The Truth About Healthcare

Medical care is a scarce good

By Douglas French

Nothing starts a fistfight like the health-care debate. The market for what is just a basic service has been contorted and mangled by government intervention for more than a century. The average person wouldn’t know a free-market health care system if they saw one.

“Life, Liberty, and the pursuit of Happiness” must include health care, say those on the political left. The alternative is barbaric, they claim. Never mind that someone else’s rights must be trampled upon in order to provide the “right” of health care. And never mind that the results will be seriously degraded for everyone but the elite.

But the political right is just as clueless. Who can forget the Tea Party member who protested loudly, “Keep your government hands off my Medicare!”

Health care is a political flashpoint for a very simple reason. As John C. Goodman points out in his monumental new book, Priceless: Curing the Health Care Crisis, many people are opposed to the very idea of using the price system to allocate medical care. That’s the fundamental point that one hardly ever hears.

Medical care is a scarce good. It must either be allocated by force or voluntarily at a cost of either time or money or both. The author’s focus is what we pay in time versus money for our health care — and how that denies access for millions of people.

Whether you have paid close attention to the health care debate or not, you owe it to yourself to get this book and absorb its lessons. It clears away the fog of confusion, cuts through the political thicket, and gets to the heart of the economic issue. It deals with economic reality in a way that no other source does and thereby fundamentally changes the terms of debate.

This is more than a policy paper. Goodman has a firm grasp on the deep history of intervention to highlight the American Medical Association-funded Flexner Report of 1910, whereby the medical establishment gained the power to control the supply of doctors by regulating medical school admissions. At the same time, “The hospitals themselves also adopted a code of ethics that saw price cutting, quality competition and quality comparisons as violations of professional ethics,” explains Goodman.

Even that early, the AMA ensured there would never be a glut of doctors. For Americans who think their health care system is just a little left of laissez-faire, this will all come as a big surprise.

“Although many would like to think that our system is very different from the national health insurance schemes of other countries, the truth is that Americans mainly pay for care the same way people all over the developed world pay for care at the time they receive it — with time, not money.”

Those who advocate for universal health care believe we all have the same amount of time, and that those with more money have an unfair advantage in the race for health care, as if there is only so much to go around. Having us all wait for hours in doctors’ offices and hospitals is their egalitarian utopia.

Goodman makes the point that we are trapped in a dysfunctional system that keeps employees trapped in jobs they hate, scared to think they can’t obtain health insurance any other way. America’s health care desperately needs the innovation and inspiration provided by entrepreneurs to free the system and its prisoners. Tragically, what entrepreneurial gains are being made in health care are stifled by third-party bureaucracies that make the payments.

Innovative health care providers are punished for not playing by Medicare’s rules, when taxpayers could be saved millions by their entrepreneurial acumen. The author’s discussion of Medicare billing requirements for treatment of high-cost, special-needs patients will absolutely make your blood boil.

Meanwhile, in areas of health care where the patient actually pays directly for services rendered, technological changes are rampant, service levels are high and costs are decreasing.

“The real price of cosmetic surgery has actually declined over the past 15 years,” writes Goodman. “The real price of Lasik surgery has declined by 30% over the past decade.”

So as much as the president and his followers preach that they want to force down the cost of health care, making it affordable for everyone, the author points out that Mr. Obama doesn’t understand that the price of health care is the symptom, not the problem. “Just as it would make no sense to try to treat a fever by lowering the body’s temperature,” he writes, “it makes no sense to try to control prices while ignoring why they are what they are.”

Goodman illustrates the problem deftly, comparing the cost of knee replacement surgery for a human versus knee replacement for a dog. The technology needed is the same, as is the human skill level, yet a dog can get a new knee at one-sixth the cost. What accounts for the difference are government regulations, malpractice liability and third-party payment inefficiencies.

He makes reference to his previous book, Patient Power, in which he and co-author Gerry L. Musgrave point out that 250-bed Scripps Memorial Hospital had 39 government bodies and seven non-governmental bodies to answer to.

Malpractice liability costs layer on between 2-10% of costs, and the costs of health care payments coming almost exclusively from massive bureaucracies is unknowable, except to say excessive.

Goodman explains that there really is no understandable price system in health care. Nobody really knows what things cost. Doctors are not paid by prices determined by supply and demand, but by various reimbursement formulas. This is not that different from the Soviet Union’s communist glory days.

Mr. Obama would like everyone to be insured. But the legal system provides the incentive for healthy people to go without. Because insurers cannot adjust premiums for risk, rates are set higher than what it would reasonably cost to insure healthy people. These high premium costs force the young and healthy out of insurance, leaving the pools dominated by older, sicker policyholders. Insurance companies have every economic incentive to turn away people with pre-existing conditions. They can’t price for the risk.

The coming tragedy is that millions of Americans are counting on a system — Medicare — that is bankrupt. “For both Social Security and Medicare to be financially secure,” Goodman writes, “we need $107 trillion in the bank right now, earning interest, and it’s not there.” And there is no hope of it ever being there.

The author goes into great detail as to how Obamacare cuts Medicare in order to pay for covering younger Americans. But with or without these cuts, middle-aged Americans, not to mention those in their 20s and 30s, must think of other ways to be cared for in their old age. Like any Ponzi scheme, the first in to Medicare do fine at the expense of the latecomers. Goodman points out that today’s typical elderly person comes out $55,000 ahead with Medicare, while the typical 25-year-old will be a $110,000 loser.

The cure for America’s health care crisis is quite simply the free market. Anything short of that will preserve rather than cure problems. Some steps in that direction: allow patients to choose and pay for services with their own money; allow doctors and nurses the entrepreneurial freedom to actually serve patients in the same way that supermarkets or iPhone providers do; make cost and quality relevant in health care decisions.

I would like to see the entire interventionist apparatus uprooted. But while it’s easy to theorize about free markets, it is much harder to lay out a concrete plan. With Priceless, John C, Goodman has done the heavy lifting, providing not only a clear explanation of a crisis often portrayed as unfathomable, but also providing an understandable road map toward sanity in the healthcare market. It’s a realistic guide that has the market generating solutions while the government gets out of the way.