Reforming Americas Medical System Through Deregulation

Mr. Bandow, a contributing editor to The Freeman, is a Senior Fellow at the Cato Institute and the author of The Politics of Envy: Statism as Theology, forthcoming from Transaction Pub lishers.

Health care has moved to the forefront of American politics and almost everyone in Washington wants to do something. In the Clintons' view the medical system is in crisis and requires radical restructuring. A number of Republicans, too, seem to believe that more federal intervention is necessary, just not quite the sort envisioned by the administration. What virtually no one is talking about, alas, is implementing the one reform program with a proven track record, but one which most policymakers perceive to be far more extreme than even the President's plan: deregulation.

Government does need to act. While there really is no health care “crisis” the sick are more likely to be treated successfully in America than in any other nation—the medical marketplace does suffer from some serious defects. Americans are paying more than necessary for their care and some people are receiving less and poorer care because prices have been inflated artificially.

It is these problems, rising costs and millions of people uninsured, that have caused the administration to advocate the de facto nationalization of health care. The basic objection to the current system appears to be that it is not centrally planned. This philosophy is epitomized by the comment of Wall Street analyst Kenneth Abramowitz, that “Right now, health care is purchased by 250 million morons called U.S. citizens.” The answer, he explained, was to “move them out, reduce their influence and let smart professionals buy it” on their behalf. This philosophy, of course, motivated generations of apparatchiks and bureaucrats throughout Eastern Europe and the former Soviet Union, and reflects what Nobel laureate Friedrich Hayek called “the fatal conceit.”

President Clinton seems to share this conceit, having forgotten who actually provides medical care. For instance, he told one audience that “Make no mistake about it, some of the people who are giving me hell in Washington [over Whitewater] are doing it so I can't give you health.” But he would not be “giving health” to anyone under his proposal. Nor would any of the scores of bureaucracies that he wants to establish.

The basic problem is that medicine is a process, not a structure; rearranging boxes in a diagram cannot account for the intricacies of human behavior. The very complexity of the medical process requires decentralized decision-making. No National Health Board, no Health Alliance, no gaggle of lawmakers and bureaucrats can substitute for a complex system in which tens of millions of patients, doctors, hospitals, insurance companies, and other participants make more than 1.3 billion medical “transactions” a year. Yet the administration would move in precisely the wrong direction, empowering political officials and health administrators instead of restoring to patients responsibility for their own medical destinies. Asks Tom Miller of the Competitive Enterprise Institute (CEI), “Do we really want to vote collectively (or delegate decision-making to anonymous bureaucrats) on how life-saying technology is rationed, where boundary lines are set for mercy killing, when life gets to begin and end, the manner in which we die, how we manage risks to our health, and how much further we can push our own definitions of ‘good health'?”

Moreover, advocates of increased government intervention in the medical market are confusing symptoms with causes. Costs do not rise in response to, say, sun spots. Rather, costs have been rising so quickly for several reasons, particularly due to government activity. For instance, more than three of every four dollars in the health care system is paid by someone else—-much of it directly by the federal government, most of the rest by insurance companies. The latter is a result of a tax code that prefers fringe benefits, particularly health insurance, to wages. Because of this pervasive third-party payment, consumers have an incentive to consume and providers to provide more and more expensive medical services than if patients were directly re sponsible for the cost of their care and acquired health insurance to cover the risk of catastrophic illness, not effectively to prepay routine care.

Washington also directly boosts the costs of pharmaceuticals through its byzantine drug approval process. States inflate the cost of health insurance by requiring policies to cover many extraneous benefits and by interfering with the operation of insurance markets. State governments also hike labor costs by unnecessarily restricting, through occupational licensure, the work that nurses and other medical professionals can perform. Taken together, these many interventions in the marketplace are the primary cause of today's health care “crisis.”

Real Solutions

Thus, the answer is not one or another scheme to restructure radically the American medical marketplace. Rather, the solution lies in building on the strengths of the existing system by enhancing the operation of market forces.

The fundamental problem with American medical care is that patients have become largely disengaged as decision-makers since most of every health care dollar is paid by someone else. As a result, patients and doctors freely spend someone else's money on ever-more expensive treatments; at the same time, that someone else is increasingly fighting to hold down costs through “managed care” and fixed fee schedules. Thus, medicine has simultaneously grown more expensive and bureaucratic. And that will not change unless patients recover more authority over their treatment.

The increase in third-party payment reflects both the creation of Medicare and Medicaid and the rise of employer-paid health insurance. The latter is largely the fault of Washington as well, since the failure to treat fringe benefits like wages encourages employees to demand ever more comprehensive health insurance. And until recently, at least, companies were happy to comply, because premiums are fully deductible and not, in contrast to wages, subject to Social Security levies. All that matters is that the employer buy the policy.

As a result, what is viewed as the most important fringe benefit is tailored to meet corporate rather than individual preferences. Many of the problems that exist today—such as lack of insurability and portability, particularly for those with preexisting conditions—are a result of the fact that insurance is written at the behest of employers rather than employees. Workers still foot the bill, since health insurance is merely one form of compensation, but most have very little control over the specific benefits that they receive. In contrast, if workers bought their own policies, individually or as part of group cooperatives, they would demand guaranteed long-term insurability and other provisions that employers have no incentive to offer.

That the proliferation of third-party payment, which affects doctors' recommendations as well as patients' requests, has had a profoundly negative impact on the medical system should come as no surprise. Imagine the result if some combination of government and private insurers paid three-fourths of the cost of buying and maintaining automobiles. Everyone would want luxury cars, few people would seriously question repair bills, garages would recommend every procedure imaginable, and total automobile outlays would soar.

Prices Matter

It has, of course, been argued that medicine will never respond to market forces in the same way as will, say, auto purchases and repair. However, while a patient may have little discretion in deciding how he wants to be treated after a serious accident or heart attack, he can easily decide not to see a doctor for a common cold or minor cut. This sort of choice is readily apparent in the market for cosmetic surgery, which involves very little third-party payment and significant price competition. In fact, if patients didn't exercise some restraint even in today's “cost-plus” system there would be permanent health care overload.

A Rand Corporation study provides dramatic evidence that moving towards catastrophic coverage promotes cost-conscious-ness: people with free care (a zero deductible) incurred 50 percent higher medical bills, visited physicians 50 percent more frequently, and were admitted to hospitals one-third more often than those with a deductible of $1,000 (worth about $2,500 today). Similarly, Medicare participants have been found to up their outlays as benefits rose and co-payments fell. In 1977 the elderly spent 3.3 times as much per capita as the nonelderly; by 1987 that figure had reached 4.1.

Reducing the generosity of medical insurance would also help cut the blizzard of paperwork. Much of the administrative bur-den is simply filing forms and cutting checks for even the smallest expenses; increasingly important in recent years is the role of insurers' “gate-keepers” who administer cost-containment procedures like utilization review and physicians' staffers who negotiate with the gate-keepers. Again, consider the effect on the cost of auto or home insurance if every repair required submission of a form, approval of the procedure by a company representative, and issuance of a check. One estimate is that administration consumes 19.3 percent to 24.1 percent of medical spending. That was as much as $202 billion in 1992 siphoned away from patient care.

What Can Be Done at the Federal Level?

End Lavish Tax Subsidies. Congress should end its tax preference for lavish insurance policies. Washington could implement this reform by taxing employer-provided health insurance (and other fringe) benefits. (Though such action should be paired with an equivalent reduction in tax rates, since rationalizing the health care system should not become yet another excuse for government to raid taxpayers' wallets.) Moving towards catastrophic insurance would benefit all concerned: hiking a deductible from $250 to $1,000 would lower an average policy's annual premium by nearly twice as much, $1,315, today.

Medi-Save Accounts. Better, however, would be a more far-reaching proposal for medical IRAs, or medi-save accounts (MSAs). Today employers in urban areas with an average cost of living spend about $4,500 per employee on health insurance. Rather than paying that $4,500 for a standard policy, a company could instead purchase a catastrophic policy for $1,500 and give the employee the extra $3,000 to cover his deductible of the same amount (94 percent of families have annual medical expenses under $3,000). The law could be structured to allow a pay-out of leftover funds at the end of each year, or to encourage the accumulation of extra money year-by- year to cover both traditional procedures, such as eyeglasses, and unconventional treatments, such as chiropractic services, not covered by the typical insurance policy. (Some cafeteria-style fringe benefit plans include flexible savings accounts, but any unused funds revert to the employer, the opposite of the result intended by MSAs.) MSAs are not an option today because the $3,000 would be treated as income and taxed; moreover, the self-employed are currently allowed to deduct only one-fourth of their health insurance premiums and medical expenses only when they exceed 7.5 percent of adjusted gross income.

The tax law could be changed in one of two ways. Most simple would be to make catastrophic policies, with large cash payments to cover patient deductibles, fully tax deductible, while ending the deductibility of comprehensive, first-dollar-payment policies. While that would eliminate the existing bias against catastrophic plans, it would leave employers in charge of the purchase of health insurance and would not help people who lacked employer-provided coverage.

Better, then, would be for the federal government to tax any employer-provided health care benefits, while providing a tax credit or deduction for individual purchase of insurance. This would place all types of insurance on an equal basis with one other, as well as on an equal basis with other forms of compensation; the serf-employed and unemployed would have equal tax standing with the beneficiary of employer-provided health care benefits. In general, more people would choose insurance tailored to their own needs.

Turning insurance back over to workers would have two additional, important effects. First, it would give individuals more choice; today only a third of employees of even mid-to-large firms can choose between policies. Second, it would help guarantee portability and insurability. Today roughly 15 percent of workers either remain in their current jobs or change jobs largely due to health insurance. If they purchased their own insurance they, unlike their employers, would have an incentive to acquire insurance configured to meet their own needs.

To further reduce third-party payment problems, Congress could apply the MSA principle to both Medicare and Medicaid. That is, rather than have Washington (in conjunction with the states for Medicaid) run mammoth fee-for-service insurance plans for the poor and elderly, the government should provide either vouchers or refundable tax credits towards a participant's purchase of an approved policy. Such an approach might initially increase federal budget costs, but in the longer term should moderate overall medical expenses and improve participants' care.

States could also promote MSAs, although their ability to do so is much more limited than that of the federal government. States could, for instance, publicize the efforts of private firms that have developed programs that promote catastrophic health insurance coverage. States could also offer accounts for their own employees and, with federal approval, for Medicaid recipients. In the latter case states could provide vouchers to program participants for the purchase of private insurance plans with cost containment provisions.

Pharmaceutical Deregulation. Access to new prescription drugs must be improved. Federal regulatory policies have heightened the perception of a health care crisis both by raising the cost of pharmaceuticals and discouraging development of prescription drugs that would lower overall health care costs. Indeed, drugs, which account for just eight percent of U.S. health care expenses, offer real potential for helping to moderate future cost rises because new substances could forestall doctors' visits, hospitalizations, surgeries, and other expensive procedures. Until federal policy is changed, however, this promise is likely to go unfulfilled.

Complaints about high drug prices are legion, yet the industry is competitive—there are some 22 major drug firms, and no company has more than a 7.2 percent market share. Indeed, the industry was even more fragmented in 1962, before more stringent federal regulatory standards, passed in the aftermath of thalidomide-induced birth defects, drove smaller companies out of business. The new FDA “regulations created pronounced economies of scale for drug innovation, which steadily increased over time,” reports author Terree Wasley.

But reducing the industry's competitiveness was not the only impact of the federal government's more restrictive regulations. In the name of safeguarding the public from harmful drugs, the FDA is protecting the public from useful drugs as well. The problem is two-fold. First, the federal regulatory process is unnecessarily cumbersome and expensive. Companies must file separate applications, which typically run 100,000 pages, for different treatments by the same drug, and the approval process averaged 12 years before the Bush administration made some modest reforms. The average cost of developing a drug runs $359 million, according to the Office of Technology Assessment, and estimates are that the FDA may be responsible for as much as half of this cost.

Second, the FDA's power is excessive by any measure: drugs cannot be released until the FDA certifies not only their safety, but also their efficacy. Yet the problem with thalidomide, which spurred Congress to give the FDA a stranglehold over the pharmaceutical market, was that it caused birth defects, not that it didn't work. Unfortunately, the requirement that firms demonstrate efficacy further lengthens the time necessary to win approval of new drugs. This problem is exacerbated by the natural bureaucratic tendency to be risk averse. To approve a drug that is either ineffective or harmful will hurt one's career far more than holding up approval of efficacious, helpful products.

As a result, families with a member suffering from Alzheimer's disease have been frustrated by the agency's refusal to authorize the use of the drug THA, available in other nations, despite evidence that it helps four of ten patients who take it. Delays in bringing propranolol, a beta- blocker for use in treating angina and hypertension, to the U.S. market may have cost 100,000 lives; nearly as many may have perished from the lack of availability of the anti-bacterial Depra. Thousands have also died waiting for misoprostol, a drug for gastric ulcers, and streptokinase and TPA, for heart conditions. Equally costly has been the delay in bringing anti-AIDS drugs, such as AZT, to the market. Only enormous pressure from AIDS activists and Vice President Dan Quayle's Competitiveness Council caused the FDA to speed up trials of potentially life-extending drugs.

But these delays are still too long: people continue to resort to “buyers' clubs” to obtain pharmaceuticals approved elsewhere in the world but banned by the FDA. Even FDA Commissioner David Kessler, a Bush appointee held over by President Clinton, acknowledges that “Back in the 1960s and 1970s, post-thalidomide, the agency's mission was to keep unsafe products off the market. But in dealing with AIDS, we have learned in no uncertain terms that our job is not only to keep unsafe drugs off the market but to get safe and effective drugs to the market.”

Alas, supposedly learning this lesson has not prevented the FDA from attempting to extend its reach over such products as vitamins and herbs, as well as possibly cigarettes under the pretense that manufacturers add nicotine. The agency also regulates advertising: aspirin makers are not allowed, for instance, to tell consumers that use of their product may help prevent heart attacks. Yet advertising is a critical means of promoting an educated citizenry.

Because of this panoply of restrictions, the FDA, contends Michael Tanner of the Cato Institute, is “one of the most destructive of all federal government agencies,” a bureaucracy that “is clearly an unnecessary burden to the American health care system.” At the very least FDA decision-making should be decentralized and streamlined. Better would be to restrict the FDA to monitoring safety, leaving the question of effectiveness to pharmaceutical companies, doctors, and patients. After all, none of them are interested in promoting ineffective drugs. Best of all, the FDA should be turned into a certification agency even for safety, to compete with private entities, such as the Underwriters Laboratory, which tests electrical appliances. Unapproved drugs could be marketed as such, with doctors, pharmacists, hospitals, and insurers all operating as “gate-keepers” advising patients. The potential for product liability lawsuits, too, would remain a potent constraint on pharmaceutical practices. Overall, the danger of allowing the sale of a few ineffective drugs pales compared to the benefit of allowing patients access to additional effective ones.

State Opportunities for Reform

While states cannot reach such issues as the federal tax deductibility of health care insurance, there is still much they could do to help reduce health care costs. In fact, one of the virtues of federalism is that states can operate as laboratories for policy experimentation. Unfortunately, few have taken good advantage of this opportunity. Rather, most states have exhibited the same penchant to regulate as has the federal government.

End Expensive State Regulations: Certificate of Need Requirements and Benefit Mandates. Rising costs are a problem in and of themselves, but they also contribute to other problems. Nearly two-thirds of those who are employed but lack insurance labor for firms with fewer than I00 workers. For those companies cost tends to be the principal deterrent to offering insurance. Thus, it is critical for states to reduce regulatory burdens that unnecessarily hike medical expenses.

One problem is state control over the offering of medical services. Past federal subsidies led to an expansion of hospital capacity and extra beds; thus, during the 1970s states began to require a “certificate of need” (CON) for hospital construction and equipment purchases. These restric tions, in the name of consumer protection, limit competition and almost certainly push up prices, especially in rural areas, where medical services are scarcer. Moreover, the CON procedure itself is costly. The Federal Trade Commission has concluded that “hospital costs would decline by $1.3 billion per year if states would deregulate their CON programs.”

Another concern is state control of benefits offered by insurance companies. State meddling in this area is pervasive, as governments force private insurers to cover specific conditions. There were just eight such requirements in 1965 and 48 in 1970; 20 years later there were nearly 1,000, involving “everything from life-prolonging surgery to purely cosmetic devices,” write John Goodman and Gerald Musgrave of the National Center for Policy Analysis, including hairpieces, pastoral counseling, and sperm bank deposits. Luckily, federal pension law (ERISA) exempts companies that self-insure. Roughly half of companies that self-insure do so in order to avoid these restrictions.

States should eliminate (or Washington pre-empt) mandated benefits. Second best alternatives include exempting small business and, something implemented by roughly half the states, allowing insurers to offer a no-frills alternative policy. The cost of the mandated benefits vary widely, but some are quite expensive. For example, outpatient mental health care raises premium prices an average of 10 percent to 13 percent, while substance abuse benefits add six percent to eight percent to the cost. Maryland's Blue Cross/Blue Shield figures that mandated benefits are responsible for 13.3 percent of claims paid out.

By raising costs, state mandates make it more difficult for poorer workers to purchase insurance. Goodman and Musgrave estimate that the percentage of uninsured who lack coverage because mandated benefits have priced them or their firms out of the market ranges from 15 percent in Arkansas to 64 percent in Connecticut, and about 25 percent overall. Similarly, the Council of Economic Advisers complained in 1991, “These requirements raise the cost of health insurance and make it too expensive for many individuals and firms.”

Insurance Law Reform. Hailed by some as compassionate social policy, courts have often ruled in favor of the most liberal interpretation of benefits due the insured. This phenomenon, in conjunction with other factors, such as the employers' enhanced role in choosing policies for workers, has badly skewed the health care market. Courts making such rulings view their de cisions as being pro-patient, of course, and they are in the case before them. But overall, such rulings inflate expenses for all insurees. They also increase risks for insurers, the burden of which falls particularly heavily on smaller firms, and discourage aggressive cost containment efforts. Thus, negotiations over health insurance need to be taken out of not only the hands of legislators—who, as noted earlier, interfere through mandatory benefit laws—but also out of the hands of judges. State legislatures need to act to allow insurers and insurees to cut whatever bargain they prefer, and to have that agreement enforced in court. Only through true market competition are we likely to see the development of the variety of policies necessary to meet the differing needs of 250 million Americans. Among the possibilities, according to CEI's Miller:

A few contractual devices might include incorporation of different medical practice guidelines, delegation of difficult decisions to an identified panel of medical experts, providing a specific process for resolving disputes over medical appropriateness, offering different levels of access to technology based on cost/benefit assessments, inserting clauses that expressly waive the insured's right to have a policy construed liberally against its drafter, varying standards for malpractice liability, and, most of all, adjusting premiums to reflect any of the above choices.

At the same time, states should reverse past interventions in the marketplace, such as forcing insurers to use community ratings. The temptation is great to attempt to manipulate the insurance market in this way to guarantee insurability for all. The result, alas, is unfairly to penalize those who are healthy and to prevent insurance rates from reflecting behaviors that affect the insured's health, such as smoking. In New York, for instance, legislation requiring community ratings and guaranteed issue has triggered staggering price increases for many citizens—a doubling and trebling, in some cases. Acknowledged one state official, “some people will not be able to afford these increases.” The rise has fallen most heavily on the young, who tend to earn less than their elders. In short, the government is impoverishing some to •assist others.

A far better approach would be directly to subsidize the roughly seven-tenths of one percent of people estimated to be uninsurable. This could be done with the government underwriting either medical expenses or the cost of insurance. Another option is to create assigned risk pools, a means used to ensure the availability of auto insurance for poorer drivers. In fact, roughly half of the states already offer such programs, though many of the existing systems are flawed. But states could redesign their assigned risk pools to offer the equivalent of MSAs to the uninsurable, with subsidies, best raised through taxes rather than special assessments on insurers, to make the plans affordable. As Mike Tanner of the Cato institute argues: “If as a society we have made the decision that individuals should, for whatever reason, be subsidized in the purchase of insurance, the cost of that decision should be borne by society as a whole rather than a particular segment of society.”

Occupational Licensure Reform. There is also a supply side to the medical equation, which is particularly important given the disproportionate role of labor in the cost and provision of health care. States, and the federal government, if it is willing to use its vast Commerce Clause power to pre-empt state rules, could increase the availability of medical providers and lower health care costs by reducing physicians' stranglehold over the provision of medical care. The problem is two-fold: doctors have successfully lobbied for laws that confine treatment to MDs and limit the number and activities of MDs.

First, most states unnecessarily restrict the activities of advanced practice nurses (APNs), who include nurse practitioners, nurse-midwives, clinical nurse specialists, nurse anesthetists; registered nurses (RNs); licensed practical nurses (LPNs); physicians' assistants (PAs); nurse's aides; and similar professionals. These providers dramatically outnumber doctors—there are 2.2 million RNs, three times the number of MDs, and nearly one million LPNs alone, while the number of APNs, well over 100,000, is about half of the number of physicians providing primary care.

Although APNs, RNs, and LPNs are capable of handling many simple and routine health care procedures, most states, at the behest of physicians, allow only MDs to perform “medical acts.” The anomalies are many: “I can take care of a patient who has broken an arm, treat them from top to bottom, but I can't give them an adequate painkiller,” complains Maddy Wiley, a Washington state nurse-practitioner. Instead, such treatment can only come through the government-created doctors' oligopoly, into which entry is restricted.

Even more virulent have been physicians' attacks on alternative professionals. Medical societies have worked to prevent chiropractors, for instance, from gaining privileges at local hospitals, and remain generally hostile today. (Doctors lost an antitrust case in 1990 for such practices.) MDs have similarly opposed osteopaths and podiatrists. Many states ban midwives from handling deliveries. Optometrists are usually barred from such simple acts as prescribing eye drops; the Federal Trade Commission and economic researchers have found that advertising restrictions on eyeglasses and contact lenses sharply raise prices. In haft of the states only physicians can perform acupuncture. Over-regulation of pharmaceuticals, which prevents patients from serf-medicating, also acts as a limit on health care competition. Allowing over-the-counter sales of penicillin, for instance, could save patients on the order of $1 billion.

The second manifestation of physicians' monopoly power is the panoply of anti-competitive restrictions on the profession itself. Doctors have helped drive proprietary medical schools out of business, reduced the inflow of new MDs, and for years prevented advertising and discouraged members of local medical associations from joining pre-paid plans. Up into the early 1980s the American Medical Association attempted to restrict walk-in clinics that advertised themselves as providing “emergency” or “urgent” care. Moreover, federal immigration law and state requirements limit foreign doctors from entering the country and often prevent them from finding work. None of these rules has anything to do with consumer protection.

Some states have begun moving slowly in the right direction. Mississippi, for one, does not regulate the practice of PAs. Nearly half of the states, among them New York, already allow nurse practitioners to write at least some prescriptions. Moreover, in this area, at least, the administration is moving in the right direction, pledging to “remove inappropriate barriers to practice.” Specifically, the administration would break down state restrictions on the ability of APNs to offer primary care—prenatal services, immunizations, management of chronic but standard conditions like asthma, prescribing medication, and treating common health problems—and to receive insurance reimbursement for such services. This effort is not, of course, going unchallenged: The California Medical Association has attacked the Clintons' proposal as “dangerous to the public's health.” A Georgia doctor said such an action would be a “catastrophe for the patient.” An AMA report argued that expanding the role of nurses would cause unimaginable harm, including hurting patients, fragmenting care, and even raising costs.

There is, however, no evidence that the public health would be threatened by allowing non- MDs to do more. The most obvious method would be to let professionals perform work for which they are well-trained without direct supervision of a doctor. At the very least states should relax restrictions in areas, particularly rural, which have the greatest difficulty in attracting physicians, allowing those with the fewest options to seek treatment from professionals with less intensive training. PAs, for instance, receive two years of instruction to work directly for doctors and could perform, it has been estimated, roughly 80 percent of the primary care tasks conducted by doctors, such as taking medical histories, conducting physical exams, and ordering tests. Similarly, the Office of Technology Assessment estimates that nurses with advanced practices could provide 60 to 80 percent of the clinical services now reserved to doctors. Mary Mundinger, dean of Columbia University's School of Nursing, argues that nurse practitioners have been providing primary care for decades and no research, even that conducted by doctors, has ever found any problems. “There is not a single study that shows any lapses,” she contends. In practice, nurses regularly perform many simple aspects of primary care far more often than do doctors and, as a result, are better qualified to handle it in the future, whether or not they work in the presence of a MD.

Patients should also be allowed greater use of alternative, unorthodox medical practitioners. In 1990 one-tenth of Americans—primarily well-educated and middle-to upper-income—went to chiropractors, herbal healers, massage therapists, and the like. Health insurance covered few of these treatments. Some of these procedures may seem spurious, but then, practices like acu puncture were once seen the same way but have gained credibility over the years. The most important principle is to allow patients freedom of choice in determining the medical treatments that they wish to receive. This requires relaxation of legal restrictions on unconventional practitioners and a more individual-oriented health insurance system, which would allow those inclined towards alternative treatments to acquire appropriate insurance policies.

Moreover, states should address the role of the MD, since even increased reliance on other health care professionals would not fully compensate for the artificial limit on physicians. Earlier this century, before the AMA's monopolistic activities had achieved their full effect, the U.S. had more doctors than other medical personnel, the reverse of today's situation. It is time for states to reconsider the entire regulatory system for which there is surprisingly little intellectual basis. Empirical evidence demonstrates that licensure reflects professional rather than consumer interests. Opines Andrew Dolan of the University of Washington, the proposition that occupational licensing is necessary “to protect patients against shoddy care” is “unproven by al most any standard.”

At a minimum states should eliminate the most anti-competitive aspects of the existing licensing framework, particularly barriers that make it so difficult for people to become doctors and so hard for physicians to compete vigorously. These include doctors' power to control entry into their own profession and restrict competitive practices. But ending these practices should only be a start, for, as Goodman and Musgrave explain: “Virtually every law designed to restrict the practice of medicine was enacted not on the crest of widespread public demand but because of intense pressure from the political representatives of physicians.”

More far-reaching reform proposals would establish a genuine free market in health care, backed by private certification and testing and continuing malpractice liability. Such an approach might seem shocking today, but only in the context of the vast regulatory structure that has been erected over the years. Full deregulation would also do much to achieve the administration's goal of encouraging both more minority and primary care physicians.

The potential benefits of attempting to deal with the supply side of health care are substantial, especially if the federal and state governments worked in tandem. For instance, in the late 1980s, New York City and Seattle allowed paramedics on the scene, rather than doctors in a hospital, to administer the drug TPA, approved by the FDA only after arduous delays. The result of more flexible government policy was better care for patients. Still, MDs criticize the prospect of increased competition from non-MDs. Complains Los Angeles physician Michael Stefan, “I spent 11 years in medical school, and you're telling me someone else could do it better and for less money with less education? That's ludicrous.” That's not what anyone is saying, however. Not every patient needs to see someone with 11 years of education and even more expensive experience. Patients deserve a fuller range of options combined with the right to choose their preferred provider.


There are legitimate reasons to be concerned over the state of Americans' health care, but none of them justifies federal proposals for social engineering on a mas-sive scale. The only genuine health care crisis today lies with the public sector that the President would entrust with control of the entire system. Thus, what the American medical marketplace really needs is a return to a free market in health care, built on the solid foundation that already exists.

To do so, the federal government should eliminate the tax bias in favor of third-party payment. Washington also should reform the drug approval process, as well as refashion Medicaid and Medicare. States, too, have an important role to play in reforming the health care system, since they can help address the third-party payment problem, deregulate the health insurance industry, and allow patients to choose who will treat them. The foregoing may seem prosaic to Washington policymakers, but unlike proposals to nationalize the health care system, these solutions actually could achieve the President's goal of providing better care to more people for less money.