medical care in the United States] is a two-trillion-dollar pot of gold, one seventh of the American economy. It is certainly a great magnet and motivation for all types of people. It attracts people because of fear and greed, and it attracts people because of their better instincts. It is also the third-rail of politics. Once people are given some sort of entitlement to medicine, it can never be taken away. Let us not blame the free market for that; there has been no free market in medicine for at least 60 years, thanks to the public-private partnership, the federal tax code, and all types of government intrusions and incentives.

Economic historian Robert Higgs has written that people often will hand personal responsibility to the state either when they are fearful that something will happen to them or when they have a fear of losing something. Moreover, governments are able to harness the destructive power of envy, and universal medical care – in which no one supposedly is permitted to have better care than anyone else – is one way that the political classes can successfully take power. Writes physician Jane Orient,

Besides being a scam as far as health is concerned, universal health care is a great way of implementing one of socialism’s main objectives through the back door: equalization of incomes through redistribution of wealth. Let us not forget that Lenin called medicine the “keystone in the arch of socialism.” In Canada, for example, socialized medicine is a reality of everyday life. Everybody has to have insurance. It is universal, it is mandatory, and it is affordable. People with low incomes may pay as little as $300 a year through their taxes whether they like it or not.

Those in the upper-income category may pay as much as $22,000 for the same low-quality insurance policy. Canada’s upside-down-and-backward universal health care makes sure that anybody can go to the doctor because of a sniffle without paying the bill. On the other hand those who are really sick are “guaranteed” to be circling around the emergency room or piled up on gurneys in the corridor, and they are forced to pay for such care on the basis of income. It is the ultimate sliding scale.

Can you think of any other product that you have to pay for according to your income? When you buy a car, does the dealer look at your tax return and say, “Well, this car is going to be ten times as much for you as it is for me”? It’s a great way to redistribute the wealth.

Orient also notes the economic-calculation issue:

A is the customer, B is the service provider. B tells A what service he should buy. Then a third party pays for it from a common pool of funds. This problem has no economic solution. We have simply disconnected supply from demand by taking the price to be paid directly by the customer out of the equation. Thus we have absolutely no control over the cost of this system. No wonder the cost keeps going up and up and up. Medicare is a perfect example.

Every time the government passes a law to make health insurance more affordable, the expenditures rise and so do the premiums. As a result, the number of uninsured people goes up as well. The only way we can get people to buy such an overpriced product is to use force. Having disconnected the free-market mechanism, the government now must control the supply side by rationing health-related products and services. Of course the word rationing is never used; instead, medical services are rationalized.

Because medical care has become a tool of the political classes, there is no way under the current system – whether in this country (which continues to move toward the Canadian system) or in Canada, or anywhere else – that it can develop as it would in a free market. Either medical professionals will throw more resources at medical care than are demanded in the market (the U.S. system) or they will throw fewer resources than for what people would be willing to pay, if they legally could do so (Canada, Great Britain, and other industrialized countries).

But there should be genuine free-market alternatives. Paul Krugman may insist that what we have now is the free market, but he simply is wrong. There really is a better way, one that would produce a healthier society.

There is one thing to remember that is very, very important when speaking of free markets: they are entities that are free of coercion. We often fail to remember that free markets are called such precisely because they involve voluntary and consensual behavior on behalf of the individuals involved in those exchanges. This does not mean that people are acting solely on a whim or without urgency, but is rather a reminder that free-market exchanges exist in an atmosphere of freedom – freedom from coercion.

Much of modern medicine and health care does not operate without coercion, and if the advocates of universal health care have their way, there will be even more coercion. Paul Krugman writes in his November 30, 2007, New York Times column,

The central question is whether there should be a health insurance “mandate” – a requirement that everyone sign up for health insurance, even if they don’t think they need it. The Edwards and Clinton plans have mandates; the Obama plan has one for children, but not for adults.

Why have a mandate? The whole point of a universal health insurance system is that everyone pays in, even if they’re currently healthy, and in return everyone has insurance coverage if and when they need it.

And it’s not just a matter of principle. As a practical matter, letting people opt out if they don’t feel like buying insurance would make insurance substantially more expensive for everyone else.

A “mandate” is just another word for coercion or force. Lest anyone think that Krugman is describing voluntary behavior, here is what he has to say about a plan by one presidential candidate, Barack Obama, that is not fully “mandated”:

Here’s why: under the Obama plan, as it now stands, healthy people could choose not to buy insurance – then sign up for it if they developed health problems later. Insurance companies couldn’t turn them away, because Mr. Obama’s plan, like those of his rivals, requires that insurers offer the same policy to everyone.

As a result, people who did the right thing and bought insurance when they were healthy would end up subsidizing those who didn’t sign up for insurance until or unless they needed medical care....

Mr. Obama claims that mandates won’t work, pointing out that many people don’t have car insurance despite state requirements that all drivers be insured. Um, is he saying that states shouldn’t require that drivers have insurance? If not, what’s his point?

Look, law enforcement is sometimes imperfect. That doesn’t mean we shouldn’t have laws.

Third, and most troubling, Mr. Obama accuses his rivals of not explaining how they would enforce mandates, and suggests that the mandate would require some kind of nasty, punitive enforcement: “Their essential argument,” he says, “is, the only way to get everybody covered is if the government forces you to buy health insurance. If you don’t buy it, then you’ll be penalized in some way.”

Well, John Edwards has just called Mr. Obama’s bluff, by proposing that individuals be required to show proof of insurance when filing income taxes or receiving health care. If they don’t have insurance, they won’t be penalized – they’ll be automatically enrolled in an insurance plan. That’s actually a terrific idea – not only would it prevent people from gaming the system, it would have the side benefit of enrolling people who qualify for S-chip and other government programs, but don’t know it.

Whether or not Krugman believes it is a “terrific” idea to force someone to enroll in a health-care plan they would rather not have is irrelevant. What we can say unequivocally is that he believes that some form of coercion is central to a successful system of medical care. Free markets have no place in such a system.

Obviously, the first fundamental of a free-market system in medical and health care would be the absence of coercion. This precept extends far beyond the question of whether or not people should be forced to purchase government “health insurance.” Indeed, the idea of free markets should extend to all facets of medical care.

The first principle here should be the absence of government licensing of medical-care professionals and practitioners. No doubt, the very mention of doing away with licensing conjures up tales of doctors who are careless, physicians who misdiagnose illnesses and medical conditions, surgeons who leave sponges in patients, and the administration of lethal doses of medicines.

Oops. Those things already happen in a system that is heavily regulated. To say, then, that government regulation prevents medical mishaps is to make a very sad joke. Such incidents are much too commonplace today.

The medical research organization HealthGrades recently conducted a study in which it found that “an average of 195,000 hospital deaths in each of the years 2000, 2001 and 2002 in the U.S. were due to potentially preventable medical errors.” A 2003 study in the Journal of the American Medical Association estimated that 98,000 deaths a year occurred because of medical malpractice or misdiagnosis, and it is doubtful that more regulation would make those numbers any better.

Ending government regulation of medical care and also ending the state certification of medical practitioners would not mean that the medical industry would be taken over by quacks and charlatans. For one, private certification would become much more important and would be a much more effective means of identifying high-quality practitioners than the current state-run system, which is done not so much for quality-control purposes as to reduce the supply of medical practitioners, thus keeping the prices for their services higher than they would be in a free market. (Economists have done many studies regarding state licensing of many professions and lines of work and the conclusion is almost unanimous that despite the rhetoric one hears from advocates of licensing, the real reason for the practice is to raise labor costs.)

The end of government constraints against the suppliers of health-care services is only one step toward free-market medical care. The second is even more fundamental to free-market care: permit the price system to work in the health-care arena.

Benjamin Anderson, one of the great U.S. economists of the first half of the 20th century, once wrote, “Prices need to be permitted to tell the truth.” The “truth” of which he speaks refers both to the relative scarcity of a particular good and to the demand for it. Without free-market prices, there is no good way to make informed decisions regarding a good’s availability and who should receive it.

Government at present has distorted the price system in many ways. First, through the “third-payer” system, patients are disconnected from the real costs of medical care. For example, when doctors discovered more than three years ago that I had three blocked arteries, they quickly put in stents. When another blockage was found five months later, doctors put in another stent. The entire bill for these procedures was $31,000, but I did not pay a dime, at least directly; everything was covered by my insurance company. I was the patient, but at the same time I was disconnected financially from what was happening.

Critics of free markets would quickly point out that if I suddenly had a $31,000 bill facing me, I most likely would not have received the stents at all. Thus, in their minds, a free-market system ultimately would mean that “only the rich” would be able to afford care.

However, one must keep in mind that the prices charged for this operation were high precisely because of the third-party paying system. Had a free-market system in medical care been in existence when I became ill, the following would more likely have been the case: Prices for such operations would have been substantially lower in a free market than they are under the third-payer system; and I would have been presented with more choices than I was, given that my doctors were operating under the constraints laid down by my insurance company and by the state mandates in existence.

For all of the rhetoric used against the free market, one should remember that most of the people who have earned great wealth in capitalistic systems have done so by making goods available to a large number of consumers, most of whom are not high-income people. (I say “most” because some political entrepreneurs have managed to make fortunes by convincing politicians to restrict competition in the markets where they operate.)

The same principle applies to medical care, just as to all other goods and services. Doctors and other medical practitioners could not make a living for very long if they constantly priced themselves out of the market. While it is true that medical prices are very high right now, they are not high because of free markets but rather because of third-party payers who are part of the giant disconnect between the services patients receive and the method used to pay for them.

Even today, despite all of the government interference in medical affairs, U.S. companies are among the most innovative in the world when it comes to developing medical devices that either are used directly for patient care (such as pacemakers) or are devices such as CAT scans and MRIs that permit doctors to make diagnoses quickly and accurately without invasive procedures. One can be assured that if government were to completely take over all medical procedures, as Paul Krugman and others have advocated, we also would see an end to medical innovation, because a socialist system would see medical devices as being pure cost.

(As I pointed out earlier, there is a logical reason that Montreal with more than three million people in its metropolitan area has as many MRIs as has Allegany County, Maryland, where 80,000 people reside. Under socialism, capital becomes a liability, not an income-producing asset.)

A price system not only serves to allocate resources to their highest-valued uses but also connects buyers and sellers, who make decisions about whether or not to trade on the basis of their respective opportunity costs. In a third-party payer system, as exists today, that connection between costs and benefits is damaged or destroyed. Yes, I paid for part of the health insurance that paid for my surgeries three years ago, but there was no direct link between the service and its payment.

The very nature of such a system means that people are unlikely to look for alternatives, so they find themselves with all-or-nothing choices. For example, would drug therapy have worked for me? Were there alternative therapies that are not invasive at all?

In a free-market system, I would have had some responsibility in determining what was best for me in my situation. In the third-party payer system, I had to decide either to have stents or to do nothing.

Fed up with this system, a number of other doctors are going to cash-only care in which patients pay directly instead of going through insurance plans. As one doctor tells me, a visit to a physician who operates under such rules costs “about the same price as an oil change for your car.” (I remember I used to see a doctor about 30 years ago who charged everyone $5 per visit. I don’t remember the care’s being of lower quality than what I receive today.)

One area of medical care that has operated on a cash basis for years has been dentistry. (More and more dentists are using basic insurance plans, but nothing as complicated as what we see in regular medical practices.) It is interesting to note that we do not hear of a “dentistry crisis” in the United States. Yet American dental care is second to none in the world.

Dental offices in this country are noted for having up-to-date equipment and strategies, which goes against the grain of what people such as Krugman are claiming. Indeed, modern American dentistry proves that a free-market system (or at least mostly free-market) can work for medical care. For that matter, veterinary care operates on a free-market basis (until recently there have been few insurance plans for pets), and we do not hear of a “crisis” in animal care.

The upsurge in medical costs can be traced to the introduction of Medicare in 1965, as the government suddenly threw a lot of new money into medicine, with the resulting increase in demand that drove up prices. It was classic supply and demand, and the addition of Medicaid did not make things better, either.

First, and most important, when one is in a deep hole, one does not grab a shovel and continue to dig. It is Medicare that has helped to dig the deep health-care hole, so expanding Medicare is analogous to digging a deeper hole.

Second, the assumption is that were it not for Medicare and Medicaid, medical care would not be available to poor and elderly people. That simply is not true; it was not true before those programs were created, and certainly is not true today. In fact, if governments permitted more medical practitioners to enter the business, and especially permitted nurse practitioners to operate more freely, one can assume that there would be plenty of opportunities for the poor and elderly to receive quality care.

Third, abolition of those programs would drastically lower the government budget deficit and allow at least a hope that future generations will not drown in federal-government debt. Contra Krugman, government involvement in medical care not only lessens the supply of available practitioners and medical capital, but it also makes the existing medical care substantially more expensive.

The free market in medical care was mostly abandoned four decades ago, as government muscled into the picture with Medicare and other “single-payer” plans, thus changing the face of how people paid for their care. The results are obvious, and often tragic.

However, the so-called universal-care solution is no solution at all. Over time, it will bring real deterioration in care, and once it is established, it will be very difficult to make the system work.

There is an alternative called a free-market system or, as some might put it, a separation of health care and the state. Because medical care is a scarce good, and because markets alleviate scarcity better than any other mechanism, it makes sense to trust health care to free markets. Indeed, to restore both freedom and health, there is no other way.

William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute. He also is a consultant with American Economic Services.

Copyright © 2008 Future of Freedom Foundation

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