Is the government capable of providing better healthcare than the free market?
Figure 1: An Indexed Comparison of Health Care Inflation and Consumer Price Index in US from 1935 to 2009 (Source: US Census 2013)
Looking at the graph above, if you had to guess, what year would you think the US government took over 60% of the healthcare market via Medicare and Medicaid? Yup, 1965. Since then prices have skyrocketed.
The U.S. “health care cost crisis” didn’t start until 1965. The government increased demand with the passage of Medicare and Medicaid while restricting the supply of doctors and hospitals. Health care prices responded at twice the rate of inflation.
Since the early 1900s, medical special interests have been lobbying politicians to reduce competition. By the 1980s, the U.S. was restricting the supply of physicians, hospitals, insurance and pharmaceuticals, while subsidizing demand. Since then, the U.S. has been trying to control high costs by moving toward something perhaps best described by the House Budget Committee: “In too many areas of the economy — especially energy, housing, finance, and health care — free enterprise has given way to government control in “partnership” with a few large or politically well-connected companies” (Ryan 2012).
Spending on prescription drugs didn't accelerate until after pharmaceutical monopolies were strengthened in 1984. Spending has increased even less for administrative, net cost of private health insurance and nursing home care, and not much at all for dental, structures, equipment, public health, other personal and professional care, home health care, research, non-prescription drugs and durable medical equipment.
Since the 1980s, the government has used its buyer monopoly power, through its Medicare and Medicaid programs, to effectively set price and quality controls (e.g., underpayments) on physicians and hospitals (Stagg-Elliot 2012). For the same purpose, the Federal and state governments promoted the concentration of private insurance into buyer monopolies (e.g., HMOs). The government has also encouraged clinics and hospitals to respond by merging into concentrated provider monopolies (while continuing to limit the supply of doctors and hospitals).
These government-private partnerships called "managed competition" resemble centrally-planned fascism (Richman 2013). Government sets prices, which has predictably led to reduced quality, rationing and other perverse gaming. Moreover, the bureaucracy has brought standardized care, higher administrative costs and high executive salaries. Although costs have continued to rise at the same double the rate of inflation, it is questionable the extent to which prices are now set by the laws of supply and demand.
Cost control incentives encouraged by competition for clients has been limited in health care because client demands have grown more than physician supply since 1965. Even when physicians work for health institutions like hospitals, physician number can limit the volume of patient care rendered and thus the extent to which competition for patients occurs between institutions. In the absence of competition, not only physician fees but prices for every element of health care that physicians control inflated because there was little incentive to efficiently manage costs. The highly paid and hurried work week has reduced cost-saving and quality-improving innovative incentives placed on physicians.
The lack of competition between hospitals and other health care institutions also limited cost control incentives placed on executives. The lack of competition between both medical institutions and the doctors that control most of their spending could explain why hospital costs have been inflating twice as fast as even physician fees. Hospitals are loaded with waste and inefficiency. For example, a hospital stitch costs more than $500 today.
Why Not Try Free Market Health Care?
Show me a health care sector where there is no Medicare, no Blue Cross and no employer and I bet that’s a market that works very well.
Lasik surgery is one example. Patients get a package price and they know what they are going to pay in advance. There are no “surprise medical bills.” As my colleague Devon Herrick has shown, there is price and quality competition here – unlike other health care markets.
Competition works. Over the past decade, the real price of Lasik surgery fell 25%, despite a huge increase in the number of procedures and all manner of technological change – the type of change we are told leads to cost increases everywhere else in medicine.
A similar story can be told about cosmetic surgery – another sector where the third-party payers have no role to play.
What about conventional procedures – like knee and hip replacements? Can the market work there? Where patients pay with their own money, it already is working. Canadian patients routinely come to the United States for these procedures (in order to avoid lengthy waits for surgery in their own country). They get package prices and they pay about the same amount that Medicare pays. That’s about one-half to one fourth of what employer plans typically pay.
Then there is the international market for medical tourism. You can shave one-third off the cost of surgical procedures and maybe more by traveling to Health City Cayman Islands. The center posts quality information online (infection rates, readmission rates and mortality rates) and I suspect that their numbers easily beat comparable figures at the hospital nearest you.
It’s also worth noting that most of the cost-saving innovations in health care have emerged outside the third-party payer system – initially catering to people paying with their own money, even if the third-party payers eventually came around.
Rx.Com came into existence to compete on price and quality with local pharmacies for patients who bought drugs with out-of-pocket funds.
Walk-in clinics emerged for patients who bought primary care with their own health care dollars.
Firms like Teladoc began providing phone and email doctor consultations – completely outside the third-party payer system.
If the idea of letting employees participate in a free medical marketplace seems too radical for some employers, I have a more modest suggestion. Liberate primary care.
Medicare-For-All, which is properly known as the single-payer system, is the healthcare program that the democratic socialist presidential candidate has relentlessly avowed in his platform. The single-payer system in fact guarantees that all medical care and costs are subsidized by only one payer, which is the government of the United States. If it were to be implemented, the single-payer system would cost $32 trillion for the first ten years of its effectuation according to the Mercatus Center at George Mason University.[1] These $32 trillion will be only generated through heavy taxation to fund the program.[2] Moreover, as we know that the federal government is the primary payer within a single-payer system, it suggests that the government will have the ultimate control over the national healthcare, which means that the government will control the prices and the means of production in the healthcare industry, and it will accordingly determine its supply.[3]
How Government Made US Healthcare Expensive
1. Lack of competition in the Pharmaceutical Industry
The government heavily protects drug manufacturers from competition. The problem is so widespread and costly that even Biden addresses it in his plan:
To create more competition for U.S. drug corporations, Biden will allow consumers to import prescription drugs from other countries, as long as the U.S. Department of Health and Human Services has certified that those drugs are safe.
The benefits of such a policy if implemented would be immense. A major reason why prescription drugs are priced so high in the US is due to the lack of market competition in the pharmaceutical industry. The reason for the lack of competition is due to patent applications that the government provides to pharmaceutical companies which delay competition and increase prices. The empirical evidence on this matter does validate this claim.
A 2018 report from the Initiative for Medicines Access and Knowledge looked at several of the highest selling drugs in the US and the amount of patent applications that were filed by the drug manufacturers:
Such filings allow drugmakers to a) increase the price of the branded drugs by an average of 68% in six years, and b) seek to stall generic competition by an average of 38 years. While these average figures are disconcerting, examples among specific drugs run even more extreme in each category. Among the top grossing and best known drugs on the market today, some of the ‘worst offenders’ include AbbVie having filed 247 patent applications for Humira, Pfizer’s 163% price hike over six years for Lyrica, and Roche’s and Genentech’s efforts to seek 48 years of patent exclusivity for Herceptin. These examples are not outliers; our analysis indicates that patent holders for the other top twelve drugs also abuse the patent system, hike the price of drugs, and delay generic competition.
Drug manufacturers use patent applications that the government provides to delay generic competition and increase prices, leading to commercial monopolies and increased prices for the consumer. In fact, high prescription drug prices are one of the leading causes of the expensive healthcare system America has today.
What would be the potential savings from patent reform? A study from the National Bureau of Economic Research looked at the Waxman-Hatch Act of 1984 and the effects it had on drug prices and R&D investments. One potential downside to patent reform is that it could reduce investments in medicinal research because of decrease in future profits from the drug research. The Waxman-Hatch Act tried to solve this problem by balancing out market exclusivity and expanding generic competition.
The study concludes that following generic entry into the market, prices fall dramatically.
Our analysis finds that in each of nine major therapy areas average pharmaceutical treatment costs have declined, in some cases very dramatically (in one therapeutic class, 84.1%) following generic entry. These cost declines encompass the entire set of molecules within each therapeutic class, not simply the molecule whose patent has expired. Across all nine therapeutic areas, at 24 months post‐generic entry, the weighted mean reduction in pharmaceutical treatment cost is 35.1%.
2. Certificate of Need Laws (CON)
CONs are a license granted by a state regulatory agency that allow for an expansion hospitals and other healthcare facilities.
CONs were created when President Richard Nixon signed the National Health Planning and Resources Development Act in 1974. As of 2020, 35 states require CONs for the development of new healthcare facilities.
The main problem with CONs is that they lead to a decrease in the supply of medical care. With rising demand for high quality healthcare, decease in supply naturally leads to higher prices. CONs also restrict market competition with healthcare, by providing already existing hospitals the ability to increase prices due to the lack of competition.
This is one of the few major negative effects of CON laws. Not only do they potentially reduce the quality of healthcare, they also restrict the supply of hospital beds and other medical equipment necessary for quality healthcare.
This study published in the Journal of Healthcare Finance found that there are severe negative effects with CON Laws on the healthcare system as a whole:
CON laws are shown to reduce the number of beds at the typical hospital by 12 percent, on average, and the number of hospitals per 100,000 persons by 48 percent. These reductions ultimately lead urban hospital CEOs in states with CON laws to extract economic rents of $91,000 annually.
3. Medicare and Medicaid Reimbursement Rates
Medicare and Medicaid are two of the largest government health programs in the world. Currently, Medicare costs $722 billion annually, with Medicaid costing around $448 billion.
The problem with both of these programs are the reimbursement rates that hospitals earn for providing healthcare the recipients is often financial unstable for these hospitals. As the graph shows above, hospitals operate at a loss when covering Medicare and Medicaid patients, with losses growing every year.
The losses from Medicare and Medicaid cause hospitals to charge private insurers significantly more to compensate for the fact that Medicare and Medicaid’s reimbursement rates are not sufficient.
A study from the RAND Corporation found that private insurers are often charged much more than Medicare is.
In 2018, across all hospital inpatient and outpatient services, employers and private insurers included in this study paid 247 percent of what Medicare would have paid for the same services at the same facilities, including both professional and facility fees. This difference increased from 224 percent of Medicare in 2016 and 230 percent in 2017. In 2018, relative prices for hospital inpatient services averaged 231 percent of Medicare and 267 percent of Medicare for hospital outpatient services.
4. Medical Licensing and Scope of Practice Laws (SoP)
Medical licensing is a form of occupational licensing, where the government creates a regulation that requires people to obtain a license to practice an occupation.
Currently, state licensing boards grant licenses to students who apply for one. In theory, medical licensing is supposed increase the quality of healthcare by supplying the healthcare system with well qualified professionals.
Instead, medical licensing (and occupational licensing in general) acts as a barrier to entry, by limiting the supply of healthcare workers into market, which artificially boosts wages for existing healthcare workers, and increasing prices for consumers.
Currently, physician wages in the United States is the highest in the world.
But the number of physicians per 10,000 people in the US is relatively low. With the number being only around 24.5 per 10,000. This is due to strict occupational licensing laws, which restrict the supply of physicians into the system. This increases the wages of already existing physicians and other healthcare workers.
The empirical research shows that reforming medical licensing can lead to increased access and reduced prices.
One study, from the National Bureau of Economic Research, looked into the effects of relaxed occupational licensing laws on prices, wages, and employment patterns. They found that relaxed licensing laws and giving nurses more flexibility reduced prices.
Our estimates from FAIR Health, Inc. show that changing occupational licensing laws to allow more autonomy by nurses lowers permitted prices by 3 to 16 %.
One common counterpoint is that licensing leads to better outcomes, but there is little to no evidence that suggests licensing leads to better outcomes. The study cited previously shows that strict licensing requirements don’t lead to better outcomes.
. . . we were not able to find any influence of these changes in the regulatory climate on infant mortality rates or malpractice insurance rates as indirect measures of the quality of the service provided.
Similar to medical licensing, scope of practice laws restrict the ability of certain healthcare workers to care for patients is a variety of ways. These laws supposedly increase the quality of healthcare for patients.
But the vast evidence suggests that Scope of Practice do not lead to better outcomes, rather, they lead to lower consumer satisfaction as well as increased costs to the healthcare system as a whole.
5. Compliance with State Regulations
Compliance with state regulations are often a massive burden to hospital and insurance budgets, which eventually lead to higher prices for families and patients.
This study, from researchers at Pacific University looked into the cost burden and other effects of regulatory compliance on hospitals in Oregon.
On average each Oregon DRG hospital spent approximately $3.9M annually, and each Type A and B hospital spent close to $0.5M annually on labor alone to comply with state regulations
One major effect of regulatory compliance is that it increases administrative spending, which one of the the main reasons why healthcare is expensive in America.
Similar effects can be seen on a national level as well.
This report looks at 190 hospitals countrywide and looks into the effects of regulatory compliance.
An average-sized community hospital (161 beds) spends nearly $7.6 million annually on administrative activities to support compliance with the reviewed federal regulations — that figure rises to $9 million for those hospitals with PAC beds. Nationally, this equates to $38.6 billion each year to comply with the administrative aspects of regulatory compliance in just these nine domains. Looked at in another way, regulatory burden costs $1,200 every time a patient is admitted to a hospital.
$38.6 billion annually is a significant burden, one which leads to higher administrative costs and higher prices for patients and insurance companies. Experts recommend that significant regulatory reform is necessary to reduce administrative costs and health related expenditures.
Decades of public policy on the state and federal level has resulted in a costly healthcare system. Patent laws and lack of drug imports have lead to soaring drug prices. CON laws, which started in the early 70s, has increased healthcare spending and as reduced the quality of healthcare. Medicare and Medicaid’s reimbursement rates have lead to hospitals charging insurance companies significantly more to stay afloat, leading to increased prices for people nationwide.
Medical licenses and SoP laws have decreased the quality of healthcare while increasing prices for patients. And compliance with regulations has put a extreme burden on hospitals and has lead to increased administrative spending and costs for the healthcare system as whole.
FDA Regulation of Health Care Products
"You can easily imagine how the restrictions of the FDA has caused premature deaths in the millions. "
Do you prefer that you and your doctor select from all possible options how to treat your ailment. Or do you choose to ignore potentially promising treatments that a low level government employee in Rockville Maryland has decided to withhold from you.
The government used the most notorious medical tragedy of modern times to advertise what they claim to prevent on a regular basis. Thalidomide was a widely used drug in the late 1950s and early 1960s for the treatment of nausea in pregnant women. It became apparent in the 1960s that thalidomide treatment resulted in severe birth defects in thousands of children. This tragedy was used as the reason for expanding the governments role in controlling access to drugs.
Centralized control implies a single rule should apply in all cases. Only specific individuals can know if the cost outweigh the costs. Who should decide which risks are acceptable? The bureaucrats in Washington of the patient and doctor?
Industry groups and manufactures and trial lawyers to angle to give the FDA more authority to get big payoffs through law suites.
FDA is constantly pushing the envelope of its authority. Very ambitious agency politically. Shocking news events have a outweighed effect.
1930's Sulfanilamide Disaster killed 100 children and led to the passage of the food drug and cosmetic act.
FDA bureaucrats react to incentives just like everyone else. Type 1 error is they deny a safe product. Type 2 error is one in which they approve a product that is not safe. Their incentives to avoid a mistake vary greatly. If they drug turns out to be less effective or safe you are exposed. They only way to play it safe is turn down the application or stall for time.
New drug applications can be over 100,000 pages.
Bureaucrats never get held responsible for the deaths and avoidable suffering caused by drugs that are delayed or not approved. In the 1960's the FDA closed their doors to cardiovascular drugs, even through cardiovascular disease was the leading cause of death and many advances had been made. Beta-blockers awaited FDA approval for a decade after already being used abroad. University of Rochester professor William Wardell estimated in 1979 that a single beta-blocker that had already been sold for 3 years in Europe could had saved 10,000 lives per year. That’s more deaths that the Korean and Vietnam wars combined. That’s 1 single drugs at one single time. You can easily imagine how the restrictions of the FDA has caused premature deaths in the millions.
Other examples include delays in raspatory drugs and a 6 year delay in the availability of
Valproate and nitrazepam for epilepsy patients. Lithium carbonate was used in 40 countries before its approval by the FDA.
1980's study by US general accounting office found of 14 vital therapeutic drugs entering the US only 1 of 14 drugs becoming available over the previous decade came to the US first, the lag ranged from 2 months to 13 years. Many drugs approved aboard are never approved in the US.
Products being used successfully for many years elsewhere still have to go through the FDA's long expensive process. US citizens had experienced sizable forgone health benefits from delayed drugs and received minimal benefits from reduced exposure to toxic drugs.
In 1962 testing requirements were greatly increased. The high cost of securing FDA approval causes companies to abandon many promising new drugs.
FDA good manufacturing practice regulations are very vague. Many times FDA will request a study then after completion request an entire new study. Companies never know what data they will request and describe the process as a giant and very expensive and time consuming guessing game.
Head of FDA drug surveillance branch "we used to say if a company makes a specific change then we would probably not take any action. Now we don’t, now even if they make the changes they might end up in court, we want to say to these companies you don’t know when or how we will strike, we want to eliminate predictability."
FDA violates 4th amendment in that they can, without a search warrant, inspect private companies facilities and records at anytime. Because the regulations are so numerous and vague, they take up 8 volumes in the code of regulations, inspectors can always enforce arbitrary violations and destroy a company at will and seize their property. The FDA is known as highly vindictive to those who challenge anything they do.
When health decisions are suppressed within the family for decisions by a central planning board no-one should expect a healthy outcome. For more than half a century Americans have been restricted from making life and death health decisions. This government agency is a political institution swayed by the pursuit of power, privilege and budget increases with a far reaching agenda. FDA systematically strives to avoid type 2 errors was disregarding type 1 errors to avoid negative publicity.
At the risk of their bureaucratic careers and funding regulations are loathed to approve any good before they complete up to 10 years of testing. This make it almost impossible for small innovative companies and drugs with smaller consumer base to succeed.
Without the FDA the private sector could look to private solutions: Insurance companies (both consumer and liability), medical and pharmacy associations seal of acceptance program of AMA from 1929-1955. Private information services, consumers union, Consumer federation of America, Manufacturers would provide more information offered by rivals, trade associations, underwrites laboratory.
Emergency care research institute ECRI.org complies and organizes information on medical use and devices.
SOURCES: