The Medical Mess

by William Anderson

[Posted January 18, 2000]

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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