Free Market Medicine: The Unknown Ideal

The title of one of Ayn Rand’s collections of political and philosophical essays, Capitalism: The Unknown Ideal, expresses her frustration at the public’s shocking ignorance of the ethical foundations of capitalism. Since its publication in 1967, I daresay that the situation has only gotten worse, as demonstrated by the politics surrounding our healthcare system.

I am not a consequentialist, so my criticism of our system–as modified by the ACA–is not that it is enormously wasteful, inefficient and riddled with fraud, although it certainly is. Rather, I condemn it because it violates the rights of virtually all participants on a massive scale, including laws against the “unauthorized practice of medicine;” nonconsensual participation in Medicare;   tax discrimination against individual insurance plans; insurance mandates, and restrictions on the interstate sale of policies; the FDA’s power to deny competent adults access to medicines they wish to purchase; and so on. Nonetheless, it is typically the case that governmental interference with freedom of contract produces perverse incentives, and medical care is no exception.

One defining attribute of capitalism is that it combines free choice with personal responsibility.  Subject to the usual caveat regarding fraud, buyers and sellers must be free to make whatever arrangements they like, but should also be prepared to live with the consequences. Despite our interventionist state, this principle is still largely intact for many consumer goods.

Consider, for example, the purchase of computers. Makers who consistently offer products that consumers are eager to buy are highly profitable, while those that don’t are soon driven out of business or acquired by more successful operators. On the other hand, consumers enjoy all the benefits and absorb all the costs associated with their purchase decisions. This circumstance generally motivates them to research the pros and cons of various products and to shop for a bargain before parting with their hard-earned dollars. The operation of a (relatively) free market explains why the cost per unit of computing power has collapsed over time.

In contrast, our system for delivering medical care is almost entirely free of the discipline enforced by free markets. Perhaps the most salient and least appreciated statistic in our healthcare politics is that of every dollar we spend on medical goods and services, only 11.4 cents is out-of-pocket;  the balance is paid for by third parties, i.e. private insurance and government.[1]  This is a much lower percentage than found in most other industrialized nations, even those with universal coverage (the figure for Switzerland is 30%). [2] The government’s own medical cost “bean counters” estimate that under the ACA this percentage will shrink to 9.1% by 2022. [1]

The implications of severing the necessary connection between choice and consequence are profound. If you are covered by an employer-based plan, your (heavily subsidized) decision to “purchase” a particular test, treatment or devise will have at most a trivial impact on the amount of your insurance premium next year. That charge will be driven by the expenses incurred by the large group of employees enrolled in your plan. By the same token, a comparable decision by a Medicare beneficiary will have no effect on her future premiums.  

Imagine if the personal computer market worked this way. The machines would be supplied by firms completely (Medicare and Medicaid) or partially  (private insurance) shielded from competition. Producers would manufacture computers according to the government’s list of “essential” features, whether or not consumers are willing to pay for them. On the demand side, consumers would join computer insurance plans. They would pay a fixed annual premium, and then could buy any computer(s) they wished at 80% off the retail price.

Clearly, this would be an inefficient, bloated mess. Consumers would pay high prices for mediocre products with bells and whistles they don’t need, and would no doubt blame the nasty capitalists for gouging them. There would be widespread political pressure for the government to simply supply everyone with “free” computers.

This, in a nutshell, is how our healthcare system operates, or fails to. There is no way to save it through incremental reform.  We need to implode this decrepit, third-party payer model and start anew. People should, if they wish, purchase individual insurance to mitigate the risk of catastrophic expense, and should otherwise pay for medical goods on an out-of-pocket basis. Such an approach would both respect individual rights and be far more cost-effective than the status quo.

I fear this solution will be possible, if ever, only after we have endured the nightmare of single payer, which will finish the job of turning medicine into the mirror image of public education. The wealthy and reasonably affluent will buy their way out of the system, leaving others to enjoy the pleasures of what will closely resemble Medicaid.

 [1] See Centers for Medicare and Medicaid Services, “National Health Expenditures Projections,” September 18, 2012, http://www.cms.gov/Newsroom/MediaReleaseDatabase/Press-Releases/2013-Press-Releases-Items/2013-09-18.html

[2] See “Featured Discussion, Understanding American Health Care: A Conversation with Christopher J. Conover,” American Enterprise Institute, March 29, 2013, http://www.aei.org/article/featured-discussion-understanding-american-health-care-a-conversation-with-christopher-j-conover/.

 

 

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