Chapter XVII: Distributism and the Health Care System

I am coming to the end of this, finally. Just a few more chapters to go. Your comments and critiques are welcome.

Distributism would be of little practical use if it could not provide useful answers to practical problems of the type we face practically everyday. I believe distributism does indeed provide a useful set of tools to analyze these problems and to devise useful solutions. But the proof of this claim can only come in the analysis of an actual problem. For this example of distributist analysis, I choose the American health care system, which is experiencing great difficulties, difficulties for which no one has yet devised a workable solution.

Some sign of these difficulties is shown by the fact that in 2007, the United States spent 16.2% of its GDP on health care, up from 8% in 1975.¹⁠ Of this amount, the government pays about 46%. Compare this with Great Britain, where they spend about half that amount, or 8.4% of the GDP (2006).²⁠ In other words, the United States spends almost as much in public money as the English do in total, yet we do not have universal health care. We spend more in private funds than the English do in total, yet we do not have a free-market system. We spend more than any other country in the world on health care, but we have neither a truly public nor a truly private system. Rather, we have a Rube Goldberg contraption that combines the worst features of capitalism and socialism. And for all the money we spend, we leave a large percentage of the population without insurance. 15.3% in 2007 (about 46 million people) and that number has risen by at least 4 million in the last year due to our economic problems. Further, even people who have insurance often find that it is inadequate and that a medical emergency leaves them with crushing debts. The insurance companies maintain large staffs whose only job is to deny as many claims as possible; indeed, their compensation is not based on how accurately they assess claims, but solely on how many they deny. Any claims adjuster who fairly assesses claims will quickly find himself unemployed.

Spending twice as much on health care might be justified if the results were significantly better. Yet the opposite is true. By every objective measure, we do far worse when compared to other industrialized nations. In terms of life expectancy, infant mortality, preventable diseases, and many other categories, the United States falls far behind Japan, Canada, Western Europe, and nearly all the other industrialized nations of the world.

The problem is not only the large share of the GDP that the system consumes, but also the continuing growth of that share. Over the last 10 years, the growth in health care expenditures as a percentage of the GDP averaged 1.86% per year. Even during this current recession, the cost of health care has been the only thing that is growing. Obviously, this cannot continue; sooner or later the system must fall of its own weight, and my guess is that day is coming sooner rather than later.

Some Possible Causes

Of the myriad of possible causes cited for this phenomenon, two are often given great weight in the discussion: improved technology and an aging population. However, there are serious problems with both of these “explanations.” Concerning improvements in technology, it is certainly true that there have been great advances in medicines and machinery. However, improvements in technology normally lower costs, not raise them. Health care is the only industry where an executive could get away with saying, “Our technology has vastly improved, therefore we are far less efficient.” That being said, there is a case where improved technology actually raises costs; it is where the technology is provided under monopoly conditions. More of this in a moment.

An aging population seems a more plausible explanation, seeing that the problems of aging tend to be more chronic and expensive than those of easily repaired youth. However, this cannot be the full explanation, since aging is not a problem unique to the United States. All of the developed countries have similar demographics—or worse—yet still spend far less than the United States. So by itself, aging cannot be the problem. However, there is something unique about the American situation which raises the costs of aging, namely, senior health care is socialized while care for most of the rest of the population is not. This means that the elderly can outbid the young and middle-aged in competing for scarce medical resources, thereby raising the costs for everybody. You have, in effect, a socialized system competing with a private system (more or less), and the socialized system seems to have endless resources, since they are the resources of the United States government.

Many other causes are often cited: the cost of malpractice insurance, immigration, fragmentation, greed, regulation, and so forth. While each of these may play a role, neither any one of them nor all of them collectively are sufficient to explain the rapid and continuing rise in costs.

Free-Market vs. Socialist?

The debates on this issue usually take place within the framework of “free market” vs. “socialized” medicine, yet the system we have is neither and both. It cannot be a free market system because the supply of medicine and medical services is limited by licenses and patents. Milton Friedman advocated abolishing the licensing of doctors altogether. Friedman argued that medical licenses restrict the supply of doctors and thereby raise the cost. He believed that the free market would judge medical competence better than any license board, rewarding the competent doctors and punishing the incompetent.

The problem with Friedman's argument is that we have already tried that. Right into the early 20^th century, doctors were unlicensed; they took perhaps one or two years at a medical college, usually a for-profit institution run by local doctors who lectured at the college. After their course of lectures, and without ever having touched a microscope or a cadaver, they set up as doctors. The results were disastrous, as became evident in the great Spanish Influenza pandemic of 1918; the level of medical training was simply inadequate to deal with the crisis. After that disaster, the move to improve education and require licenses gained public support to produce the system we have today, a system largely controlled by the American Medical Association (AMA).

Further, a free market solution depends on the availability of information and the ability to judge that information. In comparing doctors, information about them is hard come by, and even if I had such information, I would not be able to make an informed judgment. And if I am having a heart attack, I am in no position to do the comparison shopping that a free market requires.

Yet for all that, Friedman has a point. By limiting the number of doctors, we restrict the supply and raise the cost. Further, because of the high training requirements required for the license, the education of a doctor is long, arduous, and expensive. New doctors are frequently burdened with huge education loans, and setting up a practice requires a huge capital investment. This forces doctors to act more like businessmen than medical professionals; they have to turn a large profit just to break even on both their costs and the amount of income forgone while they were getting their educations. And it has frequently been charged that the AMA restricts the number of “slots” in medical schools so as to further restrict supply.

Licenses are not the only problem in making medicine a free-market service. A greater problem results from patents for medicines and medical technology. A patent is a government-granted monopoly right which gives the patent holder the exclusive right to manufacture some particular product. Currently, patents run 20 years, during which the patent holder may place any price he chooses on his product, and he usually chooses a monopoly price. Monopoly pricing is the antithesis of free-market pricing. A free market, in theory at least, prices products to produce the highest possible amount of goods at the lowest possible price; the equilibrium point between supply and demand, under conditions of perfect competition, guarantees the lowest practical price to the buyer and the lowest practical return to the producer. But none of this is true under monopoly conditions. The producer supplies the least amount of product for the greatest possible price, and in the case of medicines, it is like selling water to people dying of thirst in the desert: they will pay any price to save their lives.

Monopoly pricing also has another and more insidious effect. In a competitive market, price serves as an allocation signal. A price that is too high will leave some goods unsold; a price that is too low will result in a shortage of goods. The market will provide the proper signals to producers telling them how much product to supply to the market and at what price. But monopoly destroys this mechanism; the monopolist may demand a share of whatever funds are supplied to a given market, and the more funds supplied, the higher the prices go without increasing the supply of the product. This is sufficient to explain why medical expenses consume an ever increasing share of the GDP without increasing the number of people covered. More funding means only higher prices, not more actual goods supplied. But as the monopolists claim an ever-larger share of the total GDP, the system must sooner or later collapse.

The argument for patents is that they increase innovation; without the prospect of great wealth, people will have no incentive to develop the miracle drugs and marvelous technology that we enjoy. In other words, for the sake of science and progress, we must accept monopolies.

Health Insurance

It is often suggested that insurance can function as a middle term between the market and socialism. However, this involves a misunderstanding of what insurance is. Insurance can only be a means of cost-averaging; some must pay too much and others too little, but one way or another, the cost must be paid by the users, which, in a monopolistic market, will price many out of the market. And healthy purchasers will seek plans that eliminate as many “risky” applicants as possible; they will seek the safest “risk pool” which is reflected by the lowest cost. People with higher risks will be placed in higher risk pools with higher prices, which will price many out of the market. So nothing is gained towards a universal, affordable system.

Further, insurance works differently in a monopolistic market. Cars and homes can be efficiently insured because the home and car repair businesses are relatively free markets, which means that insurers can rely on the market to control costs. Insurance will have some inflationary effects, as people perform repairs they might otherwise have deferred, but in general the effects are mild. This is not true in the presence of monopolies; the monopolistic market cannot be relied on to control costs, quite the opposite: the more money supplied to a monopoly, the more the prices will rise. This in turn raises the cost of insurance, which drives more people out of the market. The effect is the prices rise while coverage shrinks, or precisely the effects we are seeing in the real world.

Some have suggested that these problems will go away if we make insurance mandatory and universal, as in the Massachusetts Plan. However, a mandatory purchase is just another name for a tax; since everybody is required to purchase the product, it cannot really be a free market. Again, some argue that even though the purchases are mandatory, the system is still “free-market” because of the variety of plans and prices provided. However, the price differences in the plans can only come from differences in coverage. Some will cover more, and some less; some will deny more claims, and others less. People will have to guess in advance what diseases and medicines they are likely to need, and to the extent that they guess wrong—which is inevitable—they will be uninsured. You will have, essentially, the same situation we have today but in a different form: instead of the insured and uninsured, you will have the fully insured and the partially insured, with partial insurance being the equivalent of non-insurance for many situations.

Again, some will counter that the government can require all the plans to cover the same things. However, a standard, compulsory plan is no different from socialized medicine, and is likely to be a good deal less efficient. There are likely to be high expenses for profit and marketing, even though profits are not justified for compulsory purchases, and the “marketing” can be no more than an effort to convince people to buy the same product with a different label on it; it serves no useful purpose and only adds useless expense. Finally, there is likely to be duplication in administrative expenses. If all the companies are selling and administering the same plan, there is simply no reason to have multiple administrative organizations. In such a case, a “single-payer” system makes more sense.

Some will argue that Health Savings Accounts (HSAs) combined with catastrophic insurance will go a long way towards solving the problem. HSAs allow people to put a portion of their income in tax-free savings accounts, usually up to about $6,000 per family, to pay for ordinary medical expenses and then buy high-deductible policies to cover anything beyond that. The benefits are that people will be paying for most care from their own funds and are thus likely to make better use of the funds. At the same time, high-deductible policies are much cheaper. Between the two, great efficiencies are gained.

However, HSAs or some variation have been in place for many years, but have done little to address the underlying problems. The reasons are not hard to find. The first problem is that the people who are least able to afford insurance are also those who are least likely to have a surplus that they can save. In an economy that has seen a stagnant median wage for 30 years, even in the face of rapidly rising productivity, this should not be surprising. HSAs will not help the unemployed or the underemployed at all. Further,the majority of those who cannot afford any insurance are already in the lowest tax bracket, hence the tax advantages are minimal. And the majority of taxes that they do pay are the FICA taxes, and HSAs are not exempt from these. The greatest advantages of HSAs go to those who need them the least. A person in the lowest tax bracket, assuming he can save $6,000, might get a $600 tax advantage, but a person in the 35% bracket gets a $2,100 government benefit. Although the intentions behind HSAs are laudable, in effect they are mere subsidies to those who already have sufficient surplus.

Ending the Oligarchies and Monopolies

It should be clear that the vast majority of current thinking about the problem does little to address the underlying causes of our dilemma. And this is odd because the mechanics of prices are well known and have been since the time of Aristotle. No competent economist of whatever school disputes these mechanics. There are two bedrock facts about any market system that we must confront :

1. You cannot lower prices without raising supply relative to demand

2. You cannot raise the supply in the face of oligarchies and monopolies.

Therefore, the key to the whole problem is first to control or eliminate the monopolies. Without addressing this problem, the system will be as it is, and any “reform” will only make it worse. However, there can be no question that a continuing stream of innovations have been provided under the patent regime, and medical licenses have guaranteed at least a minimum level of training for medical personnel. Is there any way to reform these systems and yet maintain their advantages?

The Problem of Patents. Contrary to received wisdom, patents are not necessary for research in any field. Even today in the medical field, 40% of research funds come from the government or from non-profit organizations. Hence, even a sudden end to the patent system would not end medical research. What research does require is a reliable funding source, which can come more efficiently from manufacturing licenses than from patents. That is, when a firm develops a new medicine they get the right to license that product to any number of production firms. The licenses should be for a longer term than the current patents, which will provide R&D firms with a much more secure revenue stream from which to fund further research. The license fee would be small relative to the current monopoly profits, but they would continue for a longer period of time, after which the product would enter the public domain and be appropriated by everybody.

Manufacturers, on the other hand, will have to compete on price and service, and will therefore have to find the most efficient ways to manufacture and distribute the medicines. The effect of such a license system would be to divide R&D and manufacturing firms. R&D firms would want as many companies as possible to distribute their product, and would have an incentive to keep the fees low. There may be a role for the government in setting the license fees.

If, however, the pharmaceutical firms insist on maintaining their current monopolies, then the only way to control costs is to have government set the prices. This is anathema to a free-market system. However, monopolies are the antithesis of the free market. And the monopoly cannot have it both ways: they cannot insist that the government enforce their monopoly rights while demanding that the government take no role in pricing. If they wish the government to withdraw from pricing, then the government should cheerfully agree, but it should also withdraw from enforcing their patents. This system of price controls already obtains in countries with a “single-payer” system. The government negotiates the price of the drugs with the manufacturers. This is why American drugs are usually cheaper in other countries than they are in America. The American taxpayer bears all the burdens of research, but gets none of the price benefits.

The Problem of Medical Licenses. Milton Friedman is undoubtedly right that medical licenses restrict the supply of medical services, and under the current system, this will not change. However, the current system may be an over-reaction to the lax standards of the 19^th century. And any group that sets its own standards is likely to set them too high in order to limit supply and keep their income high.

I believe that we can drastically increase the supply of medical services—and therefore decrease the price—by providing a range of licenses: midwives, nurse practitioners, medical practitioners, medical doctors, and more advanced doctors of medicine. First-line care could easily be provided by NP's and midwives working in their own neighborhood clinics, perhaps under the general supervision of a medical practitioner or medical doctor. Another area where this applies is in orthodontics. There is no reason why anybody needs a degree in dentistry to install orthodontics; the work could be as safely performed by orthodonturists, and at a far lower cost. It is only the legal monopoly that dentists have on the business which keeps the prices so high, thereby denying this useful and normally affordable service to many poor people, while charging the rest of us unreasonable prices.

A series of licenses would provide another benefit. As things stand now, a student will spend most of his youth and all of his fortune in getting an MD, and will still be left with staggering debts. Yet, he will have a degree in a profession he has not actually practiced. A series of licenses will provide the student with a career path by which he may alternate education with practice. He will have an income stream with which to finance his education, but he will also have practical experience to take to each successive layer of education. This will produce doctors who are more practiced.

Medical Guilds

It is not enough, however, to address supply and demand problems. All social goods, medical services included, are delivered by institutions, and the structure and control of these institutions will dictate the outcomes. If our social institutions are organized solely around the profit motive, as they are now, they will find clever ways of defeating any attempts to restrain their power to set prices. People who are only concerned with supply and demand are usually baffled by how easily the mechanism breaks down and monopoly and oligopoly take control. But the answer is not surprising: if profit is the only measure, then the entire institutional effort will be towards breaking down the limits on profit, the major limit being a truly free market. (See Chapter V on mechanisms businesses use to defeat market pricing.)

This is not to say that there is anything wrong with the profit motive per se. Indeed, without making a profit, no firm or institution can be sure that it is delivering a useful product and correctly allocating its resources. But it is to say that a single measure—any single measure—is always self-defeating. As an analogy, suppose we designed cars solely on the basis of safety. We would indeed produce cars that were absolutely safe in nearly any circumstances. However, such cars would be so heavy and expensive that few people would want them. In the same way, a system where profit is the only measure will eventually fail even to make a profit. Other measures must come into play. But an institution solely devoted to profit cannot allow such measures. So what institutional framework should medicine have?

I believe that the answer lies in a well-tested institution from out past, and that institution is the guild. The guilds were associations of professionals in a given field who took responsibility for the training of their members and the quality and price of their products and services. They were the sole judge of the qualifications of their members, and had the power to set both standards and prices. What I propose is that we allow medical professionals to form guilds with the power to grant various licenses. They would be the sole judge of the qualifications required, and they would set the practice standards and prices. But most importantly, the guild would stand surety for its members. That is to say, when a patient had a complaint, he would sue not the doctor but the guild. The guild would be responsible for the competence and good conduct of its members.

You might ask, “Why would one doctor stand surety for another?” But in fact, this is what already happens in malpractice insurance. Insurance is merely cost averaging. If the losses go up for one doctor, the rates for every other doctor in that insurance pool go up. But doctors have no control over who is in their insurance pool; the quack and the competent get thrown in the same insurance system, with the latter required to pay for the former. In a guild system, the guild would have a strong incentive to ensure the competence of their members and monitor their practice standards; they would want to weed out the incompetent or downgrade their licenses. The guild would purchase insurance for all its members, or even provide the insurance itself, thereby removing the profit motive and lowering the cost.

Since the guild would be the sole judge of the qualifications and practices of its members, there would be a greater diversity of practical approaches. The Guild of St. Luke, for example, might favor one approach to medicine, The Galen Guild might favor another, and natural competition and practical experience would be sufficient to discover the superior approach. And while it might be difficult for the public to judge one doctor against another, it would be easier to judge the performance of one guild versus another. Further, this also provides space for “alternative medicine.” I have no way to judge whether such things as acupuncture or Chinese herbalism are medically valid. But when joined in a guild and required to stand surety for each of their members, practices which do have some value would likely thrive, even if conventional medicine does not, as yet, recognize their value. And if they have no value, it is likely that such practices would simply disappear because the insurance claims would bankrupt them. Likely the government would still have some minimal role to prevent outright quackery; they would not likely allow a Guild of Peach Pit Cure-alls.

In addition to insuring their doctors, the guild would offer insurance to the public. That is, they could offer to treat people for a fixed annual fee. This would give the guilds an income stream, but also a great incentive to insure that small problems do not go untreated to become big problems. In other words, such health insurance would actually be concerned with insuring health rather than denying claims. Further, the guilds could be required to devote a certain amount of their resources to free or low-cost care for the impoverished or indigent. The government might play a role here in qualifying people as eligible for such reduced-cost treatment, and could even pay a part of the cost.

The guild would be empowered to establish its own clinics, its own training and education programs, its own pharmacies, labs, administrative structures, and whatever else is necessary to medical practice. This would also make it easier for medical professionals to enter practice without worrying about setting up the business and administration that consumes so much of doctor's time today. The doctor, and every other member of the guild, would be the “owners” of the guild, and while they would certainly be interested in their own incomes, it would be impossible for that to be their sole interest, not so long as they are providing insurance to each other and to the public.

The Future of Reform

The current system, consuming 16% of GDP—and rising—is simply unsustainable. Moreover, the great burden it places on our businesses makes us uncompetitive in world markets, as we have discovered in the auto industry. The status quo is no longer an option. But here we come to a great conundrum: either we return to the chaos and quackery of the 19^th century, or we move to a European-style socialist system, in which medical services are allocated by the state. European socialism has resulted in better over-all health statistics and at least a perception of fairness in allocating services. However, socialism converts everybody from being a citizen to being a ward of the state. Nevertheless, if one has a life-threatening illness or injury, one might prefer to be a live ward rather than a dead citizen.

But there is a great problem in establishing universal health care, whether by socialism or any other method. Namely, there will be an additional 50 million persons in the system who are currently uninsured, plus the untold millions who are under-insured. This is a tremendous increase in demand with no corresponding increase in supply. Either there will be huge price increases, or the government will be forced to severely ration health care. Both courses of action are untenable, and the system will collapse before it gets started. Without increasing the supply, you cannot control the costs, and this is impossible without curtailing or eliminating the monopolies and oligarchies that currently restrict supply.

But if costs are brought under control by market forces, and the institutional problem is solved by the guild, then the problem of universal care will turn out to be a relatively easy one; providing medical insurance to all will be no more difficult than providing car or home insurance. No system of reform currently on the table addresses either the supply or the institutional problems. Instead, they all exacerbate both problems. It will become painfully clear that as we move towards universal care, we will increase the demand but leave the supply unchanged. This will result in a disaster. I firmly believe that only a distributist analysis can give us the tools to look the problem squarely in the eye and provide rational solutions.

1Center for Medicare and Medicaid Services, “NHE Fact Sheet National Health Expenditure Data,” National Health Expediture Data, http://www.cms.hhs.gov/NationalHealthExpendData/25_NHE_Fact_Sheet.asp.

2OECD, “OECD Health Data 2008 - Frequently Requested Data,” http://www.oecd.org/document/16/0,3343,en_2649_34631_2085200_1_1_1_37407,00.html