Avoiding Dr. Leviathan

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Avoiding Dr. Leviathan
Five Ways to Solve America’s Health Care Crisis Without Accruing Massive Debt


It is widely conceded by pundits of varying ideological stripes that America faces a health care crisis. Both liberals and conservatives tout the problem; sadly, few quality solutions are proposed. The greatest problem within this crisis, also admitted widely, is the high cost of health care and health insurance.

Liberals set about to “solve” this problem by proposing universal, government-provided health insurance. This, of course, only compounds the problem and does nothing to lower real costs. Presumably liberals feel high costs are a problem when they are borne by citizens as health care consumers, but somehow acceptable when they are borne by citizens as taxpayers. Presumably they also somehow think this is a rational position. Either way, it’s worth little.

Conservatives rightly recognize the foolishness of the liberal position, but unfortunately offer few alternatives of either own, beyond legislating ad hoc limits on malpractice lawsuit settlements. Such caps are also worth little. They may be effective at reducing the legal risk of medical practice for providers, thus lowering health care costs for consumers, but they are far too legally dangerous in practice. No legislature can reasonably determine the maximum allowable damage an incident of malpractice should create. And because the possibility still remains for egregious events of malpractice to warrant damages far larger than this “cap”, such limitations end up inhibiting justice for those who are truly harmed by the worst cases of true malpractice.

It is far better to limit jury settlements through gradual legal reform, where better lawyers defend against, and wise judges deter juries from, emotionally-motivated and unnecessarily extortionate settlements. That’s exceedingly difficult to do, but it is far more important to protect the American justice system than shave a few bucks off of doctor visits.

These proposals I list here serve to lower costs for all consumers, without harming the high quality of care which distinguishes the American health care market, while addressing the humanitarian crisis of the uninsured poor.


1. FDA approval: mostly useless

The inefficient, bureaucratic and excessively long process by which the FDA approves new drugs for public consumption have two main flaws that contribute to the unnecessarily high cost of medication.

First is the high cost absorbed by pharmaceutical companies due to the process and its lumbering inefficiency. Only one in five drugs tested ever makes the market, saddling pharmaceutical companies with an average $900 million cost for each new drug. As an obvious result, fewer drugs can be developed and marketed, and those that are become very expensive with artificially high costs. It is estimated that these government-created delays, in their final impact, impose a net annual cost to society of $41.8 billion.

Second is the denial of medicine to those who most need it. The years that the FDA bans a drug while initial research and testing evaluated what eventually would be deemed a harmless drug is still banned from the market are years during which patients are denied access to medicines that could be helping them. The market availability of drugs prior to official FDA approval would lower costs and provide a helpful option for the terminally-ill who may find risky medication worth the potential danger.

The fundamentally fallacious assumption of FDA approval is that there can be a single level of acceptable risk in medication. This is clearly not the case. The value of risk is always an individual determination, and not an absolute threshold.

All prescription drugs should be allowed on the market, with the FDA and other third-parties testing and approving drugs as they feel appropriate, and all consumers should take all the information into account. The cost-benefit analysis should be performed by patients and their doctors, not by the government.


2. Like a good lawyer in our post-Miranda world, health care should be appointed to you if you can’t afford it

Health insurance, for complicated economic reasons of adverse selection and asymmetric information, is not a market that can efficiently provide universal coverage without government intervention. Without a state-funded safety net, health insurance will always price certain people out of the market.

This issue is worth the concern of all Americans. The uninsured create negative externalities, whereby their lack of effective health coverage directly harms the welfare of other people in society. Their avoidance of health care, especially preventative care, eventually necessitates emergency care which is left to be paid by taxpayers; their poor health assists the spread of disease and illness to others; they divert medical resources from preventative care to the care of preventable illness.

It is for these reasons, not merely warm/fuzzy humanitarianism, that all poor Americans who cannot afford health insurance should have it made available to them by government provision. Medicaid putatively serves this purpose, although it has many flaws and is still not effectively covering many who still cannot afford insurance. The ability of households to pay for health insurance should be calculated, similar to the way the ability to pay college tuition is calculated, and insurance should be allocated accordingly.


3. Avoid socialized medicine like the plague

It is important that the government provide health insurance to those who cannot afford private alternatives. It is however imperative, in order to preserve the lasting quality of American health care, that no one who can afford private health insurance is offered government health insurance.

There is no good reason to have taxpayers bear the cost for insurance that a person could have purchased on his own. Such third-party interference reduces consumer knowledge, raises prices (see point 5), and substitutes efficient private provision with an inferior public provision.

When this redundant spending is universalized, it is called socialized medicine. This is the health care system of most other developed countries, which, depending on your perspective, shows either our unique brilliance or our exceptionalist ignorance. The truth is the former, as such a system applied in the US would severely distort the health care market and irrevocably damage the quality of the American health care system.

The law of demand states that when the costs for a commodity go down, demand will rise. Thus if health care is free, it holds that people will consume more of it. This iron-clad pillar of economic law indeed holds in practice. The problem is, there is a such thing as consuming too much.

In all countries where health care is free at the point of consumption, demand rises. This is not surprising. Why would one not go to the doctor for a head cold when it costs nothing? Yet while this is not surprising, it is very damaging. The high demand for unnecessary care creates shortages, ending in long lines and waiting lists at the doctor’s office. It also diverts resources, as the hordes of free-riding patients rushing in with their trivial afflictions end up creating the need for doctors to address the trivial, at the expense of those few with real needs.

Anecdotal evidence from countries with single-payer health insurance describes the expected - long lines, waiting lists, and poor care as a result of artificially-high demand stretching supply to its limit. This effect is most pronounced in the countries most politically and socially similar to America (i.e. the most instructive examples), Great Britain, Canada, and Australia. An instructive statistic from their experience with socialized medicine is the percentage of patients who have to wait more than four months for surgery. 36% of the British have to wait, as do 23% of Australians and 27% of Canadians. 5% of Americans wait that long.

The effect of socialized medicine should be even more pronounced and damaging in the United States, where our large acquisitionist culture would prove dangerously incompatible with the provision of free health care. It is laughable to think that the world-famous American appetite for product consumption, already displayed everywhere from housing to clothing to automobiles, would be somehow willingly trimmed for the most indispensable and valuable product available - health care.


4. Deregulate, as always

The only solutions to the problem of high cost that don’t result in the reduction of quality (e.g. the aforementioned single-payer health insurance) will be achieved through, surprise, deregulation and privatization.

Duke University professor Chris Conover estimates that health care regulations cost Americans $169.1 billion over the benefits they provide. The total costs are $339.1 billion, yet the regulations provide only about $170.1 billion in benefits. This translates into a hidden tax of more than $1,500 to the average American household every year. It also makes health coverage unaffordable for about 7.5 million people. It’s funny how big-government advocates are the ones coming up with grand schemes to fix health care. They should start at home.

An example of such superfluous regulation is the requirement that all insurance must provide certain types of coverage, including the often trivial and absurd. In various states, these include insurance alcoholism, infertility treatment, contraceptives, acupuncturists, marriage therapists, massage therapists, and osteopaths - whether you want any of them or not. Studies have found these ridiculous mandates increase the cost of coverage by 15-30 percent and prevent up to 25 percent of the uninsured from purchasing insurance.

Obviously, comprehensive deregulation of the most unnecessary health care regulations could greatly reduce costs without increasing taxpayer expenditure or reducing quality. This should be one of the first solutions pursued by Congress, before they start cooking up 1,000+ page legislative behemoths (should we call them Dr. Leviathans?).


5. Promote freedom of choice

Americans, because of our poorly-mixed health care economy, pay for more of their medical care through third parties (86 percent) than patients in 17 other advanced countries, including Canada. This is, in its final impact, possibly the largest factor driving up health care costs. When consumers are bereft the responsibility and incentive to pay for their own purchases, cost rises. A nice (yet superficial) example of this principle is in cosmetic surgery, which is the only health care industry in which inflation-adjusted prices have actually fallen over the past few years, simply because competition abounds, consumers nearly always are bearing the full cost, and there are no third-party intermediaries.

To fix this, consumers should be granted ultimate authority to directly choose their insurers and method of insurance, as well as their individual providers. The direct provision of health insurance by an employer is encouraged by American tax laws, yet is of dubious value. Employees don’t buy their cars or their homes through their employers, choosing instead to enjoy the liberating option of the individual purchase. Why would they want to be forced into a single system of health care?

Tax incentives should continue to encourage employers to pay for employee health insurance, but the choice of the individual plans and options should be left to the employee.

This will deliver greater satisfaction for the employee, who can choose the plan that best fits his/her needs. HSAs, or health savings accounts, currently represent a worthy (although imperfect) option of enhancing such choices, and have been written about well by the Cato Institute, among others. Tax incentives should be expanded so that more, and more effective, private solutions can be discovered.

Second, choice in health care provision will create greater knowledge of one’s individual health care situation and needs. The lack of third-party intermediaries, and the subsequent patient-centric competition among providers, delivers a natural incentive for consumers to enhance their own awareness. Consumers start to care more about what they’re getting, because they can do something about it. As the great Friedrich Hayek said, "Competition must be seen as a process in which people acquire and communicate knowledge."

Third, and most importantly, consumer choice will spur competition, where little now exists among insurers and HMOs, reducing costs. No longer will customers be unwillingly forced into plans - they will actually choose the ones they want, thus giving health care companies an incentive to lower costs and improve quality. Cost competition has been shown by myriad economic studies to lower costs, and would do the same for the health care industry. It would also create an incentive for new insurers to enter the market, as they can gain new customers quickly and individually, instead of relying on employers to refer them customers en masse.

The market can’t solve every problem in health care, but it can solve many. A combination of deregulation and competition, rather than state control and funding, would lower costs and raise quality. Government shouldn’t use the poorest consumers as an excuse to regulate and lower quality for everyone else.



The above work is the opinion of the author, and not necessarily that of the Prometheus Institute.
Comments (3)add comment

Coach Outlet Online said:

April 20, 2012 | url
Votes: +0

Christel Thibodeaux said:

The cost-benefit analysis should be performed by patients and their doctors, not by the government.
September 11, 2012 | url
Votes: +0

Diamond Faison said:

Thank you for posting this great blog. The subject is intriguing to me. I hope you post more about it soon.
October 10, 2012 | url
Votes: +0

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