All Commentary
Monday, July 1, 1985

The Economics of Medical Care

In voluntary markets, private medicine included, the key knowledge necessary for trade is conveyed by freely fluctuating prices. The price system conveys knowledge of the personal and subjective utilities of the actors, that is, of the supply and demand of various commodities and services, which cannot be compared otherwise. Demand for ordinary medical care in voluntary markets is highly elastic and medical care by physicians is largely optional, except for some categories of life-threatening conditions, few in number and low in incidence, sometimes known as “catastrophic illness.” As history shows, medical care in essentially voluntary markets tends to be accessible and affordable. Sustained price inflation in medical care is always a result of direct or indirect political intervention. The lately much-touted competition between providers is not the genuine competitive bidding for the satisfaction of the actual consumer of care, the patient, as a free market would have it. On the contrary, this politically created competition will further en hance and centralize the bureaucratic controls on medical care, thus compounding, instead of reducing, the inflationary effects of the multiple and pervasive political interventions already in operation.

The Voluntary Market

This pattern of trade refers to the exchanges that take place between consenting parties, free from coercion, whence the more familiar term of free trade. Mutual advantage for the trading parties follows necessarily, since neither would consent to the exchange if some form of gain were not expected. For free trade to exist, the obvious preliminary condition is that the participants in the exchange be the legitimate owners of the goods and services exchanged, since only the owners can legitimately dispose of property. This is why regulation of trade by other parties than the owners amounts to various degrees of expropriation and involuntary servitude.

Medical care is a type of individual service consisting of skilled assistance to a person’s recovery from illness. The essence of this recovery is an inherent process of self-healing which cannot be supplanted, but only assisted (or induced, or promoted) by human interventions. The provider of such skilled assistance is usually called a physician, and the receiver a patient. Medical care also includes some types of assistance to manage chronic conditions, some types of disease prevention, and some incidental activities (such as relief of pain). It does not include assistance to terminate life or induce disease, or the conversion of humans into industrial products and major invalids.

Medical care is far from being a high priority in voluntary markets, except on rare occasions. For the most part and in most individuals it ranks way below nourishment, sanitation, education, entertainment, and so on. Most medical treatments can be deferred for various periods of time, and spontaneous healing often takes place. Lifestyles markedly affect the susceptibility to illness and the ability to heal. Effective help in case of illness can be, and often is, provided by family and friends. One’s general practitioner can provide most of the professional medical care for affordable fees, or he can refer the patient to specialists he deems competent and affordable. Further, friends, acquaintances, books and advertisements provide a wealth of both general and specific information about diseases, emergencies, medicines and specialists. Even tentative choices made under pressure or away from home can later be converted into preferred choices.

Let the Customer Choose

Thus, the paternalistic idea that the patient or his family cannot make a proper choice of medical care because they are too ignorant or too worried to explore the market is utterly false and has been promoted by bureaucrats and some physicians for the egregious purpose of portraying themselves as indispensable. It also follows that ordinary medical expenses are not an insurable risk. They are too optional and too affordable, while the respective illnesses are too preventable and too subjective to provide an actuarial basis. Insurance for catastrophic medical expenses would be the only viable medical insurance on the free market.

In voluntary markets, the patient’s freedom of choice is necessarily complemented by the providers’ freedom to compete. Thus, the patient obtains the best medical care that he is able and willing to pay for and medical fees, as well as the medical technology prices, tend to drop overall.

Yet, lower prices are not necessarily the winners in the free market. For one thing, medical services are seldom comparable between practitioners, because of differences of training, experience, manner, skill, judgment, reliability, discretion, and the like. For another, idiosyncratic intangibles, such as a familiar waiting room and set of fellow patients, a distant office picked for its closeness to a shopping mall or to the children’s home, an attraction for the specific psychopathology of the physician or the staff, often can and do make the patient choose the apparently more expensive alternative, which is, however, a very different product from the impersonal manipulations which bear the same name in the “Emergency Room” next door.

There is little doubt that banning competition or success in the marketplace makes for a hampered, non-free market condition. But the reverse is not true; that is, competition (especially if imposed) does not necessarily lead to a free market. Gladiators, who were slaves for the most part, used to compete fiercely for victory in combat sports. And many of us compete just as fiercely for government handouts. Neither of these types of competition has led to free markets, but the difference is, of course, in the fact that victorious gladiators were freed every now and then, while those of us who win the handouts wind up with even more government controls.

In a monetary economy, advanced specialization of labor and rapid accumulation of capital become possible if prices fluctuate freely, to reflect the otherwise immeasurable utilities of the myriads of actors in the market. Contrived price stability, such as wage and price control, is the deadly enemy of the essential tool of the free market, the economic calculation. Capitalism is the nickname of freedom in the marketplace, because it leads to capital formation and growth, which means less labor and more leisure, capital goods of increasingly higher order, consumer goods of increasing newness, variety and abundance.

Capitalism is thus the market arrangement which provides for the honest channeling of the profit motive, the motive of acquiring better value than the value given up in exchange. While still in good health, private medicine was a superb illustration of the success of capitalism. In medicine, even more than in any other areas of human action, any third party is profoundly unable to guess the utility of any service to the actual recipient, or the costs incurred (in terms of forgone opportunities) by those who pay the bill. The bureaucrat learns nothing from the diagnostic and procedure codes, because they cannot communicate the very thing they are supposed to: the value of the medical service rendered.

Involuntary Markets

Markets are hampered if the market actors are prevented, through the use or threat of physical force, from acting according to their own trade decisions, or if the information on which they have to base such decisions is deliberately scrambled, through various forms of fraud, by some other people who, thereby, acquire property or use of at least a part of what the first group involuntarily gives up. Those in the first group are the victims of the invaders from the second group. In involuntary markets many people switch back and forth between these two roles.

From the standpoint of the natural law, invasion is unjust and injustice is criminal. Either the property of the victim or its use, including the possible irreversible use, is seized by the criminal, for his own or his friends’ benefit. The harmony, coherence and efficiency of the voluntary exchange are disrupted and replaced by conflict, fragmentation and waste.

Private criminals hamper the markets illegally. But governments can pass laws to protect themselves and their friends from criminal and civil liabilities, whenever they resort to force or fraud to interfere with the free market. As they exceed their only legitimate function, that of de fending the natural rights of the individual, governments have to resort to force, fraud, and an expanding body of statutes to make such actions legal.

Socialist and communist governments expropriate their subjects outright. The more insidious Welfare State, a pseudo-democratic version of older forms of paternalistic despotism, obtains the same end result through regulation, subsidies, inflation and taxation. And individual freedom is also lost in the process. All areas of economic activity are affected this way, sooner or later, but in this century medicine has been the archstone of the edifice of power of the Almighty State, behind curtains of iron and behind curtains of deception alike.

In what follows here, only those government interventions will be examined in some detail which have more importantly contributed to the spiraling medical expenditures, while others will be mentioned only briefly.


Monopolies are grants of exclusive privilege to engage in certain economic activities, given to individuals or groups by the political power. This means that entry into the respective field of activity is prevented or made difficult by using force. The simplest procedure is to eliminate the violators and confiscate their property outright, but modern institutions are more refined.

In the case of medical licensure, there is a first component, ideological, designed to deceive the public into believing that licensure is operated to protect the consumer, the patient. The second component is an exclusive, expensive and time-consuming training, wherein painstaking efforts are made to inculcate in the trainee a sense of obedience, and even devotion, toward the “profession.” The third component is the bureaucratic ritual of getting licensed, quite expensive when the tedious tests which precede it and the unnecessary repeat registrations which follow it are considered. Delicensure is used occasionally against the more bothersome political opponents in the profession, but only exceptionally against incompetent physicians. The fourth component is the actual use of force against those who practice without a license: criminal penalties, includ ing prison terms, are provided for the violators, but are seldom necessary, given the ideological processing of the minds—“brainwashing”—both within and without the profession. Indeed, as shown in the previous section, the free market can provide all the information the patient requires to purchase medical care, through directories, advertisements, referrals, word of mouth and the price system.

The sole purpose of licensure is to prevent the emergence of uncontrolled competition. The privileged elite can thus charge premium fees, the so-called monopoly prices. While these fees do not necessarily maximize the receipts of the individual physician, they do maximize the receipts of the profession as a whole over the long run, which is why price-cutting doctors are often ostra cized or otherwise punished by their colleagues.

A second major impediment to a free market in medicine is the enormous edifice of government subsidies. The best known, though not usually thought of as a means of subsidizing the medical profession, is the National Institutes of Health. This name is brilliantly deceptive, because health is not at all what this huge bureaucracy usually produces. Its main products are a horrendously expensive technology—which serves the interests of the medical and political establishments—and a coherent body of theoretical and methodological dogma—which makes competition by rival schools of thought extremely difficult and even very unlikely. This major mechanism is closely coordinated with the system of government grants to the academic establishment represented by the faculties of “approved” medical schools, further complemented by grants to various medical care facilities (hospitals, clinics, HMO’s) and to the patients themselves (through Medicare, Medicaid, Veterans’ Benefits), which create the “market” required by the expensive technology and methods of practice.

Incentives for Patients

The third major impediment to a free medical market has been the political creation of incentives for the patients to buy large amounts of medical care and for the physicians to push the expensive kind. Both of these mechanisms are brought into play through one of the most fiendish tricks yet invented by the insurance industry in collusion with the government: the employee benefits. This, of course, is a system of harnessing the healthier employees and the employers to subsidize the not-so-healthy employees, as well as those who have a proclivity to abuse handouts of any kind, whether they are called “health care” or not. Enticed by apparent tax advantages, the employees are simply herded into huge populations of captive customers for the insurance industry. Moreover, they are virtually never offered the option of taking cash instead of these benefits, that is, the possibility to opt out of the system and shop for sickness insurance in the open market. In a free market, lower prices, catastrophic insurance and private charity would insure adequate access to medical care even for the improvident, although the current system of expectations and incentives might make the return to free market behaviors very difficult for a while.

The mechanism by which even the least abusive patient’s incentives are perverted is widely known as “first dollar coverage” and consists of insurance coverage for all sorts of minor expenses for even the most optional kinds of medical care, with only token amounts of deductible expenses. Thus, it is not surprising that in some metropolitan areas sex therapy with surrogates has been advertised as covered by “health insurance.”

The mechanism by which the physician’s incentives are perverted, again through the “health insurance” schemes, consists of the more favorable coverage and preferential compensation of highly technical and expensive methods of diagnosis and treatment, complementing the system of institutional grants and coupled with the virtual exclusion of the patient from the transaction through the so-called assignment of benefits to the physician. In the process, the insurance carrier (or some agent it hires) undertakes to establish allowable fees for standardized and codified diagnoses and procedures. This is the inception of rationing and of the bureaucratic control of quality in medical care. Naturally, detailed information about the patient, both medical and non- medical, has to be made available to the payer of benefits. The confidentiality of the consultation and treatment, the hallmark of Hippocratic ethic, is thereby compromised. Thus, private medical care has been replaced by impersonal procedures and a system of surveillance even before the government takes over nominally.

Other Ideological and Legislative Interventions

The escalating operation of the types of government intervention described has been facilitated by a plethora of other ideological and legislative interventions, such as:

•       promotion of the concept that “health care” is a human right;

•       tax policies, mostly within the frame provided by the income tax system;

•       creation and expansion of various public medical facilities;

•       massive regulation of medical care, especially in institutional settings, which, like taxation, is a form of expropriation of the private sector;

•       protection of the inefficient and punishment of the successful enterprises through the arbitrary application of the body of vague statutes and incoherent court decisions known as the “antitrust law”;

•       the exemption of the “business of insurance” from the antitrust law;

•       massive inflation of the money supply, often through deficit-spending, gargantuan bond issues and loan guarantees.

This is an enormously complex system of fraud and waste, which serves various special interests by using the police powers of the government, especially its regulatory and fiscal powers. Some of the participants in the scheme use it deliberately for their predatory purposes. Others contribute to the operation without grasping its meaning, dedicating themselves to the avowed humanitarian goals. In a somewhat different context, V. I. Lenin referred to such unfortunates as “useful idiots.” A third category of contributors consists of those who have some vague notion of the wrong they commit and who engage in contemptible attempts to demonstrate that it is not their fault, or that it could not be avoided, or that it is right, or that they are not actually doing what they are doing. There are many semi-literate artisans in this category, among them quite a few dedicated and competent physicians. The isolated rebel is barely worth a mention here, as he is either destroyed or converted to one of the three categories in good standing. As to the dupe, we all take turns at playing that role, full-time or part-time.

The humanitarian guise of medical care and, even more so, “health care,” is an excellent opportunity for the politician to obtain votes and for the bureaucrat to increase his power by deficit-spending in high gear, while bestowing favors to sundry friends along the way. The role played by Medicare and other Federal medical programs in the growth of the Federal budget, even though only partially known or acknowledged, is staggering. Furthermore, numerous areas of government intervention—such as occupational safety, clean air, food and drug safety—are health-related.

At Taxpayer Expense

These multiple interventions in the marketplace are ultimately supported by the taxpayers, by the people on fixed incomes and, more dangerously and increasingly so, by eroding the capital base of the economy, that is, the savings-investment portion of the national income. The economic decline is further accelerated by the commitment our government has demonstrated to various international giveaways. When hyper-stagflation will, eventually, take a definitive and deadly hold of the economy, the federal government will—messianically and presumably at our request, as expressed, for example, in the declaration of a state of emergency by the President—have to assume total control of the dwindling rubble and mandate the general and immediate pursuit of happiness . . . or else!

But individual liberty can be lost much earlier by regulations allegedly aimed at protecting people’s life and health. On the one hand, the economic intricacies of medical care extend deeply into the most varied industries, with insurance and pharmaceuticals as the most obvious ex amples. On the other hand, once the individual health becomes a matter of “public interest,” nothing that could even remotely affect it could escape the jurisdiction of the sovereign. Clean air requirements and mandatory safety belts have been only timid inroads. “You ain’t seen nothin’ yet!” But rejoice! All requirements will most certainly have to serve the dignity of human life, as defined by the best government experts, naturally. If, say, the Department of Health and Human Services will continually monitor your biological functions—quite remotely and privately, of course—you can rest assured that not only the public interest will be served, but your best interests also, even if you may happen not to fully grasp this now.

The Freaks

Since the price exacted by the interventions of the government in the market is huge, both in monetary terms and in terms of costs which include personal freedoms still very dear to many of us, it would stand to reason to ask the government to back out of our pockets, businesses and private lives. They would if we asked. Some of our Representatives and Senators still respond to the opinions expressed by their constituencies, even though decreasingly so. The others can be formally ordered to obey, or they can be recalled. But instead, we continue to delude ourselves that we can pull it through by making the next guy bear the brunt of the “sacrifice,” although it should be clear by now that we are all to be sheared, unless we manage to shake off the yoke of big government and our predatory habits together.

A rather strange instance of letting ourselves be mesmerized into delusional thinking is the recent fad for “competitive new forms of medical care” (such as PPO’s, PPI’s, HMO’s, etc.). Their competitiveness consists of their ability to secure, or take advantage of, favorable legislative treatment, government grants, tax exemptions and reserved markets—that is, captive patient populations—in exchange for their higher compliance with the rules of the sovereign or his surrogates, in particular with the procedures-surveillance approach to medical care.

These freak entities—bureaucratic medicine cloaked in free market pretenses—have absolutely nothing to do with voluntary markets, or with any genuine competitive bidding for better patient care. Presenting them as free market phenomena is an out-and-out fraud; or the expression of a delusion, at best. They are a death trap, for physicians and patients alike, the death of individuality, freedom and medical professionalism. To rejoice in joining them is like rejoicing in entering the gas chamber because they are playing your favorite tune.

George Yossif, M.D., Ph.D., is in the practice of psychiatry, Birmingham, Alabama. His interest in economics evolved from his study of the effects of fees and reimbursement systems on the psychotherapeutic process.