Government Medical "Insurance"

Mises Daily:
Friday, June 29, 2012
by Murray N. Rothbard

One of Ludwig von Mises's keenest insights was on the cumulative
tendency of government intervention. The government, in its wisdom,
perceives a problem (and Lord knows, there are always problems!). The
government then intervenes to "solve" that problem. But lo and behold!
instead of solving the initial problem, the intervention creates two or
three further problems, which the government feels it must intervene to
heal, and so on toward socialism.

No industry provides a more dramatic illustration of this malignant
process than medical care. We stand at the seemingly inexorable brink of
fully socialized medicine, or what is euphemistically called "national
health insurance." Physician and hospital prices are high and are always
rising rapidly, far beyond general inflation. As a result, the
medically uninsured can scarcely pay at all, so that those who are not
certifiable claimants for charity or Medicaid are bereft. Hence, the
call for national health insurance.

But why are rates high and increasing rapidly? The answer is the very
existence of healthcare insurance, which was established or subsidized
or promoted by the government to help ease the previous burden of
medical care. Medicare, Blue Cross, etc., are also very peculiar forms
of "insurance."

If your house burns down and you have fire insurance, you receive (if
you can pry the money loose from your friendly insurance company) a
compensating fixed money benefit. For this privilege, you pay in advance
a fixed annual premium. Only in our system of medical insurance does
the government or Blue Cross pay, not a fixed sum, but whatever the
doctor or hospital chooses to charge.

In economic terms, this means that the demand curve for physicians
and hospitals can rise without limit. In short, in a form grotesquely
different from Say's Law, the suppliers can literally create their own
demand through unlimited third-party payments to pick up the tab. If
demand curves rise virtually without limit, so too do the prices of the
service.

In order to stanch the flow of taxes or subsidies, in recent years
the government and other third-party insurers have felt obliged to
restrict somewhat the flow of goodies: by increasing deductibles, or by
putting caps on Medicare payments. All this has been met by howls of
anguish from medical customers who have come to think of unlimited
third-party payments as some sort of divine right, and from physicians
and hospitals who charge the government with "socialistic price
controls" — for trying to stem its own largesse to the healthcare
industry!

In addition to artificial raising of the demand curve, there is
another deep flaw in the medical-insurance concept. Theft is theft, and
fire is fire, so that fire or theft insurance is fairly clear-cut — the
only problem being the "moral hazard" of insurees succumbing to the
temptation of burning down their own unprofitable store or apartment
house, or staging a fake theft, in order to collect the insurance.

"Medical care," however, is a vague and slippery concept. There is no
way by which it can be measured or gauged or even defined. A "visit to a
physician" can range all the way from a careful and lengthy
investigation and discussion, and thoughtful advice, to a two-minute
run-through with the doctor doing not much else than advising two
aspirin and having the nurse write out the bill.

Moreover, there is no way to prevent a galloping moral hazard, as
customers — their medical bills reduced to near-zero — decide to go to
the doctor every week to have their blood pressure checked or their
temperature taken. Hence, it is impossible, under third-party insurance,
to prevent a gross decline in the quality of medical care, along with a
severe shortage of the supply of such care in relation to the swelling
demand.

Everyone old enough to remember the good old days of family
physicians making house calls, spending a great deal of time with and
getting to know the patient, and charging low fees to boot, is deeply
and properly resentful of the current assembly-line care. But all too
few understand the role of the much-beloved medical insurance itself in
bringing about this sorry decline in quality, as well as the
astronomical rise in prices.

But the roots of the current medical crisis go back much further than
the 1950s and medical insurance. Government intervention into medicine
began much earlier, with a watershed in 1910 when the much-celebrated
Flexner Report changed the face of American medicine.

Abraham Flexner, an unemployed former owner of a prep school in
Kentucky, and sporting neither a medical degree nor any other advanced
degree, was commissioned by the Carnegie Foundation to write a study of
American medical education. Flexner's only qualification for this job
was to be the brother of the powerful Dr. Simon Flexner, indeed a
physician and head of the Rockefeller Institute for Medical Research.
Flexner's report was virtually written in advance by high officials of
the American Medical Association, and its advice was quickly taken by
every state in the Union.

The result: every medical school and hospital was subjected to
licensing by the state, which would turn the power to appoint licensing
boards over to the state AMA. The state was supposed to, and did, put
out of business all medical schools that were proprietary and
profit-making, that admitted blacks and women, and that did not
specialize in orthodox, "allopathic" medicine: particularly homeopaths,
who were then a substantial part of the medical profession, and a
respectable alternative to orthodox allopathy.

Thus through the Flexner Report, the AMA was able to use government
to cartelize the medical profession: to push the supply curve
drastically to the left (literally half the medical schools in the
country were put out of business by post-Flexner state governments), and
thereby to raise medical and hospital prices and doctors' incomes.

In all cases of cartels, the producers are able to replace consumers
in their seats of power, and accordingly the medical establishment was
now able to put competing therapies (e.g., homeopathy) out of business;
to remove disliked competing groups from the supply of physicians
(blacks, women, Jews); and to replace proprietary medical schools
financed by student fees with university-based schools run by the
faculty, and subsidized by foundations and wealthy donors.

When managers such as trustees take over from owners financed by
customers (students of patients), the managers become governed by the
perks they can achieve rather than by service of consumers. Hence: a
skewing of the entire medical profession away from patient care to
toward high-tech, high-capital investment in rare and glamorous
diseases, which rebound far more to the prestige of the hospital and its
medical staff than it is actually useful for the patient-consumers.

And so, our very real medical crisis has been the product of massive
government intervention, state and federal, throughout the century; in
particular, an artificial boosting of demand coupled with an artificial
restriction of supply. The result has been accelerating high prices and
deterioration of patient care. And next, socialized medicine could
easily bring us to the vaunted medical status of the Soviet Union:
everyone has the right to free medical care, but there is, in effect, no
medicine and no care.

Murray N. Rothbard (1926–1995) was dean of the Austrian School. He
was an economist, economic historian, and libertarian political
philosopher. See Murray N. Rothbard's article archives. This article is excerpted from Making Economic Sense (1995; 2007), chapter 20, "Government Medical 'Insurance.'"

Copyright © 2012 by the Ludwig von Mises Institute. Permission to
reprint in whole or in part is hereby granted, provided full credit is
given.

-- Appears to me that, once again, we're attempting to change the 'results' of a problem without touching any of the factors that contributed to those results. The very definition of insanity... Doing the same thing over and over with the expectation of different results. Course, that's just my opinion.

Your thoughts?