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Drilling Down On The Real "Healthcare Crisis"

Like Reagan said, government is not the solution; government is the problem.

THERE'S ONE THING ABOUT HEALTHCARE THAT GETS SURPRISINGLY LITTLE ATTENTION in all the debates and punditry on the subject and the characterization of its current state as a "crisis" needing government intervention: WHY is healthcare so expensive?

We are encouraged to imagine that healthcare prices constantly rise (and rise dramatically faster than the rate of inflation, as well) due to the steady increase in our technology and its ever-broader implementation (and correspondingly increased effectiveness). But in fact, this is nonsense.

Increased capability lowers costs, it doesn't raise them. While it is true that if doctors used to know how to do five procedures costing, say, $100 each, and they now know how to do ten procedures costing $100 each, and for some reason do "all that they know" in any given situation, the "cost of care" for such a situation would go from $500 to $1000. But this is almost never the case (or never needs to be) in regard to routine medical products and services that the market has always supplied to consumers.

FIRST OF ALL, ONCE DEMAND FOR ANY PRODUCT OR SERVICE has reached a certain minimum threshold, the cost of providing it almost invariably goes down over time-- meaning that the original "five procedures" (and the additional five, for that matter) would steadily cost less to do (in constant dollars). More importantly, if someone learns a new way of providing a given product or service that appears worthy of adoption, he REPLACES the old way, rather than supplements it, and only does so because the new way is more efficient, and therefore less expensive by definition-- either immediately or over time.

When orthopedists caught on to using fiberglass for casts, they didn't continue to apply a full-blown plaster cast and then add a fiberglass cast on top. They abandoned the old way and adopted the new, and they didn't do so because it cost more. Nor did they do so because it cost the same but they found it more esthetically pleasing. They switched because the new way cost less, one way or another.

This rule doesn't apply to the application of technology or effort to do something one hadn't been doing previously at all, of course-- such as providing treatment for medical issues that used to be left untreated (in areas such as prosthetics, for instance, or prolonging a life that otherwise would have been let go sooner in the past). In those situations a doctor may now be doing five procedures at a cost of $500 (or whatever) where he would previously have done nothing.

However, the new costs associated with new palliations have nothing to do with the costs of doing anything that HAD been being done before. Such new expenses are meaningful for the recipients of the new, extraordinary care, but not for anyone else, nor for the "healthcare system" overall. That is, engaging in extraordinary care-- however virtuous it may be for its own sake-- doesn't make "healthcare" inherently more expensive.

Indeed, such extraordinary expenses are ONLY a burden to ANYONE other than the recipient of the services IF, and ONLY if, those costs are externalized onto other people through some form of socialized (that is, government-run or -mandated) healthcare structure. Thus, any actual increase in healthcare costs can ONLY be a "problem for society" if society is yoked to the sort of plan imposed by the Obama administration and other elements of the fascist/socialist axis in Washington. Absent any grotesque collectivization scheme by which each one of us are forcibly chained to the others, and made to bear the ever-increasing load of those receiving extraordinary care, the otherwise un-manipulated cost of routine healthcare naturally falls over time.

(Please take note that I use the term "cost" deliberately and advisedly. "Cost" is not "price".

"Price" is what a consumer is charged. "Cost" is a measure of the supplier's consumption of resources in providing a product or service. "Price" may vary wildly, based on many arbitrary factors, such as the inhibition of the supply of doctors and medical equipment that has been practiced throughout the USA for decades now.

"Cost", on the other hand, is rigidly controlled by immutable economic "laws of nature", which dictate that increased knowledge and an expanding technological base increase efficiency-- meaning the consumption of fewer resources to do a given thing. The availability of fewer doctors to provide services might allow each to charge a higher price to a consumer, but each of them will consume less of his or her own resources in providing any given service than had been necessary previously, as time goes on.)

ON THE OTHER HAND, most applications of medical technology involve routine services of the sort that have been being provided and consumed in some form or another more-or-less unchanged for as long as we have had a medical industry. The actual costs-to-deliver such services certainly have not been rising, due to immutable economic laws discussed above. Yet the PRICES of such services have been going through the roof anyway. I'm talking about things like dealing with a broken arm. Having a baby. Getting an antibiotic.

Look, for instance, at what has happened to the price of medical services associated with having a baby. The prices charged for my birth, in 1955, totaled $302.60:


Again, $302.60 was the TOTAL price-- including all doctor's services for pre-natal care, delivery, anesthesiology, etc., and ALL hospital charges, including four days room and board!

An average childbirth in 2007 was priced at $8,800.00. Pre-natal care alone for my son born in 1996 ran $2,100.00!

It's easy to see that prices for the routine medical services related to childbirth have skyrocketed. At the same time, the product delivered-- successful live birth-- hasn't changed.

Look at the statistics for childbirth mortality over most of the years involved here, which shows that the service being delivered-- successful live-birth (measured by maternal mortality rate)-- hasn't changed noticeably over the entire period. Indeed, childbirth mortality has been virtually flatlined over most of that time (the observed differential between 1955 and 1975 is attributed to high maternal mortality from illegal abortions, which is included in the statistics):

Source: Pediatrics, vol. 106 (2000)

It is empirically certain that no more resources are being consumed today than were consumed in 1955 to deliver this service (however many more might be being gratuitously expended doing things that are obviously unnecessary to deliver that service). Indeed, the odds are extremely high that much less is being consumed by providers to deliver this service today. But the PRICE for delivering this service has increased by nearly 3000 percent!

THE SAME CALCULATION CAN BE MADE for nearly any other routine medical service. It doesn't take any more resources to treat a broken arm, perform a "checkup", prescribe an antibiotic, and so forth. On the contrary, as is the case in ALL OTHER INDUSTRIES, the cost of doing all of these things has dropped over time. Just like everyone else, your doctor now uses computers to do billings, has access to friction-free information, and chooses from a greater number of competing suppliers of practice- and office-related consumables than ever before.

At the same time, the services being delivered in many cases have actually diminished. The typical visit to a doctor's office involves more time paying the bill than is spent being attended-to by the doctor.

I confess to not ever having deployed a stop-watch, but I believe that most of my routine visits to the doctor involve no more than five minutes of the doctor's time, with perhaps another two or three minutes of attention from a nurse or orderly. The typical charge for that alone?   $60.00 (in 2012, and where I live, anyway). This works out to $720.00 per hour for the services of one doctor, half a staff person, and office expenses, more-or-less.

When I was a kid on the other hand, my family's doctor drove to our house to deliver routine services of the same sort, and spent a considerable amount of time attending to the patient, in addition to the travel time. I don't have records of what was charged for these visits to look in on a sick kid, and perhaps write a prescription or two, but my family wasn't rich, and the service-charges documented on my birth-related invoices indicate that whatever those charges were, they were not high.

SO, THE COSTS OF PROVIDING MEDICAL SERVICES have stayed the same or diminished over time, and yet the medical industry is managing to charge ever-higher prices (in constant dollars)-- indeed, staggeringly higher prices. Faced with these prices, many Americans have embraced collectivist arrangements of some kind (i.e. insurance, HMOs) by which each seeks to externalize his or her individual health care expenses in some way. This distortion in the medical services market has led some to call for the imposition of a massive, all-inclusive consumer cooperative (national healthcare of one sort or another) upon everyone.

What is going on? How can this happen? What is so unique about the medical services industry that allows it to evade the discipline of the market, which otherwise would impose constant downward pressure on prices, making routine services ever-less-expensive, and innovative procedures and technologies subject to the same pricing curves we see in the computer industry (initially high prices, immediately followed by swift declines)?

The answer is simple. Starting in the 1940s, coincident with the effort to ease an unsuspecting, war-befuddled population into letting itself be treated as one big federal workforce subject to taxes on all its earnings (and perhaps as a deliberate element of this effort), federal tax policy began encouraging the widespread adoption of healthcare cooperatives by providing for "pre-tax" deductibility of premiums from "income" tax calculations. This provision made "health insurance" a cheap form of compensation that a company could offer its workforce in lieu of higher pay.

Almost immediately, 20% of the population of America began participating in some kind of healthcare insurance plan. That figure quickly rose, ultimately reaching its current 85% or so with the addition of Medicare and Medicaid to the landscape in the mid 1960s.


Source: Source Book of Health Insurance Data, 1965

Shared by the Economic History Association

Since mere catastrophic healthcare insurance is both inexpensive on the free market and only rarely utilized by working-age people-- and thus amounts to an insignificant benefit to most workers-- the "insurance" offered under these alternative compensation plans rapidly mutated into "consumer co-ops", under which the most routine medical expenses were removed from the normal disciplines of the market and became third-party-payment affairs. Before too many years of "pre-tax" healthcare premiums, even visits to the doctor by perfectly healthy individuals for simple checkups were being paid-for by others.

Needless to say, when routine medical services became a "commons" which could be consumed by the user without marginal cost (because the premium for the insurance, once paid, covered any amount of consumption within individual policy limits) the demand for such services immediately expanded to the limits of every policy. This put inevitable, relentless, unnatural upward pressure on the prices charged by the limited number of suppliers in the medical industry.

THIS BRINGS US TO PART TWO of the reason for the "healthcare crisis"-- the cartelization of the medical industry. As early as the beginning of the 20th Century, the American Medical Association had succeeded in unionizing an enormous percentage of American doctors, and had begun using its consequent financial strength to influence policy, particularly toward the establishment of monopolistic dominance of healthcare product and service delivery. This monopolistic structure further removed consumers from control over related pricing, as access to the final products and services increasingly required the (well-paid) co-operation of a cartel member.

For instance, access to what have become "prescription-only" medications now requires the paid intervention of a cartel member, while at the same time some medications and treatments are simply prohibited outright for lack of the cartel imprimatur of approval. Even things not formally restricted to cartel control, such as medical testing services, effectively fall under its sway. Where at one time anyone could go to any testing service provider and order one's own procedures (which are, after all, just tests, not surgeries or other treatments), doing so without having paid for an order from a doctor beforehand is difficult (if not impossible) today, because the service-providers have become unaccustomed to operating in any other way.

OVER THE COURSE OF THE LAST 30 YEARS, the flexing of the medical cartel's muscle in legislatures around the country has become increasingly abusive. In 1980, the products of publicly-funded research, which was previously treated as "open-source", became claimable under federal law as the personal property of the research universities and their medical-industry partners.

During the same period, the supply of doctors began to be deliberately limited by manipulation of federal policies and the supply and distribution of medical equipment was taken over from the market by state legislatures under a combination of facility licensure, subsidy-strings and so-called "Certificate of Need" laws. Enforcement of federal Food and Drug Act provisions became draconian and increasingly creative, in defiance of their Constitutional and statutory limits of relevance only to the "regulation of commerce among the several States".

In short, the reason that we have a "healthcare crisis" today is because we ALREADY HAVE (and have long had) a "national healthcare system". The provision of health care has been centrally-controlled and politically-manipulated to an ever-increasing degree for nearly 70 years, now, and the grossly overpriced industry that we struggle to pay for today is the direct and inevitable consequence of that control and manipulation.

THE PROBLEMS OF HEALTHCARE OVER-PRICING will only worsen as the ad hoc structure of today becomes formalized as a openly-declared universal plan of the sort being imposed by the Obama administration. The common feature of all such contrived systems is interference with the dynamic by which the market clears imbalances of supply and demand such as we are living with to a limited (though still enormous) degree now, as reflected in the absurd prices for medical goods and services. With increased central control will come increased imbalance, and inevitable rationing of the limited supply by one means or another.

By the same token, the current crisis will not be relieved by anything other than the reintroduction of free-market disciplines into the medical industry. The successful skewing of the public debate of this problem into an argument over which is the better version of increased governmental interference in this area is precisely the debate we DON'T want to be having.

Ultimately, achieving resolution of the "health care crisis" comes down to the same thing called for in every crisis other than invasion or natural disaster-- a reduction in the power and influence of the state.

P. S. The notion flogged by "reform"-boosters that insurance companies are responsible for excesses in healthcare pricing (or restrictions on availability) is ludicrous. For one thing, insurance companies are the ones paying whatever prices are being charged-- and are doing so with (what is by then) their own money. They have an obvious interest in finding and promoting the lowest prices generally; thus, given the choice, no insurance company is going to promote or accept a higher price for any given service over a lower alternative.

At the same time, unless constrained by external force, no insurance company is going to accept or promote restricted availability of services, either. An insurance company doesn't have any inherent stake in the level of care or consumption for which it pays, even while having an interest in ensuring that the prices it pays for each element of care are as low as possible.

The level of care paid-for by the company is a matter of contract, and the policy-holding consumer is charged accordingly (if the relationship is unconstrained by external forces). The company no more cares about the level of care paid for by the customer through appropriate premiums and charged-for by providers than does a restaurant manager care about the higher costs of the expensive dish ordered by one patron as compared to the blue-plate special ordered by another.

Aren't you really, really glad YOU'VE taken control of whether any of YOUR money goes to Washington to help pay for the people who spend their days dreaming up new ways of running your life, just as the Founders intended?

Don't you wish everybody would?

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Peter Hendrickson

232 Oriole St.

Commerce Twp., MI  48382