Earlier this year, I presented an overview of Kevin Carson’s first study for the Center for a Stateless Society, “Industrial Policy.” In his past studies, Carson has written about industrial production, intellectual property and labor issues. I am jumping ahead a bit to “The Healthcare Crisis: A Crisis of Artificial Scarcity,” his eighth study, because it is an excellent in-depth look at how industry players have colluded with governments to deny access to less expensive medical alternatives.

Although everyone takes part in it eventually, the health care industry has some pretty daunting inner workings to most people, so it is typically left to industry and government officials to frame political debates about the topic. That is why I appreciate this study. As a health care professional, Carson is more familiar than most with the delinquencies of the industry, and he packaged those issues in such a way that an outsider like myself could understand. He also documents how extensive and affordable health care insurance was before government intervention. All told, the study is about 36 pages, but I tried to condense the most content I could into about 2500 words.

Introduction

A popular analogy highlighting the problem with single-payer health insurance is that consumers, if they are not responsible for the grocery bill, are going to purchase a lot of more steaks than they would hamburger meat. Unfortunately, what is in place now is a not a free market but instead is dominated by government interventions at the behest of pharmaceutical corporations, licensing cartels and high-overhead bureaucratic administrative bodies that actively lobby to criminalize the purchase of anything but steak. Low-cost alternatives are blocked from the market and high-cost alternatives are made more lucrative by government protections and subsidies.

Much of the national coverage of the health care debate in Washington, D.C., has focussed on how to finance health care. However, if people had access to affordable alternatives, “much of the debate on finance and insurance would be moot.” Progressives by and large have focussed debate on the manner in which health care is financed and how to expand coverage to those who are without. However, Dr. Arnold Relman is quoted as citing the escalating costs of medical coverage as the reason for the increased costs of health insurance. “The incentives in such a system reward and stimulate the delivery of more services,” Relman said. It is no surprise that if physicians, who supply the medical services, are responsible for when those services are provided, “The incentives in such a system reward and stimulate the delivery of more services.” That is going to attract more doctors into speciality fields and away from general practice. Carson said, “The main driver behind rising insurance premiums is not the misbehavior of the insurance industry itself, but the rising cost of healthcare. Any finance reform that fails to address this will be a temporary fix at best.”

Insurance Regulations

The modern model of health insurance is actually an anomaly to how the “self-organized working class mutuals functioned to spread heath care risks and costs among their members.” It was autonomous fraternal societies rather than “authoritarian institutions directed from above,” Colin Ward said. The friendlies did not rely on charity. They operated for the benefit of the same people who occupied them.

In England, the self-organizing friendly societies, which covered three-quarters of those eventually covered under the National Insurance Act of 1911, were weakened by a coalition in the British Medical Association and an insurance trade association. The act, in effect, vested authority in administrative bodies under heavy influence from medical professionals, strengthened the licensing board’s monopoly and prohibited “conduct which helped the consumer to differentiate between doctors,” David Green said, like advertising. Doctors’ “incomes were doubled and financed by a regressive poll tax,” Carson said, citing Green’s 1986 “Working-Class Patients and the Medical Establishment.” The finality of friendly societies came in 1948 with the establishment of the National Health Service, which nationalized health care delivery and finance.

The extent of friendly societies and fraternal lodges were not as widespread in the United States as they were in England. The statistics are not well documented. By some estimates, though, the majority of families were covered for sick benefits. In Chicago, more than one in four black families had benefits, mostly through private firms. Those figures were similar in Philadelphia and Kansas City. Fraternal societies mutualized the delivery and finance of insurance by keeping a physician on retainer for members. The cost to join a friendly society ran about $2 a year, about a day’s wage. In many cases, family members were eligible for coverage for the same rate. Meanwhile, about two dollars was the average cost per visit for non-lodge members. The “lodge practice evil,” as many physicians came to call it, was attractive to new doctors trying to gain a reputation and a steady, reliable salary.

In the 1920s, “State medical societies imposed sanctions on doctors who accepted lodge contracts, in some cases barring them from membership.” On local levels, doctors were threatened with expulsion by licensing boards, and hospitals faced boycotts for those who cooperated with lodges. In that time, the supply of doctors per capita shrunk by about a quarter to 125 residents per doctor. The fraternal lodges also blundered by not embracing the rise of workplace-based group insurance. Lodges feared that participation would shift to group insurance instead. Carson said the better response would be have been to eliminate any overlapping services and offer unemployment insurance. The government also gave special incentives with income tax deductions for joining group insurance, but not mutual insurance.

Carson then relates that to a modern-day story of a New York doctor who ran afoul of state law by charging too little, only $79 a month and $10 per visit for preventative care, minor surgeries, lab work and physical therapy. One reason the doctor was able to charge such low fees is because he did not have the overhead of having to hire employees to deal with insurance paperwork, and there was no incentive to pile on unneeded additional services, a common logrolling practice among doctors. A clinic in Seattle, which even accepted patients with pre-existing medical conditions, could charge from $39 to $99 a month for coverage. A similar startup in Philadelphia has been hindered by laws imposing high capitalization costs ($1.5 million), a burdensome nonrefundable applications fee ($2500) and robust minimum coverage requirements. “This is just another example of how the mendacity of regulated industries intersects with the naivete of liberal do-gooders, in the ‘Bootleggers and Baptists’ model of public policy.” Coverage minimums serve as barriers for people who are already struggling to afford health insurance.

The root of the problem with the high costs of drugs, treatment and equipment “is that the state, through artificial scarcity, makes certain forms of practice artificially lucrative. In other words, it creates a honey pot,” which attracts physicians and hospitals to adopt artificially expensive medical and business practices.

Institutionalized Culture

Modern bureaucratic, hierarchical health insurance organizations operate diametrically opposed to the self-managed ad hoc mutual aid organizations. It does not really matter if the large lumbering organization is a government, a for-profit, a non-profit or a corporate cooperative. Across the board, procedures become locked-in through a series of inflexible conventions common across a shared bureaucratic culture. The catch phrases “standard operating procedure” and “best practices” are not isolated to either the side of the for-profit or non-profit divide. “If your natural foods co-op has a mission statement, or the pastor of your mega-church calls himself a ‘CEO,’ you’re seeing this tendency in action.” The formation of the military complex and the alliance among universities, corporations and governments in the area of research are more explicit examples of this culture of “cost plus.”

The domain of cost-plus markups are what lead to inflated administrative costs and production overruns. Paul Goodman considered this example. “One visits a country where the per capita income is one quarter of the American, but, lo and behold, these unaffluent people do not seem four times ‘worse off’ than we, or hardly worse off at all.” Carson said, the defining features of the corporate culture is “the treatment of labor as the primary variable and direct cost, the treatment of administrative overhead and capital expenditures as fixed costs, and the treatment of inventory as a liquid asset.” This accounting practice, called Sloanism after the General Motors executive Alfred Sloan, treats overhead costs as cause for price markups. Nothing is considered waste because every cost is seen as contributing to the “value added” to the final product.

Since labor is seen as a variable cost, that is why hospitals are chronically understaffed and administrative and capital costs are feverishly maintained. In the past eight years, hospital construction costs have doubled. While expensive consultants are hired to write mission statements about “going above and beyond” and providing “extraordinary patient care” at Carson’s hospital, there is not enough money to hire orderlies to change the bedpans. A non-profit where he worked had a focus on “the same high overhead culture and the same enormous CEO salaries to support, and if something has to give it’s patient care staff.” That is why you find $3 saline bags billed for $300, because it is the same type of culture that produced $600 Pentagon toilet seats. “As Seymour Melman described it, the military-industrial complex is a privately owned planned economy with a government-guaranteed market for its output and cost-plus pricing set to guarantee a profit on any expenditure, no matter how wasteful.”

Competing hospitals have the same incentives too for astronomical markups because they have the same institutional structure and culture and almost no price competition. Because bureaucracies — the de facto decision makers in an organization, not shareholders — benefit from this policy, bloated bureaucracies and capital spending are considered general overhead expenditures. Whereas capital expenditures are deemed investments and regarded as beneficial regardless of their outcome, labor hours are the only variable costs and the target of cuts. More often than not, decreases in staff are counter-productive because they add to costs as a result of increased infections and medical errors.

One of the direct reasons “for the constant creep toward more expensive technology and more tests even when they are not necessary, is the consumer’s insulation for direct costs comparisons.” The Democrat health care agenda is for the state to directly intervene in order to put downward pressure on price inflation. But the basic formation, third-party payments and cost-plus accounting, presents no substantive change. With fixed payments for services and hardly any competition among providers, the incentive is perform extra services and minimize the expense of performing those service. The result is that patients would be more likely to receive unnecessary and substandard care. Carson relates this to his experience working at hospitals where physicians needlessly consult one another in a mutual logrolling exercise that pads a patient’s bill. One example are CT scanners, which have not been empirically proven to be more effective than conventional scans that are 10 percent of the price. To turn a profit on these half-million dollar CT machines, a physician needs to perform approximately 3000 tests at a cost of about $1500. So when given an opportunity to perform one of these tests, physicians are inclined to take it.

Part of the blame for increase medical procedures is what has become known as defensive medicine. Providers are paid for performing procedures rather than improving a patient’s health. Technology creeps plays a part in that hospitals compete for doctors and patients on the basis of which equipment, need or not, is at a hospital’s disposal. Arnold Kling differentiates between what he calls “empirical medicine” and “premium medicine.” Instead of treating conditions with low-cost antibiotics and other procedures, patients go through a battery of expensive (likely inconclusive) tests. Rather than cooperating to share “bleeding edge technologies,” hospitals and outpatient centers vie for the same well-insured patients.

Government action is also partly to blame for the centralization of hospitals companies. Paperwork procedures and capitalization requirements leave all but the most bureaucratic hospitals able to cope with the government’s demands. The certification to receive Medicaid reimbursement requires hospitals to form special committees and develop “best practices” procedures. That thinking presupposes a large bureaucracy in place to administer those programs and then imposes busybody work that can only be satisfied with a hierarchical separation of management and staff.

Licensing Cartels

The practical effect of licensing is to outlaw “competition between multiple tiers of service” relative to a consumer’s demands and resources by prohibiting “one of the most potent weapons against monopoly: product substitution.” Nevertheless, most of a physician’s work does not require a medical degree worth of knowledge and skill. It would be more cost-efficient for doctors and nurses with less skills to treat minor injuries and ailment.

Licensing is often defended on the basis that licensing boards will discipline delinquent license holders. But is that the case? According to one study out of Florida, the state medical board had sanctioned only 16 percent of physicians who had malpractice payouts of over a million dollars. Only one-third of physicians who made at least 10 malpractice payments in the past 15 years had been punished in any way. Most often, investigations are not made public and have no effect on a doctor’s reputation. In California, it typically takes almost three years for a case to come under review. These boards, often staffed by doctors, are ways of shielding doctors from accountability.

Drug Patents

The existence of drug patents perpetuates the vast majority of research and development expenses to focus on tweaking existing drugs about lose their patent. When new medicines are brought to market, the patents for those drugs are more often the result of smaller independent firms that grew of out university lab work. The billions of dollars invested in these drugs are a result of literally millions of tests being performed to avoid conflicting with existing drug patents or to be able to claim a similar compound if their first choice had already been patented. The recent health care bill neglects the abusive drug patent regime and did not even include modest reforms for drug reimportation or bulk price negotiations.

Hardware Cartels

Medical technology accounts for up to two-thirds of health care spending. Unfortunately, most of that spending is unnecessary. Technology is supposed to reduce the costs, but it is only because of “artificial property rights, which prevent market competition from passing on cost savings from increased efficiency to the consumer and enable the privileged owner of a monopoly to capitalize efficiency improvements as a source of rents.” One example of this is artery stints, which cost about $15 to manufacture but are billed for as much as $2000. The solution is not to slow down technological progress, Carson pointed out, but “to allow free market competition to distribute the advantages of increased efficiency and lower cost to the consumer ….”

Conclusion

“The state-sponsored crowding-out makes other, cheaper (and often more appropriate) forms of treatment less usable, and renders cheaper (but adequate) treatments artificially scarce. Centralized, high-tech, and skill-intensive ways of doing things make it harder for ordinary people to translate their own skills and knowledge into use-value.”

Appendix

Carson’s plan would be to “shift to decentralized delivery of service and cooperative finance: small, neighborhood clinics and associated small hospitals as the main source of primary care, bypassing the insurance system altogether and operating on the same flat-fee membership basis ….” That would hinder the cronyism between specialists and reduce the 25 percent of health care costs associated with paperwork. It would also keep clinics cost-efficient across the board and their administration size to a minimum.

Licensing would be voluntary and offer a complete array of patient care. “The idea is not to reduce the skill level or technological sophistication of healthcare where it is necessary, but to stop forcing the patient to pay for it when it’s not necessary.”