Why Doctors Don’t Want Free-Market Medicine

16 Jul

by Theodore Levy,  THE FREEMAN

You may have heard that the AMA and “America’s physicians” favor universal health care. That’s true of the AMA, but that organization represents fewer than 20 percent of the nation’s doctors. And it’s true of many academic university physicians, but anecdotally it is obviously untrue of most doctors in private practice. Many of those docs desire to “get government out of medicine.”

But those physicians have a problem, of a sort that “getting government out of medicine” doesn’t solve.
I’ll describe the problem in a moment; but first, an economic interlude:

When special interests get special grants of power from government, they benefit, of course. But the benefits—what economists call rents—are not static. Over time they tend to dissipate, because the prices of the factors of production required to obtain them are bid up. A new market equilibrium is formed. Some examples:

  • The chattel-slave system present during the first century of this country’s existence gave the lie to the noble words of the Declaration of Independence that all men are created equal. I have much sympathy for abolitionist William Lloyd Garrison’s famous epithet that, because it sanctioned slavery, the Constitution was a “covenant with death and an agreement with hell.” But slavery persisted. Economic historians have asked why. Nobel laureate economist Stanley Engerman, in his work Time on the Cross, coauthored with Robert Fogel, investigated the tricky economics of slavery. Do slaves financially benefit the slave owner? One would think they must, and at first that had to be true. But one had to purchase slaves. What is the “market price” of a slave? In theory it would be the same as with any other long-term capital good: the discounted marginal value of the revenue stream the slave could generate over his lifetime of work. People who bought slaves before markets were well established may have benefitted, but over time the economic benefits of slavery were transmitted down the structure of production. So the slave owner ended up paying, on average, the discounted value of what the slave would end up producing. This is not to say that slave-owners therefore had no interest in maintaining the slave system. While not making large profits in holding slaves, they were at risk of incurring large capital losses if slavery ended.
  • Few people think today that Social Security is a good deal. Young people doubt it will be around when they retire. Middle-aged people and those recently on Social Security know they could have done better had they been allowed to invest the money themselves in a diversified low-risk portfolio. Granted, those who turned 65 in the early years after FDR began the program benefitted, as they received benefits without incurring costs. But those days are long gone. Now people on Social Security may only break even, and surely in the future they will suffer a financial loss. Nonetheless, current recipients don’t want the system to end, because they’d lose even the little money they’re counting on.
  • In New York City and other large metropolitan areas, before you can legally drive a taxi, you have to purchase a medallion (license) from the government. The nominal price of a medallion is not high, but to restrict the supply of cabs the municipality sharply limits the number sold. So (as with ticket scalping) in the resale market the price is much higher than the face value, sometimes several hundred thousand dollars or more. The system benefitted the taxi companies operating at the time licensing was enacted—unsurprisingly, these were the very companies that lobbied for them—because restricting medallions restricted taxi supply and increased the amount the companies could charge their customers. But it didn’t help make a larger profit for the taxi owners who came along later, because the larger fees they were able to earn from a lower supply of cabs were offset by the exorbitant cost of the now-expensive medallions. And yet, although making only market incomes, the current taxi owners have every incentive to maintain the medallion system because eliminating it now would cause them an even greater loss when the market price of medallions fell to zero.

What does any of this have to do with medical care? Medical licenses are like taxi medallions. The AMA assiduously sought the licensing of medical professionals from its very beginning in 1847. At that time, ironically, schooled physicians had little more to offer patients than charlatans did and often caused more harm than good through what was known as “heroic therapy,” treatments like leeching and the use of arsenical purgatives. Finally, about a hundred years ago, medical services were cartelized. After the release of the Flexner Report (1910), the number of medical graduates declined by approximately half over the next decade, a decrease falling disproportionately on minority and female physicians.

How Much Training?

The question is not whether it’s a good thing to have better-trained doctors; the question is whether overtraining is possible, and how to know without market competition whether we’ve reached that point. A recent physician survey asked if doctors thought every M.D. needed all the training he received to be able to provide high-quality care. Many respondents answered no.

Perhaps doctors as good as those currently practicing could be trained in six or seven years—rather than the 12 or more today. Perhaps a combination of less human training but better computer diagnostics would be of value. Perhaps an apprenticeship model would work better than the current didactic educational model. Without a competitive market, there’s no way to tell.

No doubt most physicians are sincere when they say they can’t imagine a system with less training that would protect the patient from charlatans. But it’s also true most citizens under Soviet rule couldn’t imagine how shoes would reach market without central command, and no doubt at least some plantation owners were sincere in their concern that if slavery ended, the slaves would not know what to do or where to go.

Most everyone has met a bad doctor. And yet he, too, spent four years in medical school and passed the boards as presently constituted. If quality were the only consideration, isn’t that evidence that four years plus residency is not enough? Should medical school be eight years long? The point, of course, is that extra training before practice has a cost as well as a benefit.

Just as the economic rent (the excess earnings over the amount necessary to keep the factor of production in its current use) from taxi medallions was dissipated over time as the cost of obtaining the medallions increased, so too the economic rent of a medical license over time does not go to doctors but rather to those who can charge doctors more to meet the license and practice requirements. In the decades after Medicare spending increased the income of physicians, the price of medical school skyrocketed. So while licensed doctors made more money, becoming a doctor with a license cost more money. Doctors all complain about the high cost of malpractice insurance, but few realize that one reason such insurance commands a high price is that doctors can pay it.

Trouble Breaking Even

Current doctors have all paid huge costs to be where they are today. Yet many of them describe trouble breaking even financially, even though the average doctor makes a great income compared to the average American. Like those currently collecting Social Security, they would be hurt by a change in the system that lowered their incomes.

So most doctors do not really want “less government” in health care. They want the type of government control and regulation that restricts supply and limits innovation to that which directly benefits the medical cartel. They don’t want nurses doing things—even simple things—without physician supervision for the same reason dentists don’t want dental hygienists to do even simple basic cleanings without dental supervision. They prefer to view ancillary personnel as subordinates rather than competitors. Like most other licensed professionals, they complain only about the regulations that harm them to the benefit of others, not those that benefit them at the expense of others.

Society was better off ending slavery and would be better off ending the Ponzi scheme of Social Security and the legal cap on taxi medallions. But there are always special interests who will be hurt by socially beneficial reforms. No one likes to see himself as a special interest. But physicians as a group would likely be financially harmed by a true free market in health care, one that ended not only the burdensome regulation doctors all complain about but also the restrictions placed on who is legally allowed to offer services labeled as “health care,” restrictions that redound to physicians’ benefit.

Fortunately for the physicians, almost no one is calling for a free market in health care. Doctors want regulations that free them to practice as they wish, while still having the government assure that everyone can get health insurance and thus pay doctors for practicing as they wish. Patients want as much care as they need and desire, paid for by others. Insurance companies want to maintain their cozy relationships with state regulators, built up over years, and not have to compete nationally, and are therefore opposed to calls to end the prohibition of interstate sales of health insurance. Everyone calls for help from the State, which, as Bastiat pointed out, is the fiction by which everyone tries to live at the expense of everyone else.


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2 responses to “Why Doctors Don’t Want Free-Market Medicine

  1. Dr. J

    October 2, 2010 at 2:18 pm

    I don’t agree with your premise that “doctors” don’t want free-market medicine. I believe all interested parties would be well-served with a complete deregulation of all licensed fields and a robust public display of credentials that would be required to provide any service of any kind that would allow for fees to be charged. If a doctor isn’t great at what he does and provides great customer service he will wither on the proverbial vine. There are more willing to sacrifice now more than ever. As the marginal cost to retain licensure becomes ever-more-onerous the tide will turn and a “black market” will rise. This is the information age and people are not stupid. The tide si turning as we speak!

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