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This talk was given at the LRC Health and Wealth Conference in Foster City, California, December 2, 2006.

With the Democrats taking charge in Congress, we will surely hear talk of mandatory national health insurance, more spending for health care for the poor and elderly, and more taxes on individuals and business to pay for the whole scheme. This is admittedly not that different from what Republicans have been doing since taking over. In some ways, Republicans are even worse, driving us to socialism in the name of market reform and other sloganeering. Either way, we are stuck with a system that is moving the health sector ever more into the hands of the state.

There are two popular images of socialized medicine. I don’t think either captures what the reality is in our prosperous and largely capitalistic country.

The first image is that held by the delusional left. They imagine that if most health care were publicly provided and administered by the state, people of all social classes, age groups, and races and sexes, would have equal access.

Enlightened public bureaucrats would make the essential decisions about health priorities. Leftists imagine that this will save money in the long run because people will be prevented from doing things that cause them to get sick and die prematurely, such as smoke, eat fast foods, and fail to go on long nature walks.

Mostly the left-wing view is of the negative sort. It makes them crazy, and offends their moral sense, that the rich can afford better health care than the poor. They believe that it violates a sense of fairness that the rich have the means to live longer, healthier lives, than the poor, who are left to the mercy of life’s exigencies.

But let’s say that we can show that under a capitalist health market, the poor will be better off in absolute terms. I doubt very seriously that this will satisfy the true socialist. What bothers him is not so much bad health as the unequal access to good health.

For the same reason, the socialist is not persuaded by the argument that the poor will be richer under capitalism because they are aware that inequality will continue to exist under capitalism. It is more important to them to reduce the well-being of the rich than it is to improve the lot of the poor, so long as the poor still constitute an identifiable class within the population.

It is because of these normative assumptions that left-socialists can rightly be called the party of envy, for their desire to destroy and expropriate is more intense than their desire to uplift. That is to say, they are more interested in equality than general prosperity. What Mises called the destructivism of socialist theory is merely the next step in socialist logic.

The second view of socialized medicine sees the problems with socialism, that it leads to building up a state apparatus that has life-and-death control over the population. Because bureaucrats have no strong incentive to see to the wellbeing of people, they make decisions based on politics.

And because entrepreneurs are cut out of the picture, innovations cease to be brought to the health-care market in a way that makes them accessible. We end up with a bureaucratically controlled nightmare in which no class in society receives the level of medical attention it would receive in a marketplace.

So far as stated, this critique is a good one. But the opponents of health-care socialism also have in their minds a vision of what life would be like under socialism. Mostly these visions are drawn from experiences under socialist countries that have been driven into poverty by state ownership of the means of production. The state in these cases does not have much money. There is no private store of wealth to speak of, and no private business that has the motivation or the means to provide customer service.

What happened in these countries is entirely predictable. There was an undersupply of medical services just as there was an undersupply of everything else. Yuri Maltsev tells harrowing stories of how people would suffer relentlessly in the USSR. When the death rate per hospital would grow so as to embarrass the state, the state would simply order the rate to be lowered, just as they ordered grain production to be higher.

The hospitals would respond in perverse ways. Instead of providing better care, they started rolling people out the door if the personnel suspected that the patient was near death. The result was a decline in per-hospital death rates, but an overall increase in deaths.

One thing that the state has not been able to lie about is vital statistics. The Soviet state did its best to keep them from being revealed. But once the data were collected, the truth came out. Between 1971 and 1986, the Soviet state faced a calamity. Life expectancy decreased. Infant mortality increased. In fact, the Soviet state stopped collecting data again. But later, once the truth was revealed again, it turned out that infant mortality was on the increase, in some cases as much as 58 percent between 1971 and 1986.

A similar experience was repeated in every socialized state. Health declined. Vital statistics did not keep up with capitalistic standards. It is a great irony that Marx had thought socialism would be the next stage of history, following capitalism just as capitalism followed feudalism. And yet socialism itself had been systematically driving these countries back to feudal-era forms of health care that were increasingly deprived of modern technology.

Not that these countries didn’t invest in scientific medical research. People from the old Soviet Union said that sometimes it seemed like every fifth person had a medical degree. Indeed, no societies in human history ever invested more in science than socialist countries did. But they kept sinking further into the abyss. Why? The problem was economic rather than technical. You can put 10,000 government medical scientists in a gigantic cushy building, pay them all a million dollars a month, give them access to every journal and all the equipment they need, and let them invent whatever they want. But the population will still be without.

Inventions and scientists might be a necessary condition for popular access to medical goods and services. But they are not sufficient. We need an economic system that can calculate the best use of resources. It requires the division of labor and a complex capital structure for products to reach a general market. What’s more, not every innovation needs to go to market. There must be a way for consumers to transmit information about their most urgent needs to producers, and there needs to be a means for producers to decide among alternative uses of resources. In other words, there must be a system of profit and loss, which in turn must be based on private property exchange.

In short, without capitalism, medical services cannot reach the multitudes. The experience of socialism reinforces what the theory would suggest.

We might raise the question about why it is necessary that consumers themselves be in a position to pay economically rational prices for the medical services they consume. Wouldn’t it be better if everyone could just consume all the services and drugs and surgeries that they needed? Mises addressed this point brilliantly in 1922. He pointed out that that there is no clean division between sickness and health. We ourselves are capable of making misjudgments on this matter, believing ourselves to be sick and even making ourselves sick if we so will it.

The will to health, Mises wrote, is an important determinant of our well-being. But socialism, by pricing all services at zero, destroys the will to health and thereby generates sickness. Here is Mises from 1922, in a passage that was criticized for decades as being completely outlandish:

“By weakening or completely destroying the will to be well and able to work, social insurance creates illness and inability to work; it produces the habit of complaining…. It is an institution which tends to encourage diseases, not to say accidents, and to intensify considerably the physical and psychic results of accidents and illnesses. As a social institution it makes a people sick bodily and mentally or at least helps to multiply, lengthen, and intensify diseases…. We cannot weaken or destroy the will to health without producing illness.”

Note that he said this 42 years before the US created just such a situation. We can observe this to some extent in the way disability law has been misused in this country. After the Americans With Disability Act was passed, millions of Americans found that they were themselves disabled. So too with poverty. The welfare state actually succeeded in driving people to adapt their life conditions to the make themselves eligible. I’m quite sure that if the government were to institute a Good Samaritan Office, we would find the streets strewn with people who had been beaten and robbed. It is the nature of a government program to multiply the problem rather than solve anything.

I find it striking that after the collapse of socialism in Eastern Europe and the Soviet Union, virtually no effort was made to privatize health services. To be sure, there are now private health services in these countries, but the official systems of socialized medicine still exist. This fact is a testament to the reigning orthodoxy. The world seems to understand that it is a mistake to nationalize agriculture and factory production. No one advocates a Department of Software Development, even if there are far more interventions in this sector than there should be. And yet health care, all over the world, is assumed to be a normal function of government.

In this area, as in many others, the former socialist countries — under US advice, bribes, and pressure — took social democratic economies as their models. So they not only created a panoply of new regulatory departments, and imposed a series of destructive taxes, they also did not question the assumption that health-care provision cannot be left to the market alone.

This is despite the vast number of stories we hear about English and Canadian health care socialism, mostly having to do with a lack of innovation and a grim shortage of medical, surgical, and emergency services. In these countries, there is much that mirrors the former Soviet experience, except in one area: their governments are not as poor. This changes the incentive structure. The government has incentives to spend money. Indeed, governments win from passing money around, and that can mean making more money available rather than less, unlike in the Soviet system.

To understand this point is to add an additional factor to the way we understand socialist medical care. It’s time that we change our expectations concerning what socialism will look like in our future, though we have it partially now. The key problem with socialism is that it misallocates resources, and when applied to the U.S. medical sector, this means a vast overconsumption of medical services as well as artificially high prices. The system is carefully structured in a mercantilist way to socialize losses and privatize profits. In this way, the largest players in the market benefit and a small group of semi-private cartels are insured against financial failure.

Let’s take a closer look.

First, there are severe limits on the number of service providers, as there have been for a century. We brag about the specialization we have among doctors, but what we do not have is a range of choices among levels of training. When we want our car fixed, we can go to the dealer or we can go to another 40 places with a range of mechanics, some of whom have had extensive training and some of whom have not — a fact which may or may not reflect on the quality of their work.

In medical economics, however, we are supposed to believe that physicians are a class set apart like ordained priests with special powers. You are either ordained to practice medicine or you are not. The limits on the numbers — which are built into the cartel of medical schools as well as the licensure system — are nothing but a mercantilist effort to increase prices and incomes. Of course every profession has its licensure system, but the medical one has been uniquely successful in making the barriers to practice incredibly high.

This sad situation began in the states in the 19th century, and nationally in 1910. Originally, our medical sector was nearly 100% free. It would have been inconceivable that the federal government should have ever intervened in this critical area of life. Then came the Progressive Era, with its fashion for central planning. The medical sector came under mercantilist control during the same period in which we got the income tax, the Federal Reserve, the direct election of Senators, the Federal Trade Commission, and US entry into World War I. An important part of this medical cartelization was the suppression of homeopathy and other non-allopathic schools of treatment.

As an offshoot of this monopoly, we still live under the absurd system whereby doctors must give prescriptions for the drugs we want to buy. The pharmacy industry and the doctors cling to this system for life support. But it is an insult to consumers and a ripoff of the sick. In a free market, you should be able to consume whatever medications you want, official or alternative, purchased in ways that accord with market demands, not government dictates.

Second, we have a third-party payment system whereby insurance companies, contracted by businesses working within government mandates, are paying the bills for services. So the insurance company, not the patient, is the customer, with the doctor responsible to those paying him.

The mandatory aspect of the program led to a cartelization of the medical insurers, who stopped behaving like insurers and began acting like a cartelized payment system. Hospitals were paid on a cost-plus basis. Thus the vast artificial boom in this sector. The insurers paid for routine and not unexpected services. The risk pool was cobbled together in a way that had nothing to do with the actual risks.

These features all led to a vast overuse of the system that benefited the medical industry. These features all became part of the 1960s welfarization of medicine with Medicare and Medicaid. And the inevitable huge increases in costs have led to ever more government price caps, and patch-work interventions to keep the system afloat and its customers from engaging in political revolt. It has also caused a general overmedicalization of the population, especially older people under institutionalized care.

Everyone has horror stories to tell of how aging people are treated by our medical system. What strikes me as strange is how the financial incentives of hospitals and insurers are rarely considered to be a factor in the medical decisions made on their behalf. We are all supposed to believe that our medical establishment is purely interested in human welfare. But if we understand the financial incentives at work, we have a new window into why it is that so vast a percentage of medical resources are used to treat people in the last months of their lives.

Think of the entire field of medical ethics that has become particularly important when technology has permitted an ever greater control over the time and circumstances of death. Everyone speaks as if the resources that are required to sustain life beyond its natural term belong to all of us to spend how we as a society have decided. Think of the debate over Terry Schiavo, for example. Not once in the public clamor over this tragic case was the issue of who was paying brought up. This is a very dangerous trend. There is no getting around the fact that the institution that is the source of funding will ultimately make the decisions on how resources are used. The more that programs like Medicare and Medicaid pay for life extension, the more the government will be in a position to decide when a person’s life must be sustained and when it must end.

Now, many people have written about the coming meltdown of these programs. But not many are willing to speak about the true origins of the payment-system mess. The medical insurance cartel got its biggest boost in World War II, when wage controls caused business to compete based on benefits rather than pay. Here we see a direct connection between the warfare state and the welfare state. As usual, they work hand in hand.

Third, innovations in official and alternative treatments are very seriously shackled by the FDA, an institution that overrides patients’ freedom to choose their own treatments, and constructs its approval process to favor only the largest pharmaceutical companies. So we face a peculiar situation in which there is an overuse of approved drugs and nonuse of needed but unapproved drugs and other remedies. The way around this problem is to leave it to the market, but that is a solution hardly anyone wants to consider.

You might be able to argue that in past ages, a government bureaucracy was necessary to collect and assess information about a drug, and finally approve it, on grounds that consumers did not have the information to make their own decisions. I don’t happen to think that argument is correct, given the universal efficiency of markets over government. But in these times, the case for bureaucracy is even more obviously incorrect.

Consumers have more medical information from more sources at their fingertips than at any time in human history. The people who need specialized but unapproved treatments are aghast to find that the FDA is withholding approval. Increasingly, we see cases where a manufacturer doesn’t even bother to file for approval in the US.

In this context, too, we need to raise the subject of medical patents, which are nothing but government privileges given to an innovative company to prolong the period of profits that come from being the first firm to gain approval for the drug. Patents have no justification in a free market. There is no patent given on recipes for food, and yet that has not inhibited innovation nor diminished the quality of food at restaurants. The high profits flowing to pharmaceutical companies from patents, combined with increasing government subsidies, have led to an untenable situation. The prices of prescription drugs have soared by 50% in the last 10 years. Non-prescription drugs have gone up by 6%, which in real terms means falling prices. I suggest to you that this data set tells us pretty much all we need to know.

Recently, Wal-Mart made the remarkable announcement that it would begin making generic drugs available at its stores for $4. This program has been a phenomenal success. People wonder how they can do this. It might be true that Wal-Mart is using drugs as a loss leader, trying to get people in the store who might otherwise be going to smaller drug outlets. If this is what they are up to, I say it’s all to the good. The fact is that in any market exchange, both parties benefit and human welfare improves. The very existence of the program has pushed prices down in competitive businesses. This is the way the market is supposed to work.

Wal-Mart has helped solve some of the problems that have been generated by the scandalous prescription drug benefit program pushed by the Bush administration. Not only will this cost far more than the Clinton medical reform might have cost, many people have found the program itself to be a bureaucratic headache.

But with Wal-Mart we once again discover how the market comes to the rescue. The striking fact of all of human history is how the market works around government’s failure to solve human problems and, indeed, the market finds the way to correct for human problems that the government itself has created.

To watch the flow of history is to observe two great streams of activity. In the private sector, we find innovation, efficiency, cost cutting, human service, dynamism, and problem solving. In the public sector we find stagnation, bureaucracy, inefficiency, cost overruns, human coercion, and problem creating. If the government alone had been in charge for the last 500 years, our world would look very different. Indeed, we might have no civilization to speak of. But fortunately the market — meaning innovating and cooperating human beings — seems to find a way around the problems that government has created.

This is nowhere more true than in the medical sector. It is thanks to the market that there is more medical information available today than ever before in history, more life-saving techniques, more access to services, and more choice. Ideally, we would have radical reform so that government programs would be abolished, medical cartels smashed, and medical service provision wholly privatized.

But what if that doesn’t happen? It could be that 50 years from now, the competitive private sector, with its dazzling capacity for finding ways around every barrier, will be completely dominant in the medical industry, and those sectors that have lived off government largess will be reduced to near insignificance. For the sake of our health and prosperity, let us hope for this as a 2nd best solution to the complete separation of health and state.

Ideally we would come to see health and medicine the way it’s been seen in the whole of human history prior to the century of socialism. At every level and in every sector, it should be subject to market discipline. The money we use to purchase medical services should be private money, whether out of our own bank accounts or from charitable sources. We need to rethink the meaning of medical insurance, which, if it exists at all, should only apply to catastrophic cases to cover life contingencies over which we have no control. And of course we need freedom for all schools of treatment. The path for progress here, as in every aspect of economics and civilization, lies with privatization, the elimination of restrictions and welfare, and freedom itself.

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