Thursday, August 20, 2009

Socialized Healthcare vs. The Laws of Economics

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Gary’s Note: The government moving into the health insurance business will kill some of you. The lucky ones will survive with poorly treated chronic ailments. If the socialists have their way, either make sure you stay very, very healthy or have enough money to take a medical tour to South America or South Asia. Thomas J. DiLorenzo explains why below. Enjoy. And send your questions and comments to

Whiskey & Gunpowder
By Thomas J. DiLorenzo

August 20, 2009

Socialized Healthcare vs. The Laws of Economics

The government’s initial step in attempting to create a government-run healthcare monopoly has been to propose a law that would eventually drive the private health insurance industry out of existence. Additional taxes and mandated costs are to be imposed on health insurance companies, while a government-run “health insurance” bureaucracy will be created, ostensibly to “compete” with the private companies. The hoped-for end result is one big government monopoly which, like all government monopolies, will operate with all the efficiency of the post office and all the charm and compassion of the IRS.

Of course, it would be difficult to compete with a rival who has all of his capital and operating costs paid out of tax dollars. Whenever government “competes” with the private sector, it makes sure that the competition is grossly unfair, piling costly regulation after regulation, and tax after tax on the private companies while exempting itself from all of them. This is why the “government-sponsored enterprises” Fannie Mae and Freddie Mac were so profitable for so many years. It is also why so many abysmally performing “public” schools remain in existence for decades despite their utter failure at educating children.


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America’s Healthcare Future?

Some years ago, the Nobel-laureate economist Milton Friedman studied the history of healthcare supply in America. In a 1992 study published by the Hoover Institution, entitled “Input and Output in Health Care,” Friedman noted that 56 percent of all hospitals in America were privately owned and for-profit in 1910. After 60 years of subsidies for government-run hospitals, the number had fallen to about 10 percent. It took decades, but by the early 1990s government had taken over almost the entire hospital industry. That small portion of the industry that remains for-profit is regulated in an extraordinarily heavy way by federal, state and local governments so that many (perhaps most) of the decisions made by hospital administrators have to do with regulatory compliance as opposed to patient/customer service in pursuit of profit. It is profit, of course, that is necessary for private-sector hospitals to have the wherewithal to pay for healthcare.

Friedman’s key conclusion was that, as with all governmental bureaucratic systems, government-owned or -controlled healthcare created a situation whereby increased “inputs,” such as expenditures on equipment, infrastructure, and the salaries of medical professionals, actually led to decreased “outputs” in terms of the quantity of medical care. For example, while medical expenditures rose by 224 percent from 1965–1989, the number of hospital beds per 1,000 population fell by 44 percent and the number of beds occupied declined by 15 percent. Also during this time of almost complete governmental domination of the hospital industry (1944–1989), costs per patient-day rose almost 24-fold after inflation is taken into account.

The more money that has been spent on government-run healthcare, the less healthcare we have gotten. This kind of result is generally true of all government bureaucracies because of the absence of any market feedback mechanism. Since there are no profits in an accounting sense, by definition, in government, there is no mechanism for rewarding good performance and penalizing bad performance. In fact, in all government enterprises, exactly the opposite is true: bad performance (failure to achieve ostensible goals, or satisfy “customers”) is typically rewarded with larger budgets. Failure to educate children leads to more money for government schools. Failure to reduce poverty leads to larger budgets for welfare state bureaucracies. This is guaranteed to happen with healthcare socialism as well.

Costs always explode whenever the government gets involved, and governments always lie about it. In 1970 the government forecast that the hospital insurance (HI) portion of Medicare would be “only” $2.9 billion annually. Since the actual expenditures were $5.3 billion, this was a 79 percent underestimate of cost. In 1980 the government forecast $5.5 billion in HI expenditures; actual expenditures were more than four times that amount — $25.6 billion. This bureaucratic cost explosion led the government to enact 23 new taxes in the first 30 years of Medicare. (See Ron Hamoway, “The Genesis and Development of Medicare,” in Roger Feldman, ed., American Health Care, Independent Institute, 2000, pp. 15-86). The Obama administration’s claim that a government takeover of healthcare will somehow magically reduce costs is not to be taken seriously. Government never, ever, reduces the cost of doing anything.


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All government-run healthcare monopolies, whether they are in Canada, the UK, or Cuba, experience an explosion of both cost and demand — since healthcare is “free.” Socialized healthcare is not really free, of course; the true cost is merely hidden, since it is paid for by taxes.

Whenever anything has a zero explicit price associated with it, consumer demand will increase substantially, and healthcare is no exception. At the same time, bureaucratic bungling will guarantee gross inefficiencies that will get worse and worse each year. As costs get out of control and begin to embarrass those who have promised all Americans a free healthcare lunch, the politicians will do what all governments do and impose price controls, probably under some euphemism such as “global budget controls.”

Price controls, or laws that force prices down below market-clearing levels (where supply and demand are coordinated), artificially stimulate the amount demanded by consumers while reducing supply by making it unprofitable to supply as much as previously. The result of increased demand and reduced supply is shortages. Non-price rationing becomes necessary. This means that government bureaucrats, not individuals and their doctors, inevitably determine who will get medical treatment and who will not, what kind of medical technology will be available, how many doctors there will be, and so forth.

All countries that have adopted socialized healthcare have suffered from the disease of price-control-induced shortages. If a Canadian, for instance, suffers third-degree burns in an automobile crash and is in need of reconstructive plastic surgery, the average waiting time for treatment is more than 19 weeks, or nearly five months. The waiting time for orthopaedic surgery is also almost five months; for neurosurgery it’s three full months; and it is even more than a month for heart surgery (see The Fraser Institute publication, Waiting Your Turn: Hospital Waiting Lists in Canada). Think about that one: if your doctor discovers that your arteries are clogged, you must wait in line for more than a month, with death by heart attack an imminent possibility. That’s why so many Canadians travel to the United States for healthcare.

All the major American newspapers seem to have become nothing more than cheerleaders for the Obama administration, so it is difficult to find much in the way of current stories about the debacle of nationalized healthcare in Canada. But if one goes back a few years, the information is much more plentiful. A January 16, 2000, New York Times article entitled “Full Hospitals Make Canadians Wait and Look South,” by James Brooke, provided some good examples of how Canadian price controls have created serious shortage problems.

  • A 58-year-old grandmother awaited open-heart surgery in a Montreal hospital hallway with 66 other patients as electric doors opened and closed all night long, bringing in drafts from sub-zero weather. She was on a five-year waiting list for her heart surgery.
  • In Toronto, 23 of the city’s 25 hospitals turned away ambulances in a single day because of a shortage of doctors.
  • In Vancouver, ambulances have been “stacked up” for hours while heart attack victims wait in them before being properly taken care of.
  • At least 1,000 Canadian doctors and many thousands of Canadian nurses have migrated to the United States to avoid price controls on their salaries.
Wrote Mr. Brooke, “Few Canadians would recommend their system as a model for export.”


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Canadian price-control-induced shortages also manifest themselves in scarce access to medical technology. Per capita, the United States has eight times more MRI machines, seven times more radiation therapy units for cancer treatment, six times more lithotripsy units, and three times more open-heart surgery units. There are more MRI scanners in Washington state, population five million, than in all of Canada, with a population of more than 30 million (See John Goodman and Gerald Musgrave, Patient Power).

In the UK as well — thanks to nationalization, price controls, and government rationing of healthcare — thousands of people die needlessly every year because of shortages of kidney dialysis machines, pediatric intensive care units, pacemakers, and even x-ray machines. This is America’s future, if “ObamaCare” becomes a reality.

Thomas J. DiLorenzo

A Parting Shot
You can read more from Thomas J. DiLorenzo’s book How Capitalism Saved America.

State-run healthcare will be like state-run everything else. It will be awful and you will come to hate it.

Currently, however, we have this unholy copulation between insurance companies and the government that is also worthy of intense hatred. The heroic Ron Paul explains on…

“No one disputes the diagnosis: American health care is in lousy shape. As a practicing physician for more than 30 years, I find the pervasiveness of managed care very troubling.

“The problems with our health care system are not the result of too little government intervention, but rather too much. Contrary to the claims of many advocates of increased government regulation of health care, rising costs and red tape do not represent market failure. Rather, they represent the failure of government policies that have destroyed the health care market.

“It’s time to rethink the whole system of HMOs and managed care. This entire unnecessary level of corporatism rakes off profits and worsens the quality of care. But HMOs did not arise in the free market; they are creatures of government interference in health care dating to the 1970s. These non-market institutions have gained control over medical care through collusion between organized medicine, politicians, and drug companies, in an effort to move America toward “free” universal health care.

“One big problem arises from the 1974 ERISA law, which grants tax benefits to employers for providing health care, while not allowing similar incentives for individuals. This results in the illogical coupling between employment and health insurance. As such, government removed the market incentive for health insurance companies to cater to the actual health-care consumer. As a greater amount of government and corporate money has been used to pay medical bills, costs have risen artificially out of the range of most individuals.

“Only true competition assures that the consumer gets the best deal at the best price possible by putting pressure on the providers. Patients are better served by having options and choices, not new federal bureaucracies and limitations on legal remedies. Such choices and options will arrive only when we unravel the HMO web rooted in old laws, and change the tax code to allow individual Americans to fully deduct all healthcare costs from their taxes, as employers can.

“As government bureaucracy continues to give preferences and protections to HMOs and trial lawyers, it will be the patients who lose, despite the glowing rhetoric from the special interests in Washington. Patients will pay ever rising prices and receive declining care while doctors continue to leave the profession in droves.”

I have an especially grisly reason to detest the demonic offspring of private insurance and government regulation…but more on that next month for reasons that will be revealed at that time…

Now a response from a Shooter:

Holy crap, Gary!  Some of your reader mail really gets me going.  But then, that’s why you print it.

I have a few points of my own in response to Mr. (or Ms.?) “A Few Points” from yesterday:

1.  Sure, there are quite a few people who think nothing’s wrong with our current health care system. There are also quite a few people who understand health care costs are outrageously out of control, but aren’t vacuous enough to think that a public option has to be better just because it’s “change”. Those who cling to this religion obviously have no experience or knowledge of what goes on in federal programs.

I’ve never worked directly for the federal government myself, but I have worked under contract for a federal program.  That’s how I met my husband, who is (currently) a federal employee.  The program he works for has helped a lot of people.  However, in the 8 1/2 years that I’ve been able to see it from the inside I’ve seen:

* Millions of dollars wasted on technology that ended up not working as expected and never got used as intended.  In fact, half the time it was used to surf for porn.  Also, hundreds of thousands wasted on lavishly catered “symposiums” or “training sessions” at expensive resort hotels (while working under contract I was actually shipped a couple of these to provide technology support).

* Federal Employees’ Union staff who constantly run to the Union with petty complaints, hoping to get something for nothing.

* Upper management staff building their own little “kingdoms” and having their own agendas, which have little or nothing to do with efficient running of the program.

* Upper management staff driving good, dedicated lower managers out so they can replace them with “their own people”.

* Employees embezzling money from the program.

* Managers taking “short-cuts” in order to make the facility they run look good on paper

* Managers who don’t seem to know what goes on at their facilities - and don’t seem to care

* If I had to guess, I’d say maybe 60% of the employees are competent in their positions and dedicated to the success of the program.  That leaves about 40% who are incompetent or just there to collect a paycheck.

* Extremely low morale.  In a recent survey of federal bureaus, the one my husband works for ranked third from the bottom.

Are these really the poeple some of your readers want running our health care system?  Seriously? They think these people can do it better?

Oh, and for the record, the sections of the program that are run by private contractors are run much more efficiently.  They have to be, or they’ll lose their contract.  Score 1 for competition!

As to this reader’s assumption that those of us opposed to a public option must be “in the upper income spectrum”, I have another revelation.  I have worked for 23 years now, and in all that time I have never once made more that $46,000 in one year.  That hardly puts me in the upper income spectrum.  I am not financially wealthy.  What I am is rational.  Personality type INtJ, look it up on your favorite search engine, Mr. “Few Points”.

2.  “Much is being made about “higher taxes” and “high costs” of any public option, and this is all pure conservative “think tank” propaganda foisted upon dim and paranoid minds.... But what’s not being said is that tax increases will be more than offset by reductions or elimination in insurance premiums, due to increased financial efficiencies.

Riiiiight... and “bailing out” our failing economy was only going to cost $700B.  That’s it!  No more!

What also is also not being said is that like Amtrack and the USPS, any public option will be able to run indefinitely  at a loss, and what is not made up in higher taxes will be made up in public debt, which will eventually translate into inflation, the hidden tax. 

“Increased financial efficiencies”?  I have four words for you:  Fannie Mae, Freddie Mac.  Name me one instance where the federal government creating or taking over any enterprise has ever resulted in “increased financial efficiency”, or improved efficiency of any kind.  When you are financed by public funds, what incentive do you have to operate efficiently?  Compassion?  Nobility?  Good intentions?  See point #1 above.

For that matter, much has also been said on the proponents’ side that everyone who wants to will be able to keep their current private insurance.  But what’s not being said is that when the government tells private insurers whom they have to cover, what conditions they have to cover and under what circumstances they have to provide coverage, they are placing all of the risk on the private insurers.  And they know damned good and well this will eventually drive private insurers out of the market, as they will be forced to increase premiums geometrically in order to cover the additional costs and remain solvent, or operate at a loss - which a public option can afford to do as long as it’s subsidized by public funds, but a private company cannot.

3.  If you want to improve the government, eliminate the party system altogether.  If you want more affordable good quality health care, eliminate insurance altogether.

I could go on and on about how inane this person is, but this has gotten pretty long.

Keep the whiskey pouring!!!  And keep us informed on how many more of these federal government groupies are out there.


Woof. Thought about editing that one for length, but I hate to inhibit a good roll. Keep those responses coming, dear patrons. They make your editor’s day.

Gary Gibson
Managing Editor, Whiskey & Gunpowder

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