Fixing US Health Care Once And For All – 5 Crucial Steps

posted by Nima

August 20, 2009 · Posted in General Economics 

The root causes of the problems with health care in the US

The problem with health care in the US, but in virtually every other country in the world as well, is a simple one: The goods (products and services) offered on the market that address illnesses and and improve our well being are offered at prices that are so high that most consumers are unable to afford a sufficient amount to address their demands.

On top of that, these prices are continuously rising. All other health care issues stem from this simple fact. Health insurance premiums, for example, are charged based on the prices that competing insurers expect to end up paying for health care goods. Thus, naturally, health insurance premiums are on the rise as well, even in the current deflationary environment. The rapid increase in government expenses for its entitlement programs Medicare and Medicaid, too, is simply the result of these ongoing price increases. It is thus not a coincidence that today the US government spends more than any other industrialized nation on health:

On the market, such imbalances are, under free competition, swiftly addressed via a simple process: High prices for certain consumer goods indicate a high demand and an insufficient supply. Thus profit seeking entrepreneurs have an incentive to shift from what they are currently doing to focusing on producing more of such highly demanded goods, by employing more commensurate factors of production that turn out the demanded goods. This leads to a decline in their prices, moving the market closer to equilibrium and thus restoring balance.

But when a group of people which obtains its means of operation via aggression and theft, the government,  imposes decrees that prevent the voluntary market participants to perform such balancing acts, and threaten them with imprisonment and fines should they not oblige, the imbalance will persist. If that group’s actions are such as to bring about even more shortages for the demanded goods, the imbalance will grow, prices will keep rising.

As an outcome of such an interventionist policy, there will always be a small group of entrepreneurs that benefits from the protection awarded against competition and voluntary action on the part of consumers and new entrepreneurs. They naturally reap the benefits from the ability to charge prices that are not being bid down by potentially competing entrepreneurs. It is important to keep this fact in mind when members of such groups utter statements that attempt to justify the policies that have brought about and continue to maintain the imbalance.

If those who run the government desire, as they profess, to remedy such an imbalance, the course of action they need to take is just as simple as the problem: lift all those decrees that hinder consumers and entrepreneurs from fixing the imbalance.

Moving forward, I will outline 5 simple steps that the US government needs to take in case it is interested in addressing the precise pain points that have precipitated the imbalance outlined above:

5 steps toward affordable health care

1. Get rid of government enforced AMA privileges, restrictions, and monopolies

The American Medical Association (AMA) has, over the course of the past 160 years, done everything possible to utilize government power in order to restrict the amount of health care services, the number and efficiency of health education facilities, the access to drugs in pharmacies, price transparency and negotiation, and the practice of alternative health approaches. It has deliberately and happily reduced the availability of goods that address consumers’ health care needs, leaving many consumers in a desperate situation at the benefit of those doctors whose privileged position it has been protecting.

It is certainly not easy to back up such an outrageous charge against the AMA. Fortunately we have a rather reliable companion to corroborate our accusation – the AMA itself:

… in 1901 the Journal of the American Medical Association released the following statement: “The growth of the profession must be stemmed if individual members are to find the practice of medicine a lucrative profession.”

In order to achieve these objectives, the AMA lobbied heavily with state and federal government institutions – with remarkable success. As Lew Rockwell notes:

To help bring about a higher-paid profession, the AMA in 1904 created the Council on Medical Education, which sought to shut down more than half the existing medical schools by rating them on a scale of A to C. In cooperation with State medical boards composed of what Arthur Dean Boran, head of the council, called the “right sort of men,” the AMA succeeded in cutting the number of schools to 131 by 1910, from a high of 166.

Then the council’s secretary N.P. Colwell helped plan (and some say write) the famous 1910 report by Abraham Flexner. (…)

The Flexner Report was more than an attack on free competition funded by special interests. It was also a fraud. For example, Flexner claimed to have thoroughly investigated 69 schools in 90 days, and he sent prepublication copies of his report to the favored schools for their revisions. Homeopaths noted that his authority derived solely “from an unlimited access to the pocketbook of a millionaire.” Homeopaths did not use synthetic drugs, of course. John E. Churchill, president of the Board of Education of New York, called the report a “menace to the freedom of teaching.” Years later, Flexner admitted that he knew nothing about medical education. But he did not need to in order to serve his employers’ purposes.

Flexner’s attack, stepped up by the AMA’s Council on Medical Education and its State medical boards, closed 25 schools in three years, with more over the years to come, and cut the number of students attending the remaining schools in half. All non-mainstream practitioners were targeted. For example, from the early part of the century, consumers preferred optometrists to ophthalmologists on grounds of both service and price. Yet the AMA derided the optometrists as quacks, and in every State, the AMA-dominated medical boards imposed restrictions on these and other “sectarian” practitioners when they could not outlaw them entirely.

Homeopathy still had a remnant of about 13,000 practitioners, supported by a fiercely loyal customer base, but decades of well-financed attacks had taken their toll. The battle-weary Homeopaths eventually gave in, conceding major parts of their doctrine, but the AMA was not satisfied with anything less than total victory, and today, American Homeopaths practice mostly underground.

With its monopoly, the AMA sought to fix prices. Early on, the AMA had come to the conclusion that it was “unethical” for the consumer to have any say over what he paid. Common prices were transmuted into professional “fees,” and the AMA sought to make them uniform across the profession. Lowering fees and advertising them were the worst violations of medical ethics and were made illegal. When fees were raised across the board, as they frequently could be with decreased competition, it was done in secret.

The AMA, in its constant quest for higher incomes through lower competition, also battled churches and other charities that gave free medical care to the poor. Through lobbying, it attempted to stamp out what it called “indiscriminate medical charity.” A model 1899 law in New York put the control of all free health care under a State Board of Charities dominated by the AMA. To diminish the amount of free care, the board imposed fines and even jail terms on anyone giving treatment without first getting the patient’s address and checking on his financial status.

Then there was the problem of pharmacists selling drugs without a doctor’s prescription. This was denounced as “therapeutic nihilism” and the American Pharmaceutical Association, controlled by the AMA, tried to stamp out the low-cost, in-demand practice. In nearly every State, the AMA secured laws that made it illegal for patients to seek treatment from a pharmacist. But still common were pharmacists who refilled prescriptions at customer request. The AMA lobbied to make this illegal, too, but most State legislatures wouldn’t go along with this because of constituent pressure. The AMA got its way through the federal government, of course.

There were other threats that also had to be put down: “nostrums,” treatments that did not require a visit to the doctor, and midwives, who had better results than doctors. Also a danger was “contracting out,” a company practice of employing physicians to provide care for its workers. This was “unethical,” said the AMA, and should be illegal. Fraternal organizations that contracted out for their members were put out of business with legislated price controls, and hospitals – whose accreditation the AMA controlled – were pressured to refuse admittance to patients of contracting-out doctors.

By the end of the Progressive Era, the orthodox profession as led by the AMA had triumphed over all of its competitors. Through the use of government power, it had come to control education, licensure, treatment, and price. Later it outcompeted fraternal medical insurance with the State-privileged and subsidized Blue Cross and Blue Shield. The AMA-dominated Blues, in addition to other benefits, gave us the egalitarian notion of “community rating,” under which everyone pays the same price no matter what his condition.

Thus, more importantly than anything else, the federal government needs to lift all federal laws, rules, and decrees that restrict the supply of health care services and stifle competition between health care providers. Regulatory hurdles for alternative medicine and services performed by non-doctors, such as registered nurses need to be removed.

There is a hole slew of health services that can be performed without knowledge of biochemistry, neural sciences, or similar fields. Lots of diseases can be diagnosed rather easily and treated just as easily.

Interestingly, nurses are very popular with many people because they are known to take a more holistic and personable approach to dealing with patients’ concerns.

Anyone in favor of the status quo, such as AMA members will come up with an entire list of arguments against such changes in the system. This should not surprise us, as I outlined above: There will always be a small group of entrepreneurs that benefits from the protection awarded against competition and voluntary action on the part of consumers and new entrepreneurs (in this case alternative practitioners and nurses).

There will be the most popular argument of safety and protection against quacks. But how about we let the consumers and independent rating agencies make this decision? What gives us the right to force them into arrangements? If these potential competitors are all quacks, then surely their customers and professional raters  will post horrible reviews on Yelp.com and other sites and drive tons of traffic back to AMA approved doctors. On top of that, how do we know the state commissioners are such better raters than the customers and competing agencies?

To bring up an example in a different field, when you are looking for a good restaurant, whom do you trust more? Private raters such as Zagat and Michelin, or the FDA? Who trusts a monopoly institution which has no pressure of performing over a profit seeking entrepreneur whose very existence depends upon making successful recommendations? I will not here delve into the terrible judgment that the FDA has displayed again and again when it came to approving drugs, and the many people whose lifes have been destroyed, if not taken, due to malpractice on the part of these bureaucrats.

In fact, ironically, under free competition consumers would be a lot more safe than they are under a system where the current sellers are constantly protected against and unchecked by potential competitors. If state licensure were so indispensable, why don’t we do away with free competition in all other fields? Why not let all services be sanctioned by a federal board and protected against more apt service providers? Because it doesn’t make any sense at all.

All other arguments you will hear against free enterprise from those who are privileged by a government enforced monopoly can be debunked just as easily and need not concern us at this very point.

2. Legalize importation of drugs

What I wrote regarding doctors and the AMA applies almost verbatim to pharmaceuticals and the The Food and Drug Administration (FDA). Pharmaceutical corporations in the US have, over decades, pushed through federal regulation that shields them from competition. The Food and Drug Administration (FDA) acts as their protector and deliberately restricts the supply of pharmaceuticals that are available on the market, all in the name of “drug safety”.

An important part of limiting the supply of goods is always restricting importation from abroad. Federal legislation, as per US Code Title 21, 384 prohibits and restricts the importation of prescription drugs from abroad. Where it permits it, it imposes burdensome rules and restrictions, the compliance with which costs time and money which, again, makes these goods more expensive to the consumer than they could be.

The quickest and most effective way to put an end to this would be to lift the ban on the importation of drugs from abroad. If our domestic drugs are so much better an safer, then surely the domestic producers should be delighted about an influx of inferior products which will only reaffirm their position as producers of quality. But what if the imported drugs are actually just as good, or better, or cheaper than domestically produced drugs. Well, this would precisely constitute the other piece of our puzzle.

While the AMA has, through federal and state legislation, restricted the number of practitioners available, and prolonged the process of educating such professionals, the pharmaceutical corporations have, through the FDA, limited the amount of drugs on the market and prolonged their approval processes, shutting out small innovative entrepreneurs with less means at their hands, and foreign producers who might have better and certainly cheaper drugs to offer.

Allow at least pharmacists and doctors to import pharmaceuticals from abroad, and prices for such goods will fall rapidly, getting us closer to a state of affairs where medication is affordable to everybody.

3. Allow Medicare/-aid to negotiate prices with drug companies

The federal government collects Medicare and Medicaid taxes from employees to pay for these two programs. This in itself is bad enough. But at the very least, if they do so, they should assure us that they put this tax money to proper use and that they will try to get the best deals out of any purchases they make on our behalf. This in itself is virtually impossible due to the Trouble With Bureaucracy. But it is downright destructive if the law completely prohibits Medicare/-aid purchasers from negotiating with the drug companies. Such is unfortunately the case, due to a program called Medicare Part D:

By the design of the program, the federal government is not permitted to negotiate prices of drugs with the drug companies, as federal agencies do in other programs. The Veterans Administration, which is allowed to negotiate drug prices and establish a formulary, pays 58% less for drugs, on average, than Medicare Part D. For example, Medicare pays $785 for a year’s supply of Lipitor (atorvastatin), while the VA pays $520. Medicare pays $1,485 for Zocor, while the VA pays $127. Former Congressman Billy Tauzin, R-La., who steered the bill through the House, retired soon after and took a $2 million a year job as president of Pharmaceutical Research and Manufacturers of America (PhRMA), the main industry lobbying group. Medicare boss Thomas Scully, who threatened to fire Medicare Chief Actuary Richard Foster if he reported how much the bill would actually cost, was negotiating for a new job as a pharmaceutical lobbyist as the bill was working through Congress.

This creates nothing but a giant bonanza for these corporations, and ends up driving up costs to everyone.

Change these nonsensical laws, allow the DHS to negotiate drug prices and another important step toward lowering health care cost is taken.

4. Repealing the Kefauver Harris Amendment from 1962.

I outline why in more detail here:

It is being estimated that drugs could cost about 80%(!!) less if it weren’t for these burdensome regulations. In addition to that, innovation has been stifled immensely. Most people don’t even begin to realize what a great health system would be possible if our government simply reduced its excessive meddling.

… ideally, just scrap the entire monstrosity that is the FDA and be done with it.

5. Abolish Patent Laws

Patent laws are mostly favored by supposed free marked economists. But patent legislation leads to nothing but another state enforced monopoly. Pharmaceutical companies have been the biggest beneficiaries of US patent law as can be seen in their margins and profitability, keeping away competition and pushing up prices. Moreover, there is no historical evidence or tenable conceptual logic that corroborates the notion that patent laws foster competition, in fact, quite the opposite is true.

By the way, here is a very informative and entertaining lecture on patent law by patent lawyer and Austrian economist Stephen Kinsalla.

Moving forward

There are many other things that can and must be done in the long run. The government will have to get out of the way of restricting competition between health insurance providers across state borders, Medicare and Medicaid will have to be phased out for new workers who join the workforce, by enabling them to choose between paying taxes or paying the money into their own health savings account. And there are probably myriad other things that the government needs to be removed from in order to allow for a dynamic and efficient health care market.

But without addressing the 5 steps I outlined above, all other efforts will be completely and absolutely futile. Without addressing the root of high health care costs, it does not matter whether we let government alone take care of health insurance, or whether we completely liberalize the health insurance market. Nothing would change substantially. We would still be paying high premiums that go into a pool that pays for overly expensive health care products and services. We would still be faced with an inherent shortage of health care goods and services.

If the cost for medical products and services were to come down significantly, it won’t even be necessary to have an insurance for regular treatments and checkups. Most expenses could be paid out of pocket. There exists no other market where routine procedures and operations are so expensive that people need insurance to cover them. Insurance, by its very definition and in every other field, is supposed to be for rare and catastrophic events only.

Only by tackling the root structural, regulatory, and political causes of our problems will we make the dream of affordable health care for everyone a reality.

Update: I added points 4 and 5 after publishing this post.


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Comments

6 Responses to “Fixing US Health Care Once And For All – 5 Crucial Steps”

  1. Devin Martin on September 10th, 2009 10:10 pm

    Uh, bro, that nice little chart you conveniently posted at the beginning completely refutes your entire thesis. If the solution is less government involvement and more competition, then why is it that the US–which already has the most market involvement in health care–has far and away the most expensive health care? Don’t get me wrong, I’ve studied economics, and I’m a small business owner, so I like free markets. But that doesn’t mean free markets are the ideal solution to every societal problem. You can spout econ theory all you want, but here’s some facts:
    1) Among OECD nations, the US spends the most per capita, followed by Switzerland, which coincidentally (?) happens to have the second most market-oriented health system. By contrast, the almost entirely government run British system ranks among the lowest in costs as percentage of GDP. (I’m not saying the British system does particularly well in terms of quality, but right now we’re discussing cost.)
    2) In the US, Medicare, a single-payer government run system, is seeing costs rise more slowly than private insurers in the (albeit regulated) market.

    It’s unfortunate you started off by revealing yourself as an ideologue completely divorced from reality, because I honestly tend to agree with most of what you’re saying in your 3 big points. I don’t think they’re the panacea you think they are, but they’re good ideas nonetheless. Although, I must say suggesting rating doctors on Yelp is as good as having the AMA sounds kind of silly. I can see it now, “Gee, my mom just died cause that doctor was a total fraud, but at least I can give him a bad review on Yelp!” Seriously, Yelp and similar systems are great for finding a good pizza, but when it comes to surgeons I want something with a little more oversight.

  2. Nima on September 10th, 2009 10:44 pm

    You must have gotten something seriously wrong:

    “that nice little chart you conveniently posted at the beginning completely refutes your entire thesis. If the solution is less government involvement and more competition, then why is it that the US–which already has the most market involvement in health care–has far and away the most expensive health care?”

    Where do you take the claim from that the US has the “most market involvement” in health care? In fact, over 50% of the health expenses in the chart above are US GOVERNMENT health expenses. All other false things you said can be traced back to this fallacy of yours.

    But I am glad you agree that the steps I proposed are a step in the right direction. I am not sure where I said “rating doctors on Yelp is as good as having the AMA”, but I assume you got my point.

  3. George Zhang on January 22nd, 2010 12:33 am

    I totally agree that AMA’s monoply is enemy of health, based on what I see. The question is what can we do tp remove it. I may want to write a letter to the editor to some newspapers. Do you know exactly what issue or paper for the following statements?

    1901 the Journal of the American Medical Association released the following statement: “The growth of the profession must be stemmed if individual members are to find the practice of medicine a lucrative profession.”

  4. Nima on January 22nd, 2010 2:16 am

    It was the “AMA Journal” in 1900:

    In 1900, the AMA Journal, which was already under the editorship of Dr. George H. Simmons, sounded the call to arms. “The growth of the profession must be stemmed if individual members are to find the practice of medicine a lucrative profession.”

    Not sure which exact issue but should be possible to find out via google …

  5. Wright Larue on June 25th, 2011 11:28 am

    Uh, bro, that nice little chart you conveniently posted at the beginning completely refutes your entire thesis. If the solution is less government involvement and more competition, then why is it that the US–which already has the most market involvement in health care–has far and away the most expensive health care? Don’t get me wrong, I’ve studied economics, and I’m a small business owner, so I like free markets. But that doesn’t mean free markets are the ideal solution to every societal problem. You can spout econ theory all you want, but here’s some facts:1) Among OECD nations, the US spends the most per capita, followed by Switzerland, which coincidentally (?) happens to have the second most market-oriented health system. By contrast, the almost entirely government run British system ranks among the lowest in costs as percentage of GDP. (I’m not saying the British system does particularly well in terms of quality, but right now we’re discussing cost.)2) In the US, Medicare, a single-payer government run system, is seeing costs rise more slowly than private insurers in the (albeit regulated) market.
    +1

  6. Nima on September 14th, 2011 10:45 am

    I’m sure you might have overlooked or not seen the actual numbers, so I’ll just post a link here:

    http://www.economicsjunkie.com/public-health-care-in-the-us/

    Government health spending in the US in 2005 was at 7.2 percent of US GDP. In a comparison of 188 countries worldwide the US ranks at position 18. If we exclude third world countries, the US ranks at position 9, ahead of such supposed big government health care paradises as Canada or even Cuba!

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