Why Government-Provided Medical Care is Always Doomed to Fail

There is a fundamental confusion, it seems, of cost with price. The two are not synonyms. Price must cover cost. If a service is provided or a good manufactured and the price charged does not cover the cost of the good's manufacture or of the service's provision, that good or service will not be provided long. Losses will, sooner or later, drive the provider out of business. This is assuming, of course, that the provider needs to profit in order to remain. In the world of consumers and producers, i.e. the marketplace, this is the rule. It is not, however, the rule in the world of government. Government has no competitor and government doesn't go out of business.

In the marketplace, a doctor enters his field of chosen practice possessing costs previously acquired that must now be paid. These include the costs of undergraduate and medical school as well as the required residency and certification requirements (differing in specifics, of course, from state to state), and the cost of malpractice insurance (differing from state to state and depending upon the specific area of practice). These costs must be covered sufficiently enough by the wage earned to encourage the doctor to continue practicing medicine where he is and, also, to encourage future young adults to enter the field.

The wealth created by the doctor is the service provided and the wage paid the doctor derives from the monies earned as wages by the patients in their individual wealth-creating endeavors. In the marketplace, if a consumer is displeased with a producer, that consumer can take his money to a different producer that does not displease him. This provides an incentive for the producer to do his best to please his customers, so as not to lose any future business that may be provided by said customer as well as any future business that may be provided by those who learn how satisfied or dissatisfied that customer is.

The patient also has an incentive to make certain he is 'getting his money's worth.' It's a remarkable fact that when a person spends his own money, he is much more careful about the expenditures than when he is spending other people's money. It tends to entice the individual to prioritize. This is, of course, why we all pay our rent/mortgage payment, bills, debts, etc. before splurging on that new fancy piece of electronic equipment or some other novel trinket we've been wanting. Irresponsibility has a pretty severe price and no one wants to explain to his friends that he got evicted because he kept buying PS3 games with what should have been his rent money.

When patients procure a doctor's services they may choose to render payment in a number of ways: immediate cash payment, a series of payments stretched out over a predetermined number of months, on credit, with borrowed funds, with gifted funds, or the payment may be made in part or in whole by a health insurance company.

All insurance companies were originally created with one goal: to manage risk more effectively than individuals can by pooling as many individuals as possible so as to make use of sophisticated statistics. We cannot eliminate risk. We can, through insurance, shift the burden off the shoulders of those who are less able to handle the costs of these risks onto the shoulders of those who are more able to handle these costs. I can't predict when I'll die, when or if I'll get into a car accident, when or if I'll get cancer or some other catastrophic disease, or when or if my home will catch fire. Insurance companies can predict the odds of all these things by looking at my lifestyle and choices (smoker? drinker? skydiver?), where I live (high crime or low crime neighborhood?), what I drive (bigger, safer car?), and all the previous experiences of those most like me that they have insured in the past. Insurance companies use this information to determine the likelihood of any of these things happening to me. This information is then used to determine the premium I will pay. The premiums charged to all policy holders and the returns earned on investments made with said premiums must cover all of the present and future claims or the company will not be selling policies very long.

We live in a culture that expects medical insurance to pay for even the most rudimentary procedures. This isn’t what insurance is for. If you know you will receive a physical examination every year, you are able to plan for and budget the expense of that exam. If you know you will have children in the future, you are able to plan for and budget the expense of those births. Of course, everyone would rather someone else pay. And, why are premiums so high? If I’m paying such a large sum per month shouldn’t the insurance company pay for my doctor’s visit? Allow me to introduce you to the government.

The government erects the framework of rules and standards within which all market activity occurs. The government also enforces these rules and standards. If the government requires by law that insurance companies pay for services they otherwise would not pay for, premiums must rise to cover this new cost. Why wouldn’t the insurance companies cover these costs anyway, without government intervention? Because we aren’t willing to pay the higher premiums and would buy lower-priced policies (albeit, policies with fewer benefits) from competing firms. But, if government requires all insurance companies to cover these costs, then competition is taken out of the picture and we have no choice but to pay higher premiums, if we want to have health insurance.

And so, costs rise.

Combine this fact with the rising malpractice insurance premiums due to numerous judgments awarding large punitive damages based upon junk science (for example, John Edward’s claim to fame: birth defects resulting from doctors not choosing to perform a C-Section soon enough – leading to preventive C-Sections being performed when they otherwise wouldn’t have been as a just-in-case measure, which raises the costs of birthing those children), the fact that insurance companies are forbidden to compete across state lines, and the fact that state medical boards control the number of students permitted into medical schools each year and we have an inherently rising cost of medical provision. To cover these higher costs, we, the patients, must pay higher medical prices.

So, why can’t government step into the picture and pay for it all? Government certainly can. And, now, government will. But, you say, government isn’t paying for everything! Private insurers still exist! We still have choices! Yes, for now – but, not for long. First, I will explain why private insurance will be crowded out of existence by government payments and then I will explain why we aren’t better off for it.

Insurance companies, like every other company in the market, exist to make money. When a company cannot make enough money it folds, in a normally functioning market. Government may certainly ‘bail out’ the failing company so it does not die a normal death. This choice is highly problematic, however. The money used by government to bail out failing firms is money that, by necessity, is taxed from the wealth creators. Government cannot, on net, create wealth. Every penny spent by government is a penny gained by taxes. Every penny earned by a business is a penny earned by creating a good or service desired by consumers and every penny paid by consumers is a penny they earned in their various jobs by providing productive value to the firms employing them.

If government builds a library in a small town, we can see the construction crews working with stone and wood to build the building. We can see the books placed on the shelves and we can see the librarians who now have jobs at the new library. What we cannot see are all the myriad things that would have been purchased by the taxpayers with those tax dollars of theirs that funded the library’s construction and maintenance. Perhaps one would have purchased new shoes earning a commission for a salesman at the local mall department store, as well as a sum for the company that manufactured the shoes and the employees that actually pieced them together. Not to mention the sum earned by the providers of the leather, thread, and rubber used in the shoes’ construction and the employees that harvested that rubber, cured that leather and spun that thread. Or the sum earned by the rancher whose cattle provided the leather, the farmer whose cotton provided the thread, or the landowner whose trees provided the sap that helped create the rubber. We can’t see all of these effects because they didn’t happen. Multiply these ‘might haves’ by the number of tax payers and we get into some pretty serious numbers.

The problem isn’t whether or not government can create or save a job. Government certainly can. The problem lies in whether that is a net gain, whether government will spend tax dollars as carefully as we spend our own, and whether individuals are better off buying what they want with their own money or having their money taxed away to purchase things thought better for them by those with political power.

Since government will never go out of business, the government-provided medical plans do not have to charge cost-covering premiums. Private firms do. How may a firm that must remain profitable to continue in existence compete with a government that does not have to earn a profit to do likewise? The private-sector insurance companies will be undercut. The only way they will survive is if they eventually become wards of the state. We may have choices now, but as the number of those who purchase the government plan grow, inevitably, the private insurance companies will be pushed aside or absorbed, one by one.

Another side effect of the growth in the number of those being added to the government medical plan, is a necessary rise in the costs of that government medical plan. To pay for these costs the government must cut spending in other areas, raise tax rates in hopes of earning higher tax revenues or establish a system of price controls mandating what doctors and hospitals may charge for each service and even what a doctor may legally earn as wages. As compensation for doctors and hospitals declines simultaneously with the inevitable increase in demand for medical services due to the free or artificially low price, the only way costs may be lowered is by cutting corners so the quality of care received will worsen.

The easiest corner to cut is time. If price is not permitted to ration medical care, then time will. You’ll wait. We’ll all wait. Maybe you’ll be one of the lucky ones that gets necessary surgery in a timely fashion provided by a well-trained doctor for a low, low price. Maybe you won’t. Maybe you’ll die on a waiting list.

When the wage earned by doctors drops due to government cost-saving initiatives, what will happen to the number of people who decide to enter medical school? The number will drop. They’ll find other fields that permit a higher return on the investment of their time, energy and skill. Who will take their place? Cheaper doctors will take their place – most likely from Third World countries and other nations whose medical schools have lower entry requirements and lower overall performance standards. We can already see this playing out in Britain’s National Health Service and in Canada’s system as well.

None of this will matter to rich people. Money always provides the possessor with options. The middle-class and poorer people will be the ones to suffer. We can also see this play out in Europe and Canada. Witness the recent trip made by the premier of Nova Scotia, a province in Canada, to Florida to get surgery.

Our quality of life will not improve. Our bills will not decline.

At the end of the day, my friend, you will always have to pay the Piper.