Localizing Health Care

by John Médaille on September 28, 2009 · 34 comments <span>Print this article</span> Print this article

in Economics & Empire

health

Having found fault with Dr. Iliff’s admirable efforts, it is incumbent on me to show whether distributism has any real answers or practical plans. There can be no question that the health system is in need of reform. 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.⁠ 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).⁠ 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 20th 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 19th 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.

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 19th 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.

Center 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.

OECD, “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

{ 32 comments… read them below or add one }

avatar Kent (MC) September 28, 2009 at 11:50 am

Cogent and compelling!

avatar Hudson September 28, 2009 at 12:09 pm

Overall, I this is certainly one of the best–if not the best–explanations of the health care mess and how to fix it that I have read; and I have read many of them. Congrats, John. I’m not certain that “guild” as a term is salable to the American public, although many persons have heard of the Writers Guild of America, for example.

avatar Empedocles September 28, 2009 at 12:46 pm

Some questions:
Would businesses still have a hand in providing health care to their employees, or would it be up to each employee to purchase health insurance from the guilds?
Would you buy it from the guilds or from an insurance agent?
Would the guilds be national organizations so that if you are on a trip to the other side of the country you still can get care?

avatar John Médaille September 28, 2009 at 12:55 pm

Empedocles, excellent questions! I don’t think it is a good idea to have the employers involved, although they could be. A businessman should not be required to become an expert on health care in order to run his business. Better if he set aside an amount that the employee could use to make his own choices. But if the employer wanted to be the provider, as today, I suppose he could choose to do so. The guild would simplify the the problem of providing such insurance.

As for insurance agents, such marketing decisions would be up to the guilds themselves; if they saw an advantage in marketing the service in that way, they could do so.

As for national guilds, I suspect there would be no economies of scale from going national, and many dis-economies, so I would expect them to remain local and regional. For one thing, the doctor and nurse-owners might not want to have their ownership diluted by a national guild. However, the guilds are scalable, and if there are advantages, they would be free to take advantage of them. I suspect there would be, in any case, national associations of guilds and all sorts of inter-guild agreements.

avatar Russell Arben Fox September 28, 2009 at 1:16 pm

A fascinating treatment of a complex problem, John; thanks very much for taking the time to write it. Even on just one reading it has taught me a lot, and I’ll probably want to come back to it to consider it further in the future. The guild idea is a brilliantly intuitive one, though I suspect that the government would have to play a somewhat more extensive role than simply preventing “outright quackery”; it would be necessary to make certain information about the practices and standards of various different guilds were fully shared, and the evidence of corporate history is that you can’t necessarily count on competition to force that information to be made broadly available. Which leads me to wonder, again, if the best basis for developing a guild mentality might depend upon the prior construction of a means of cost and information sharing, centered upon particular areas and localities; my idea being that only then would you likely see distinct medical cultures and practices emerge that would be willing and capable of sustaining their members. In short, a context very different than our present one in the U.S. might be necessary before a move in the direction of guilds would be even conceivable.

avatar cecelia September 28, 2009 at 2:05 pm

Excellent. I have had several years experience with the NHS in the UK. I found NHS to be superior to my experiences here. One feature of the NHS system was the use of midwives and nurse practitioners which you discuss in your excellent essay. The use of nurse practitioners and midwives helps to control cost and has been shown in some studies to actually provide higher levels of patient satisfaction and better health outcomes. I would also add that in the UK physicians are provided with financial incentives to promote preventive care. Example – if you are overweight or a smoker and the physician helps you to lose weight or quit smoking, the physician receives a bonus. There are no incentives in our system for a physician to engage in preventive care or to use cost control methods. I’d also note you can still get a physician to come to your home in the UK.

Your comments on the education of doctors are also apt. Our high costs are also a function of shortages in other medical professions. Consider that only 150 occupational therapists are graduated every year from US schools. Hence shortages in OT and higher salaries for the existing OT’s. Nursing is another example where shortages raise costs. One of the issues around nursing shortages is we have eliminated the three year hospital based programs and now educate nurses in colleges and universities. The nursing school teachers must comply with the usual requirements for advanced degrees in order to teach. However, there is a shortage of nurses with those degrees and so any effort at increasing the supply of RN’s is doomed because schools cannot find faculty with the required degree. The result is recruitment (and the associated costs) of nurses from other countries as well as hiring bonuses of up to $20,000. Some nurses will switch hospitals every three years so as to benefit from the hiring bonus. Those costs show up in your insurance premium.

avatar M.Z. September 28, 2009 at 3:35 pm

Any claims adjuster who fairly assesses claims will quickly find himself unemployed.

This is incorrect. Claims adjusters manage charges up to a specified amount, typically $5,000. (Claims under $2,000 are generally auto-adjudicated.) Supervisors approve, generally, claims up to $10,000. Any claim over that amount goes to a Spec Adjuster. Additionally once a claimant exceeds a certain amount in claims (generally $25,000), all claims go to Spec. This isn’t for nefarious reasons. The reason this happens is to insure reimbursement by the reinsurance carrier. This will also trigger an enrollment review so that the reinsurance carrier doesn’t reject the claim for some clerical error. In some cases these triggers will also result in a Claims Management review by (generally) a specialized firm. Large carriers will have their own departments for this.

Rescission is a bit of bogeyman. I’m not familiar with a case of it on a group health policy, but I live in a more heavily regulated state and enrollment in group plans is more automatic. With individual plans, this appears to be a greater issue. It would seem better to do like life insurance in a number of places and limit rescission to within 2 years of policy inception. Current proposals seem to indicate elimination. I’m not sure it will make much of in premiums overall.

avatar Albert September 28, 2009 at 4:30 pm

First, glad to see the site has been restored.

Second, that’s a lot of interesting content. I’m especially intrigued by the limitations on conglomerates evinced in the section on licensing vs. patents, where you essentially move the monopoly from research-administrative-production to only research via use of licensing. My question is why you believe the revenue from monopoly licensing will be profitable enough to motivate organizations to research, or will this role be taken by non-profits or government research facilities? I wonder if there any precedents for a successful disjunction between large-scale research and production based on that research. At any rate, your suggestions seem prima facie better because there is *less* that is being monopolized, and this is a concrete way to limit the size of businesses.

avatar John Médaille September 28, 2009 at 5:13 pm

Albert. It’s just the opposite. Large organizations won’t be motivated to do research. Without monopoly pricing, they would have no interest in it. Research would move to R&D firms, universities, private labs, whatever. Despite the claims about the research expense, it is only half the marketing expense, and that scale of marketing is only possible with monopoly profits at stake. 40% of research is already done outside of big pharma. Licenses provide a long-term, reliable funding stream, while cutting down on monopoly power. Best of both worlds.

avatar Grace Potts September 28, 2009 at 9:26 pm

John, simply outstanding. I’ve been unable to stomach so much of the conversation surrounding health care reform recently: and the subject is so dear to my heart – I moved here 15 years ago to study public health!

Thank you, re-posting widely.

avatar Grace Potts September 28, 2009 at 9:57 pm

I will say one thing that I don’t think was addressed here.

Insurance is only appropriate for an uncertain event- that is to say, you buy car insurance because you really don’t know if you’ll have an accident (and because it’s mandatory). You hope not, and in fact plan _not_ to have an accident. The insurance is there only in the event that it’s needed. A significant amount of health care is anticipated and planned on – in some cases every bit as much as a trip to the grocery store… We wouldn’t really expect to have some kind of insurance cover the cost of our regular food bill- health care should be no different. The very presence of insurance as coverage for expected expenses is a noteworthy distortion.

This also raises my interest in insurance mutuals – basically insurance co-ops – why aren’t there more of them? Anybody heard anything from Mutual of Omaha recently? It’s the last mutual I can remember on the insurance scene.

In related news, John: would you consider doing a distributist essay on public education, K- 16?

avatar Audrey September 28, 2009 at 10:22 pm

Government run health care – the so-called “public option” – presents serious challenges for us. The private sector and competitive market forces are the best means to meeting health care needs. Watch this video from the U.S. Chamber http://www.friendsoftheuschamber.com/media/

avatar cecelia September 29, 2009 at 12:08 am

JOHN – I echo Grace’s request – education please.

avatar M.Z. September 29, 2009 at 8:45 am

The private sector and competitive market forces are the best means to meeting health care needs.

This is true as long as you ignore all empirical evidence.

avatar John Médaille September 29, 2009 at 8:47 am

Audrey, the video in the link seems to be about securities regulation. However, it is absolutely untenable to speak of “competitive markets” in an industry dominated by patents and licenses. It is both intellectually and economically contradictory to say “competition” and “monopoly” in the same sentence. But thanks to the miracle of modern education, people know very little of the intellect or of economics. This is especially true if they happen to be economists.

avatar Donald Goodman September 29, 2009 at 10:14 am

+AMDG

John, as usual, an excellent and thought-provoking article. You were particularly courageous in taking on the reprehensible patent system, which is often sadly considered untouchable.

Still, I’m not sure your answer here is satisfactory. The patent system grants the manufacturer a monopoly on production; he can license out that production as he sees fit even now. Your system, from the sounds of it, would give him the same exclusive right to license, but wouldn’t call it a patent. As a practical matter, what’s the difference?

You mention splitting R&D and manufacturing firms. Would this split be legally mandated? As in, an R&D firm would be legally prohibited from actually producing its drugs above a certain experimental quantity?

Even in that case, what’s to stop an R&D firm from simply having an understanding with a manufacturing firm that it, and only it, would have its manufacturing contracts? In return, the manufacturing firm agrees to pay a higher-than-normal licensing fee, because it gets to sell at monopoly prices. Or even if there’s just a small group of manufacturers (quite likely), why wouldn’t they all just agree to sell at higher prices, and claim that the nefarious government-regulated licensing fee requires such high prices? Would you posit laws to prevent this? Wouldn’t this require a great deal of managerial overhead on the government’s part? Granted, it’s hard to imagine how such overhead could be larger than our unwieldy FDA is currently.

And then there’s the whole problem of industry capture neutralizing, or even appropriating, its own regulatory agencies, as is often currently the case with the SEC and the USDA.

Personally, I think there’s plenty of incentive for drug companies to research their own new drugs even without the prospective of monopoly pricing. Most obviously, developing famous new drugs makes their brands even more famous, whereas now most people don’t even know some of the biggest drug brands. But if you think of GlaxoSmithKline as the company that invented the famous new drug that’s saving millions of lives, wouldn’t you be more likely to patronize them for their version of the drug you need, rather than somebody else who’s just aping it? The same way that people tend to buy Kellogg’s Raisin Bran rather than the supermarket brand? This is speaking in a market in which prices are not being manipulated by monopoly power, of course.

A good example would be Bell Labs, which in the 1960s and 1970s produced vast new computer technologies which it then proceeded to give away completely gratis, despite having patents on all of it. This was for the sake of improving the image of Bell, which they deemed more important than the profits they would have gotten for selling it. (One such technology was Unix, which they later sold and which got tied up in patents and thus priced in a oligopoly market. This made it impractical for many users. Unix really took off, however, when free versions like BSD and Linux, unencumbered by patents, because widely available in the early 1990s; innovation proceeded at a vastly increased pace *after*, rather than before, patents ceased being an issue.) Corporate charity is another strong factor; there’s a reason that so many companies chuck billions of dollars at charities, and it’s not (just) the tax write-off.

avatar polistra September 29, 2009 at 1:19 pm

Best thing ever written on the subject.
If I were a billionaire, I’d buy all the air time on
all the networks and require them to read this article
over and over for a month.

There is one company that resembles your
guilds to -some- extent: Qliance.

http://www.qliance.com/

avatar John Médaille September 29, 2009 at 1:30 pm

Russell, you are right that the gov’t would still have a regulatory role, specifically in reporting requirement and (I would add) insurance regulation. If the guilds are offering what amounts to health and malpractice insurance, then there would have to have to be some guarantee that they are solvent enough to pay the claims.

Donald, there is nothing except to prevent a company from being both R&D and a producer, but I seriously doubt it would work that way if they had to license all products to all comers. But if they wanted to, why stop them?

As for AT&T, it was one of the most predatory companies in the area of patents, which was the whole point of the Carterphone case. Whatever patents they gave away (they were not interested in developing computers, except as they related to switching systems) they were more interested in retaining them for the core business.

Kellogg’s et al. is a matter of branding, not patenting. They spend a lot of money to convince us that their corn chips are superior to anybody else’s corn chips. The point of a brand is to remove the product from the competitive environment that homogeneous products would normally have.

avatar Brett Beemer September 29, 2009 at 4:08 pm

John,

If you are going after how Doctor’s are licensed would that apply to other professions and technical jobs? Lawyer’s, Accountant’s, Plumber’s and contractor’s? It seems that if one is better served than all are. Are all these groups willing to take a pay cut?

Brett

avatar Albert September 29, 2009 at 4:09 pm

Ms. Potts, your comments regarding the over-comprehensiveness of health insurance (and under-utilization of high deductible insurance) are on the mark. The origins of widespread adoption of comprehensive insurance are especially interesting to note.

Mr. Medaille, well yes, it’s certainly true that large businesses wouldn’t be motivated to do R&D unless they also had monopoly pricing on the drugs they produce, which is the reason, I thought, why they are allowed to have that monopoly currently. You suggest that the R&D will happen without the monopoly profits from drug production but with revenues from licensing. That may very well be true.

I haven’t commented on the guilds yet: I am wondering, with great ignorance, whether the AMA and other such professional organizations are much different than guilds. Do they not police their members, at least in theory? I’m not sure what differences you see between current professional organizations, armed with the power of accreditation, and guilds, armed with the power of licenses. The one difference mentioned is the guild’s capacity to set prices; are professional associations forbidden to do so due to limitations on collusion, etc.?

avatar Doug Iliff September 29, 2009 at 6:22 pm

Mr. Medaille, let me return the compliment. Your piece is clearly written, thought-provoking, and philosophically sound. Of course, I agree with the philosophy, so my judgment is suspect.

Before I add a couple of “amens”, however, I need to quote Mr. Sarkozy again, this time from a couple of days ago in his rebuke of Mr. Obama’s disarmament speech: “We live in the real world, not a virtual one”. As long as we understand that due to the lobbying power of rich and powerful organizations none of your suggestions has a snowball’s chance in hell of being enacted (in contrast, my HSAs are only a 30-to-1 longshot!), let’s enjoy the conversation.

With regard to drugs and patents, what most laypersons don’t know is that a terrific constellation of drugs, mostly available for $10 for a 3-month supply, are current available in generic form. I rarely need to use patented drugs for hypertension, hyperlipidemia, or diabetes, which are the Triumvirate of chronic diseases. The few exceptions are coming off patent soon. The expensive new drugs, on the other hand, are Me-Toos which I don’t need, and survive because physicians are too lazy to seek out generics; and boutique drugs for rare conditions. So we’ve already won the price war, and are engaged in a mop-up operation.

I have always maintained that medicine is an apprenticeship trade, and so your “guild” analogy fits right in. Medical schools impart knowledge that is 50% useless to physicians (what the hell did I need to learn about embryology or biochemistry?) but is necessary to support another guild, that of the University. We wouldn’t want to unemploy professors, would we?

Furthermore, as you surmise, many tasks in medicine could be done by dexterous high school graduates. Many an auto mechanic or video gamer could have been a colonoscopist, and disenfranchised many a gastroenterologist, at a huge cost saving to the public. There are, at the other end of the spectrum, extremely difficult tasks in medicine which require extraordinary skills and/or native abilities. In between, as you point out, are intermediary positions, which in fact are being filled by physicians’ assistants and nurse practitioners. A dermatology nurse practitioner knows far more about dermatology esoterica than I do, and I willingly refer my unknowables to her. Like I said, it’s an apprenticeship trade.

The world you envision would be much to my preference and liking. Too bad.

avatar Bruce Smith September 29, 2009 at 6:24 pm

John. Very good article and good use of subsidiarity. I’m not convinced though about the incentives any guild of doctors would have to raise the numbers of licensed doctors and thereby dilute profits by increased competition. Isn’t there a case for government to put some kind of civil service minimum salary level into play with additional tax incentives for raising the number of licensed doctors and containing inflationary increases to the health insurance? In other words some kind of formula or “nudge” intervention and justified on the basis of health care being in the category of Public Goods.

avatar Donald Goodman September 29, 2009 at 6:34 pm

+AMDG

John, no question that Bell was predatory and monopolistic. But the point was that they were willing to spend good money and the labor of their most brilliant programmers to create an operating system which they proceeded to give away. They did this to create good will—and it worked. This paradigm has become quite common in the software world, where many people labor essentially without pay because it makes them more respected, it spreads their labor, or simply because it solves a problem that they personally want solved.

A good example would be Red Hat. Red Hat gives away its software for free; it does this because it wants to make a good name for itself in the community (in which it has succeeded), which makes people more likely to choose its system than others. It can then leverage this good will to encourage people to pay them for things like services and maintenance. This paradigm has resulted in great leaps forward in computer technology, while patented computer technology has comparatively stagnated.

The point being that direct payment of money isn’t the only, or even the greatest, incentive for making new discoveries and developing new products. This is particularly true when advances are sequential; that is, new advances require building upon old ones. If these are subject to patent, it’s impossible for anyone but the original inventor to build upon the invention without violating that patent. So when a company develops a blood pressure pill, no one can improve on the formula except that company; they have to abandon the field entirely, or try to come up with a new formula from scratch. This makes it take much longer for new formulas to arise, since only one company can legitimately work on them. Licensing rather than patents, though, would go a long way to alleviating this problem—provided that the licensing fees were kept reasonable.

Re: licensing. Are you saying that the R&D companies would be *required* to license it to anyone who was willing to pay the fee? That would certainly prevent the development of oligopoly, provided that the licensing fee is reasonable. It would also remove the necessity of strictly segregating R&D and manufacturing companies, as you observe.

avatar John Médaille September 29, 2009 at 7:25 pm

Doug, If we limited Front Porch Republic to discussing what was politically possible in the current environment, this blog would dry up and blow away. But two points: The first question is always whether a thing is practical in itself, not whether 535 members of Congress in the pay of a collection of interests will like it; the second point is that the system will rapidly collapse as it is presently constituted. And it will collapse sooner if it is “reformed” under any of the current plans, none of which address the real problems and all of which function as subsidies to the pharma and insurance companies. But the laws of supply and demand, and the laws of monopoly pricing will break the system if we try to add 10 of millions of new customers without increasing supply or controlling costs. And then many things will be possible that are impossible today, if there is someone to advance the right ideas. FPR is certainly a good place to start.

While there are many generics, patent medicines are still a large percentage of the market, particularly since doctors are often “rewarded” for sticking with the more expensive brands. And then there is the problem of equipment patents.

The more interesting question is why there are medicines so cheap once they go off-patent? The manufacture of most medicines is a simple enough process, and great quantities can be produced at low cost. Even at $10/month, the manufacturers make a profit, which indicates how cheap they are to make. There are exceptions, to be sure, such as vaccines, which are “grown and harvested” rather than manufactured, but they are a smaller part of the market.

Brett, I think there are still states where you can take the bar exam after apprenticing at a law office. But then, the bar exam is designed to keep such riff-raff out of the profession.

Donald, Red Hat (which I believe is owned by Dell) is a Linux service company. They deal in open-source software. The open source movement proves that patents aren’t necessary for real progress.

Bruce, good point but I think doctors would have no way of limiting the entrants to the medical profession or the start of new guilds.

avatar Donald Goodman September 29, 2009 at 8:03 pm

+AMDG

Red Hat is not owned by Dell, though they do partner pretty closely in some areas, particularly JBoss. But that was precisely my point: that we don’t need patents or, necessarily, even licensing.

I like the licensing idea, though, as long as it allows others not only to manufacture the drug, but also to produce derivative products, which the new company will then possess rights to license independent of the original company. This will provide both incentive and opportunity for innovation without contributing to an oligopoly.

Someone mentioned applying the guild system to other professions. From the legal standpoint, an entirely different type of guild would be necessary. State laws vary widely and require state-level organizations, which is what we have now. The American Bar Association is voluntary (I’m not a member, personally), while most, perhaps all, states have mandatory state bars, which bars govern entrance into the profession as well as ability to remain within it. Various faults, such as commission of certain crimes or violation of the often esoteric ethical rules of the profession, can result in discipline, from the written reprimand all the way to formal and permanent expulsion. Still, despite the bar’s efforts to raise the entrance bar (failure rate in Virginia for first-time bar takers is around one-third), the bar’s problem has been an inability to limit entrance, rather than the reverse. There are too many lawyers, by far. This results in a private sector which is often grotesquely overpaid, while the public sector, like prosecutors and public defenders, is grotesquely underpaid, often insufficiently even to repay the voluminous loans their legal education required. The public sector can afford to keep salaries low because they know there’s an endless crop of attorneys ineligible for various reasons for employment in the obscenely lucrative large private firms willing to come work for a comparative pittance.

In other words, the legal profession needs reform in an entirely different way from the medical one, up to and including serious reconsideration of how we treat criminal and civil matters. Why, for example, does a civil trial regarding mere money take weeks or months, while a typical capital murder trial, in which there is at least one dead victim and a defendant whose life is at stake, will rarely extend for more than a few days? This clearly reflects some very warped priorities.

Don’t get me wrong; the pseudo-guild system currently in place does fairly well at regulating lawyers’ conduct. But what’s needed here is clearly much different from what’s needed with the AMA.

avatar D.W. Sabin September 29, 2009 at 9:16 pm

Guilds? How medieval. We’re modern and oh so “Free Market” so we don’t need no stinken Guilds cluttering up the smoothly functioning lube job we’re getting now. Next thing you know, we’ll be seeing colonic booths at the local Renaissance Faire.

You got a lot of nerve bringing the issue of supply and demand into a discussion of Health Care costs buster, just what are you trying to pull?

Supply and demand…hhhmmmph. Fat chance. Theres nothing like Fiat Money to create a good old fashioned Command Economy

As to Beemer and his idea that abolishing professional licensing would require a pay cut , licenses never dictate pricing, the quality of service does. Does licensing guarantee minimum standards of service? Perhaps but they also sanction widespread levels of mediocrity made even more mediocre by the fruitlessly expensive conventioneering industry of “continuing education”. Not that I minded dropping $2 grand on a Chicago Convention but I would have rather spent $1,000 instead and gone to the King Biscuit Blues Festival instead….you know, down where folks eat grits in bacon fat, wash it down with corn liquor , smoke hand-rolls and live to be a hundred and ten because they have joy in their lives, not hypertension.

But, in the end, I for one would like to see a supply and demand scenario that has one cost for fat lethargic drunken slobs with a multiple generation record of preposterously bad health and another for those who actually care about health or don’t care about their health but spring from hardy peasant stock. Not that it is always this easy but sometimes it is. I think this might have something to do with supply and demand.

Once again Medaille, for a bolshevik, you always show signs of civilization.

avatar John Médaille September 30, 2009 at 11:28 am

DW, how can you talk about bacon fat, whiskey, and hand rolls (I hope this refers to cigarettes) AND good health? As a person addicted to all of the above (including rolling my own cigarettes), I have to tell you that it is my secret plan to indulge all of these things and stick you with the bill for the consequences. This is called “utility maximization” in economics, and we are all utility maximizing individuals, no?

Or maybe not. My godfather smoked a pack of cigarettes and 10 cigars every day of his life, (okay, maybe not when he was six), and died tragically, at 99. Had he given up the cigars, I’m sure he could have made it an even 100. The Europeans indulge fats and wine and tobacco in amounts that would kill an American, but it doesn’t seem to do them much harm. I wonder why there is not more in the way of cross-cultural food studies, in this wonderful age of multi-culturalism. Every week, we get a new warning about something that will kill us, but that other nations do without great harm. Maybe its all the warnings that are killing us. Who knows?

avatar D.W. Sabin September 30, 2009 at 7:29 pm

Medaille,
Yes, I was speaking of hand rolled Fags and not the Jamaican spliff. Delta healthniks might have enjoyed hemp but I was speaking of the food groups; Whiskey, Nicotine, Pork and Grits.

I think the commie pinko green left-Connecticut-and-moved-to-Berkeley Michael Pollan summed up the “food” issue by naming most of the contents of our gleaming supermarkets as “feed”. He recommends sticking to primarily the extreme perimeter where fresh baked goods, dairy products, produce and meats are present but observe a proper Jihad over the vast center realm of packaged chemicals with sugar. I don’t know why but we seem to like our food to issue forth from a brightly painted cardboard or plastic carapace.

The europeans used to follow Pollans regimen with daily jaunts to the corner markets because their home refrigeration stunk but i’m not sure they still do . They also make mealtime into a social art and this alone, is bound to extend one’s lifespan and good health.

But you know those europeans….commie pinko socialist malingerers to a last man.

avatar Septeus7 October 1, 2009 at 2:13 am

Excellent article as always John and especially the part about the need to increase supply i.e. more doctors and infrastructure. I’m bit confused as how an institution like a medical guild would allow for increase in the supply of doctors and lowering of prices.

It seems to that your guild system is very similar to the German regional single-payer system that have community funds (from private and state insurance) that negotiates prices every couple of years with “provider unions” that represent hospitals and doctors.

avatar Bruce Smith October 1, 2009 at 9:49 am

George Bernard Shaw once said that the professions were a “Conspiracy against the laity.” It’s believed he was prompted to make this remark after a botched operation on his foot. However, whether you agree, or disagree with his remark, it is clear that we need to be mindful of the types of “power” in life when we design institutions. So at a minimum in addition to the Power of Capital and Markets we have the Power of Knowledge, the Power of the Un-Known (Religion) and the Power of Democracy. The Power of Knowledge can be clearly exploited by the medical profession to limit entry and only the Power of Democracy can be used to challenge to this. The huge irony though with regard to both the health care industry manipulations for wealth and many other human activities is that the inequalities we create between ourselves through conspicuous consumption for genetic propagation reasons (fitness) is also the cause of dysfunction within society including physical and mental health. Human beings like to dominate (fitness) but hate being dominated. Domination by others stresses people out! Endless comparison of yourself (fitness) to others stresses you out. Endless conspicuous consumption for fitness also seems to be stressing out the Planet! It is difficult, however, under the more “efficient” market system to deny the importance of Incentive. Why study hard to become a health specialist if you are unconcerned with “fitness,” of which high pay is a component, unless you are of a religious or socialist minority? Even under the equalizing philosophy of distributism differentials of pay are seen as an essential driver. Could the difference of these being democratically decided help us to avoid blundering on with our dysfunctionalism? Who, therefore, should do the democratic decision making and through what institutions and in relation to this topic with regard to the provision of health care? Where do patients rights as paying consumers fit in to all of this, for example?

avatar David Clark October 5, 2009 at 10:55 am

Excellent essay with many thoughtful points. As a doc, I agree with Dr. Iliff: I would love such a world.

Speaking of Dr. Iliff, his essay dealt or more accurately posed questions concerning the pesky problem of patient expectations and increasingly, demands. In a recent NPR interview with author/surgeon Atul Guwande, he was forced on questioning to admit that patients get what they demand–If I want grandpa to have a a CT scan or to see a doctor instead of a nurse or the opposite, and I yell or threaten loud enough, it happens. Given our American distaste for anyone telling us what is or is not appropriate, how and who should limit the demand side of the equation or determine what will be considered appropriate therapy, therapy often without clear data regarding “benefit.” Does your plan offer help? Finally, would you anticipate a need for tort reform?

avatar Doug Iliff October 8, 2009 at 9:13 am

John:

Here’s best article I have ever read on the economics of health care (from the September Atlantic). Absolutely every point the author makes rings clear and true from my experience:

“How American Health Care Killed My Father” http://www.theatlantic.com/doc/200909/health-care/1

I think it answers a lot of the remaining questions in our exchange.

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