Right now the hot topic is the healthcare debate.  Proponents of “single payer” and “universal” healthcare are quick to point to the disparity in care, high cost, exclusion of pre-existing conditions, denial of benefits, etc.  The opponents assert arguments along the lines about socialism, government takeovers, Obama and the Democrats are bad, etc.

In all the talking points from both sides about healthcare, few real solutions are offered.  Nearly all of the healthcare solutions to the “crisis” propose more government interventions.  Liberty advocates who understand free markets realize that more intervention is not the solution to this complex problem.  Most conservatives also suspect that more government involvement at any level is not the solution; however these same conservatives were willing to entertain ideas such as Mitt Romney’s mandated health insurance concept (as adopted in his home state of Massachusetts) during the 2007-2008 presidential primary.  It is curious that so many conservatives are now (rightly) outraged over the current congressional proposals with insurance mandates that include fines and the potential for imprisonment.  This problem, like many in politics, is essentially an economic problem of supply and demand where special interest groups (some well intended and others not so) have advocated and achieved government intervention in the marketplace.

Let it be perfectly clear that the government can not legislate or regulate away the fundamentals of economics, especially the principle of scarcity. Macroeconomic principles such as supply and demand can not be legislated away any more than the force of gravity can be legislated away.  Resources are scarce, as in they are not unlimited; however, the combination of goods and services that can be produced is infinite.  How are these resources to be arranged to satisfy society’s demand?  Who decides?  Will it be individuals in a marketplace or a centralized authority deciding for most in society?  The healthcare problem today has two components, the cost of goods and services which we shall call “supply” and how we pay for these products.  Government interventions at all levels that try to answer the questions of scarcity have not solved our problems; instead, they have only made it worse by distorting the marketplace.

The “crisis” has had its roots with government intervention in the marketplace for healthcare from the very beginning.  It started in the early 20th century with the regulation of drugs at the federal level, followed with the regulation of healthcare providers at the state level.  The regulation of drugs and doctors is proclaimed to be necessary to protect people from negligent or incompetent doctors or dangerous drugs.  This is true to some extent.  Regulation has increased the quality of healthcare services and reduced risk, but this has not been without cost or victims.  The total increase in healthcare cost results from a direct increase of expense to provide the products combined with reduced supply of the products because of higher barriers for people to enter the market in order to compete.

Consider the massive expense of bringing drugs to the market from prolonged testing combined with clinical trials.  Also consider the cost in lives in preventing the “good” drugs from reaching the marketplace as quickly as they could have otherwise.  Obviously some “bad” drugs have been prevented from entering the market, but not always.  In the cases when “bad” drugs do enter the market, does one honestly believe a company will profit?  A company has a large incentive to produce only “good” drugs in terms of its profit and reputation.  A poignant example of the success of drug regulation in the U.S. by the FDA was the prevention of Thalidomide from being sold.  Even in this case, the company would not have sold the drug knowing it was dangerous.  How much profit did the producer of Thalidomide make?  No amount of monetary compensation can correct for the damages done by Thalidomide, but monetary rewards from suits brought for defective drugs and services provide a strong incentive for safety.  As an aside, this is a reason NOT to advocate tort reform in the form of monetary damage caps.  We want companies that produce “bad” drugs to compensate for damages AND pay punitive expenses as an incentive to be more careful.  This is how a free market works.

Let’s look at healthcare providers: doctors, nurses, registered nurses, nurse assistants, pharmacists, opticians, dentists, dental assistants, hygienists, etc. These professions are currently regulated by the states, so there is more hope with this issue.  Again, the regulation of these positions is well intentioned, but not without cost.  Advocates for the regulation of these professions have two groups: those who genuinely want to protect society from bad healthcare providers and those who wish to strengthen the position of their particular guild. For the most part, the quality of these services has increased; however, by creating barriers of entry into these careers, we reduce the supply of providers and increase cost.  Few consider the cost incurred by those who can not access particular healthcare products because they have been priced out of the market, even with insurance.  Large segments of the population are protected from malpractice because the level of quality that they can afford has been made illegal for them to purchase.  Indeed, regulation of healthcare providers even interferes with those who would offer these services for free.  Organizations that hold temporary healthcare clinics in low-income urban areas rely on the donation of the services by those in the field.  These temporary clinics are constrained to only use those healthcare providers licensed within the state where the clinics are held even though the volunteer pool from out of state far exceeds those within the state.  Because each state regulates its own healthcare providers, a doctor or a nurse can not legally practice their profession across state lines.  Those who would attend the clinic and receive healthcare from out-of-state providers are protected from this “risk” by not receiving any healthcare services at all.  While a mechanic or software engineer can practice their trade anywhere in the country without regard for the political boundaries of states, those in the healthcare trades can not.  This is another absurdity that is well intended, but the costs are enormous although they remain largely unmeasured.  States that wish to help their citizens gain greater access to healthcare would do well to consider unilaterally accepting license reciprocity of healthcare providers from other states.

Finally we come to how people predominantly pay for healthcare products, through health insurance.  Health insurance itself is a creation of government interference in the market.  Price controls on wages during World War II caused companies to offer health insurance as a means to compensate employees outside of the wage controls imposed by the federal government.  The practice continued after the war and was reinforced when the IRS decided that employer- provided health insurance coverage was not taxable income.  This allowed an employer to offer a higher valued tax compensation package to an employee at no marginal increase cost to the employer than would have been possible otherwise.  Additionally, the business of insurance itself has been protected from federal anti-trust laws so long as states regulate insurance.  The provision of protection from anti-trust suits by definition can prevent a free and competitive market from ever existing for health insurance.  Note:  One of the government’s few legitimate roles in a market is to prevent cartels, trusts, and monopolies, and not to create them.  So, health insurance is largely a manifestation of the government’s interference in the marketplace, in particular wage controls and convoluted income tax laws.

Health insurance itself is not a bad or poor concept when offered in competitive markets free from mandates and burdensome regulation; however, this is not the case.  Health insurance is offered in non-competitive markets with government sanctioned trust protections, heavily regulated and with huge minimum coverage mandates.  Fortunately states set the regulation and mandated coverage, so there is hope of reform in these areas. Although states have a sovereign right to regulate these matters, they do so mostly against their citizens’ best interests and for the benefit of a particular special interest.  In Florida it was considered a triumph by advocates for the treatment of autism when it became mandated that insurance cover particular treatments.  The discontinuity of regulation and mandates between various states prevents consumers from purchasing health insurance from outside of their particular state. A solution can be found within a state by unilaterally accepting health insurance from outside of the state and dropping most (if not all) of its own mandated minimum coverage.

The health insurance system itself is a convoluted system of paying for a service.  This system of third party payments obscures the actual costs of goods and services rendered.  By disconnecting what the consumer actually pays from what the provider charges, the price system can not help but to become distorted, especially in an industry that is heavily regulated.  Consider the famous example of doctors charging $100 or more for a single aspirin or several hundred dollars to change a bedpan.  Healthcare providers charge the maximum allowed to be reimbursed for a particular service every time without consideration for individual circumstances.  Then again, there are many services provided that are not profitable or are net losses to the healthcare provider’s bottom line on that particular service.  In many cases the treatment prescribed (or even a diagnosis) is based upon what is covered by a particular insurance provider.  When a patient is given a choice in this instance, the patient chooses what the insurance covers rather than paying out of pocket, even though the actual cost of the good or service may be the same.  A total disconnect exists between the cost and what the consumer pays.  Personally I have had two beautiful daughters delivered while being covered by medical insurance.  In both cases we were unable to definitively estimate what the out-of-pocket expense would be.  In fact, nobody at the insurance company, obstetrician’s office, or hospital could give us an answer.  My wife and I were unable to even come to an approximate figure.  Some argue that insurance is necessary and lowers the cost for the consumer.  Although this may be true for individual cases or groups, overall we intuitively know that one can not sell a product for less than what it costs to produce it, while including an incentive to create it in the first place (profit).  Consider the field of laser eye correction surgery.  This procedure is not covered by most insurance policies, yet it has come down from $8000 per eye to less than $1500 per eye in addition to being able to correct more conditions.

So what is a very simple economic problem that has been addressed for centuries in the marketplace has now seemingly become too complex of a problem for the private marketplace to sort out without government intervention.  Yet, it is the gradual government intervention over the past 100 years that has created the problem.  In every other industry, technological advances increase quality and reduce cost, but not so in healthcare.  It is no coincidence that this is because of the heavy regulatory and licensing burden on the products and healthcare practitioners.  The drugs and medical device manufacturers suffer an enormous regulatory burden increasing cost, yet despite this (not because of it), the U.S. leads the world in developing new drugs, devices, and treatments.  The burdensome regulation and licensing on practitioners of healthcare also increase cost for consumers by reducing the supply of healthcare providers in addition to imaginary lines drawn along state boundaries.  Finally we face how the consumer actually pays for the services rendered through third party payment systems that disconnect what one pays to the actual cost incurred.

Healthcare is expensive.  Politicians frequently point out that “we spend more on healthcare than any other nation” but neglect to say that we spend more than any other nation on a lot of things like shoes and candy.  Spending “a lot” might be a good investment when one considers the quality of life and institutional knowledge that is maintained in the workforce.  If we are to spend less (or more), how much is the “correct” amount and who gets to decide?  This is only a crisis for the federal government because health insurance is the largest entitlement liability.  It is not a crisis for most Americans who are satisfied with their healthcare and no doubt would like to pay less, like we would like to pay less for a lot of things.

The solution resides in a gradual (or rapid) withdrawal of government from this industry.  While it is ludicrous to expect the federal government to reduce the regulatory burden for drug and medical device manufacturers, the threat to remove anti-trust protection on health insurance companies should be exercised.  More competition in the marketplace should exist and there are no legitimate reasons for insurance companies to enjoy a monopoly in any region.  States can also take action on their own by accepting insurance policies purchased in other states and allowing companies to offer policies without mandated coverage for particular ailments.  Additionally, states should allow practitioners of healthcare licensed in other states to practice in their own state even if it is not reciprocated in other states.  Obviously there will be a lot of resistance to these proposals by special interest advocates, but these are real solutions that can be used to increase supply and not cost the taxpayers one penny.