“It wasn’t government that gave us nearly 50 million uninsured Americans and denials for pre-existing conditions. It wasn’t government that gave us the yearly and lifetime caps on insurance coverage that have sent so many people into bankruptcy when they’ve faced a serious illness or accident. It wasn’t government that gave us a system in which the gap between what we spend and what we get is so enormous.
It was the free market.”
–Paul Waldman, writing on CNN.com
Of all the many things that disappoint me about political discourse in America lately, perhaps the greatest disappointment of all is that, in the runup to Obamacare, somehow, the left got away with calling America’s health care system a “free market.”
Nothing could be further from the truth.
We had something like a free market in health care, once. Dr. Ron Paul, who began practicing medicine before the worst government interventions took effect in 1965, described it this way:
“For decades, the U.S. healthcare system was the envy of the entire world. Not coincidentally, there was far less government involvement in medicine during this time. America had the finest doctors and hospitals, patients enjoyed high-quality, affordable medical care, and thousands of private charities provided health services for the poor. Doctors focused on treating patients, without the red tape and threat of lawsuits that plague the profession today. Most Americans paid cash for basic services, and had insurance only for major illnesses and accidents. This meant both doctors and patients had an incentive to keep costs down, as the patient was directly responsible for payment, rather than an HMO or government program.” 
The era Dr. Paul describes let out its dying gasp more than forty years ago.
It was a death that was a long time coming.
Early Government Supply Restrictions
Large-scale government intrusions into our health care market, intrusions that are still with us today, began in the early 20th century, when the American Medical Association partnered with state governments to artificially limit the supply of doctors in the United States. In 1904, the AMA formed the Council on Medical Education, which wrote a report that state medical boards and legislatures used to justify a massive cutback in the number of medical schools in the United States.
At the beginning of the 20th century, there were 166 medical schools. By the 1940s, thanks to the AMA, there were 77 .
Why was the AMA so intent on using the government to limit the supply of physicians in the United States?
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“The profession has good reason to urge that the number [of medical graduates] is large enough to diminish the profits of its individual members, and that if educational requirements were higher, there would be fewer doctors and larger profits for the diminished number.” 
In other words, Let’s get government to restrict the supply of physicians so we all can make more money.
Early Government Demand Subsidies
Government wasn’t just tinkering with the supply side of the market. In the 1940s, government became very active in the demand side as well. It started, as these things often do, with Franklin Roosevelt.
In World War 2, with many young men off to war, the supply of labor was low, yet the demand for labor was high, what with the government wanting an incredible amount of tanks, planes, cars, guns, and bullets.
As we all know, low supply and high demand is a recipe for high prices. But FDR didn’t want high prices in the labor market translating to high prices for his tanks and planes and guns and bullets. So he and his National Labor Relations Board instituted wage controls in many industries. 
This government interference in the labor market had the predictable outcome of changing people’s behavior. What neither Roosevelt nor Paul Waldman nor anyone else who thinks government should be involved in health care understands is that any and every time government tries to control the market, it creates unforeseen and unintended consequences.
In the case of Roosevelt and his wage laws, employers in a given industry couldn’t pay more than a maximum wage in dollars per hour. But the law didn’t say anything about non-cash benefits.
Let’s imagine a conversation between that great American industrialist, Henry Ford, and the prototypical American factory worker in the 1940s, Rosie the Riveter.
Henry Ford: Hey Rosie, I’ve got orders for twenty tanks and nobody to build them. Can you come work for me?
Rosie the Riveter: I’ve got a good job at GM, but thanks.
Henry Ford: How much is GM paying you?
Rosie: The maximum wage. $2 a day.
Henry Ford: What if I paid you $2 a day, and I paid for a health insurance plan for you at your local hospital?
Rosie: Awesome. I’ll take it.
Rosie’s story was repeated all throughout America in the 1940s. With the market wanting to pay more than the federally mandated maximum wages, employer-provided benefits, particularly health insurance, became standard practice. The number of people who had health insurance exploded in the 1940s, from 20 million at the beginning of the decade to 140 million at the end. 
What do you suppose happened to the demand for health care when, suddenly, as a result of Roosevelt’s maximum wage laws, everyone started getting health insurance from their employer?
If you’re uncertain, think of it this way. What if you got paid half your salary in dollars, and half your salary in Starbucks cards?
Would you start going to Starbucks more?
Would you continue to buy Starbucks coffee even if they raised their prices? Even if they raised their prices a lot?
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Here’s another question. What do you think Starbucks would do if they heard some Congressman wanted to change the law so that employers would stop paying us in Starbucks cards?
Once the health insurance industry started getting favorable treatment from Washington, they sent lobbyists to Congress to make sure they would never lose their government gravy. In 1943, health industry lobbyists secured a tax exemption for health insurance, ensuring that employer-provided health coverage, a government-created demand subsidy in the health care market, would never go away. 
Restict Supply, Subsidize Demand, What Do You Get?
It should come as no surprise that, by the end of WW2, with government restricting supply and subsidizing demand, the cost of health care began to rise rapidly.
In the 1950s, American voters, furious at the rising price of health care, but unaware that government policy was the reason health care costs were rising, began pushing Washington to do something. After several failed attempts under Harry Truman, Washington pulled off a national health insurance scheme in 1965 with the passage of Medicare.
And then everything really went to hell.
Caption: Look at how the trouble began in the late 1940s, right after government gave a demand subsidy to health insurance, then things really took off with the passage of Medicare in 1965. Source .
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By 1965, American health care had entered a government death spiral that we’ve never escaped. It’s a two-step, endless loop that goes like this:
- Government intervenes, making costs go up.
- Voters, unaware that higher costs are due to government involvement, demand that government do something about it!
Now do you understand why the cost of American health care has been rising exponentially for decades?
After the passage of Medicare, that loop of government madness had voters screaming for Washington to fix our health care system, and a Senator named Ted Kennedy was happy to try.
For three months in 1971, Kennedy oversaw Congressional hearings on the “Health Care Crisis in America.”
Here’s a quote from good old Teddy during this time.
“We need legislation which reorganizes the system to guarantee a sufficient volume of high quality medical care, distributed equitably across the country and available at reasonable cost to every American.”
Sounds like Senator Kennedy wanted to create a system where the supply of medical care would rise to meet the demand.
It’s a shame no one ever told him such a system exists. Adam Smith explained how it worked two hundred years ago. It’s called the free market.
Unaware that economics had already solved America’s problem, Ted Kennedy wanted Congress to remake the entire sector in a new government scheme.
“It is going to take a drastic overhaul of our entire way of doing business in the health-care field in order to solve the financing and organizational aspects of our health crisis. One aspect of that solution is the creation of comprehensive systems of health-care delivery.”
When Kennedy said ‘comprehensive systems of health-care delivery,’ what he was really talking about were HMO’s. And in 1973, Kennedy realized his dream and Nixon signed the HMO Act.
With the HMO Act, government subsidized the creation of a mob of new prepaid health plans, and mandated that the majority of American employers contract with these new government-financed insurance companies. That’s a demand subsidy.
At the same time, the HMO Act empowered these quasi-government agencies to restrict the supply of health care providers each patient could use. That’s how managed care is designed to work. The HMO contracts in advance with a network of physicians. To get the benefit you’ve already paid for, you have to seek treatment that is in-network.
Kennedy didn’t understand that the reason so many people were being priced out of the market was because government intervention was driving the price up. He simply saw that there was more demand for medical care than supply of it, and he thought government could step in and ration the way care was delivered. That’s what the HMO Act was about. In a free market, sellers and buyers find their way to a deal through the pricing system. In Ted Kennedy’s vision of the health care market, it isn’t acceptable for people with more money to have more access. He wanted a system that would ration care so that everyone got the same amount.
Here’s what health care looked like for most Americans after the HMO Act.
- Government subsidies and mandates gave managed care organizations a huge advantage over other insurers, and by the 1980s, most Americans got their health insurance through an HMO.
- Government intervention drove health care costs so high that if you weren’t part of a health insurance plan, you were priced out of most of the health care market.
Does this sound anything like a free market to you?
In the broken marketplace I’ve just described, your health insurance premium is no different to you than a tax. It’s money you are required to pay unless you want to be punished. Don’t pay your taxes to the IRS; get fined. Don’t pay your premiums to the government-created, government-controlled health insurance company; get locked out of the health care system.
Yes, ladies and gentlemen, we’ve had national health care in America for a long, long time. For seniors, it’s been around since 1965. For the rest of us, America’s version of fully socialized medicine, with government agencies managing the health care market, and your health insurance premium functionally no different than a tax, was signed into law in 1973.
And, of course, the government death loop in health care has only continued. With each session of Congress, government gets more involved in health care, driving up costs and ruining quality even further. Obamacare is only the latest iteration of that ceaseless death spiral.
With that knowledge in hand, let’s revisit Paul Waldman’s quote from the beginning of the piece.
Paul says, “It wasn’t government that gave us nearly 50 million uninsured Americans and denials for pre-existing conditions. It wasn’t government that gave us the yearly and lifetime caps on insurance coverage that have sent so many people into bankruptcy when they’ve faced a serious illness or accident. It wasn’t government that gave us a system in which the gap between what we spend and what we get is so enormous.”
Yes it was, Paul. Before government involvement in health care, service was affordable for everyone. Now, your health insurance company is, effectively, a government agency. Don’t blame the market that people can’t afford government’s product, or that government arbitrarily sends them away and sometimes drives them to bankruptcy.
The free market had nothing to do with it.