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Wednesday, December 9, 2009

Does Regulation Lower Costs? A Personal Experience

For many years I have struggled to breathe through my nose, and decided to do something about it, given that the condition helps cause sleep apnea. The experience of having this condition “fixed” has taught me both about the wonders of modern medical care as well as the idiocy of the medical/government bureaucracy. Unfortunately, the latter slowly is destroying the former.

I won’t describe the procedure, except to say that the local anesthetic was effective, and I have a high pain tolerance. Furthermore, I was surprised that this invasive operation resulted in quick results, making me the beneficiary of something that was medically impossible not long ago.

The procedure itself was good, but the administration of the operation was lacking because it was much more costly than it needed to be. The activity took place in the same-day surgery center at our community’s brand-new hospital, and while the center was impressive, it was not medically necessary for me to be there.

The doctor and I often discuss the economics of medicine and the government policies that are driving the system into ruin, and our encounter that week provided more opportunity for conversation. After he finished and I was leaving, he dropped a small bombshell: He told me that he just as easily and efficiently could have performed this small operation in his office for $250, much less than what my insurance company will be paying for the same procedure.

Obviously, someone will wonder why an insurance company would demand practices that raise its costs. Insurance companies, after all, are private firms that allegedly are trying to make a profit, and why they would impose unnecessary costs on themselves should be a mystery.

It is not hard to solve this paradox, however. The insurance process we have today would not exist in a free market for medical care. Just because a firm providing a service is a profit-seeking corporation does not mean it is engaged in free enterprise.

First and most important, the present system came about because of a quirk in tax policy during World War II. Because of government wage and price controls, companies could not compete for workers by offering better wages, but they could offer benefits such as “health insurance,” a relatively new product that was not taxed as income. Thus health insurance became employer-based, a situation that became institutionalized in the postwar years.

Second, while early insurance tended to provide protection against catastrophic events, the entire apparatus took another turn after Congress enacted Medicare in 1965. This tax-funded plan paid a large percentage of medical costs for senior citizens, and it poured a lot of new money into the medical system. Although doctors at first were leery of this program, they found soon that if they billed it, the government would pay.

At the same time, American labor unions began to demand greater pension and medical benefits, and U.S. companies gave in, creating a huge time bomb that fully exploded when General Motors and Chrysler went bankrupt earlier this year (only to be bailed out by taxpayers who now have alleged ownership of these white elephants). At the time of their bankruptcies, the largest single cost these companies faced was the medical bills of union employees.

What does that have to do with the unnecessary costs for my own operation? Over the years, as the federal and state governments have increased their intrusions into health care, driving up costs, health insurers have become little more than regulated utilities that operate just like other risk-averse bureaucracies, and regulated bureaucracies tend to demand medical procedures that supposedly are safe. Hang the costs.

I must admit that I was tempted to pay the $250 and get the job done in the doctor’s office, as a matter of principle. Unfortunately, after having paid monthly premiums well in excess of that amount, the incentive was for me to get the higher-cost procedure, since I was not paying directly for it. Welcome to “cost containment,” government style.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.