Medical Monopoly Mayhem
By Tom Hurst, 14 September 2009
Health care spending is consuming a huge and ever-growing part of our otherwise productive economy, and is now of such a magnitude (about 18% of GDP!) that it profoundly affects each of us. Indeed, to the degree that we spend money on health care, we become less prosperous both as individuals and as a nation, for in a sense it is a nonproductive service. Simply stated, for us to continue as a prosperous, free country, we absolutely must remedy this problem. To that end, I have a simple but overlooked fundamental observation to make - one that I think will make clear exactly what the solution is. Before I do that, though, for reasons that will become obvious shortly, I'd like to review the basic economic tenets of monopolies that everyone would do well to understand.
To begin, exactly what is a monopoly? In short, it's one company, or perhaps a number of them in quasi-cahoots, or even guilds and informal groups of individuals that provide similar services, more or less controlling all economic activity in a given sector of the economy, or even just controlling certain aspects of a sector. The problem with that, of course, is that being self-interested (like all of us), given the opportunity these businesses naturally tend to raise their prices far above the cost of production, and hence increase their profit margins far above normal market rates of return. They also tend towards offering just a limited selection of low quality products and services, do not innovate, and treat customers poorly, all because there is financial incentive to do so, and very little incentive to do otherwise. Certainly, consumers do not benefit from and hence do not want any of these characteristics in markets they must deal in, so what exactly allows businesses to get away with such bad behavior? Though there are occasionally extenuating circumstances, like their owning exclusive patents or being the first to enter a given market, for the most part monopolies and pseudo-monopolies are a product of big government. Ayn Rand, too, makes this observation: "Every coercive monopoly was created by government intervention into the economy." Why, you ask, is government the linchpin? Well, when government (at all levels) unConstitutionally claims the power to plan, manage and regulate everything and anything, businesses immediately go into high gear looking for ways to influence government policies, regulations, laws, licensing, taxes, and subsidies, the cost of entering a given business, and such, all to advantage themselves and disadvantage both consumers and competitors; such conniving affects everything from A to Z, including even our fundamental rights. And when big government cooperates (as it always does) by effectively removing the pressure normally exerted by consumers and competitors, monopolizing businesses are empowered and incentivised to raise prices (and hence profits), lower quality, eliminate innovation, and treat customers poorly. Simply, they conspire with government to stack the deck such that they can make more money by not being concerned about customers. Of course, it's really just corrupt politics at that point, so we know that companies and such with the most money or best connections - certainly more money and connections than individual voters have - will be the ones successful at getting government to do their bidding at our expense and at the expense of other companies and such that might consider that business. Actually, fundamentally it's a variety of fascism, this "cooperation" between certain businesses and the state (including even so-called "public-private partnerships"), and carries with it all of the attendant evils, most importantly a progression towards tyranny. In any case, the bottom line lesson here is that whenever one sees high prices, high profit margins, a limited selection of products and services, only low quality products and services, a lack of innovation, and customers treated poorly, there is definitely some sort of monopoly at work. And where there is a monopoly, one knows that almost always government is the cause. When in this sad situation, people are robbed by businesses empowered by government - or even by government itself - and hence become poorer because monopolized markets are inherently inefficient and unfair. How to end a monopoly and force the fair, free-market competition that will benefit us? One must simply remove government completely from the equation, for no government means no monopolies.
Now, let's clarify what we observe where there are NO monopolies, that is, in nominally free markets where government is essentially not involved in choosing winners and losers. Most basically, in any free market sector throughout history, whether service or product oriented, we see the incentive of profits that arise from pleasing consumers and bettering one's competitors incessantly force lower prices and increased variety, innovation and quality. Think about it... do you ever worry if you'll be able to find shoes that you like at a price you can afford? Of course not, for stores everywhere are overflowing with a seemingly infinite variety of shoes at all price and quality levels. What about, say, computers, or even bread? One would make the exact same observations. Indeed, in any reasonably free market segment of our economy, we see "greedy" companies and individuals doing all they can to provide us with what we want and need at a price that we can afford. This is the "invisible hand" of Adam Smith at work, the so-called forced "discipline" of a self-regulating free market, wherein companies and such play off against one another, each vying to get our dollars by providing to us what we consider the best value in goods and services lest they go bankrupt. Those that are successful in meeting our needs profit and grow, and we become satisfied and prosperous because of it. Those that are not sufficiently innovative, efficient, or beholden to consumer demands go out of business, and the resources they once consumed or owned are then diverted or sold to new or better companies that will put them to better use. The bottom line lesson here is that whenever one sees the price of products and services very close to (and sometimes even below) the intrinsic cost of providing them, profit margins near the average market rate of return (historically, typically on the order of 5% or so per year) or lower, a great variety of innovative, quality goods and services, and customers treated well, there is definitely a relatively free market at work. And where there is a free market, one knows that it is always because government is NOT interfering with the business of doing business. This is the ideal condition wherein all people become more prosperous because free markets are inherently efficient and fair.
With the above observations under our belt, let's examine at our current health care market to see if it resembles a government-enabled monopoly (bad) or a free market (good). First, hospitals. There I would most basically observe that a hospital room at many thousands of dollars per day is far, far above the intrinsic cost of providing that service. Just do some simple math: cost out the building, supplies and equipment, then add in reasonable salaries for nurses and staff, and a reasonable administrative overhead rate (the best companies have on the order of 1 manager per 30 employees), etc., and one would come out with a number on the order of just several hundred dollars per day per room. That's what a hospital room would cost in a free market, but for some reason doesn't in the real world. Surgeries, too, even considering all of the high-tech equipment used these days, similarly cost out at a small fraction of what the hospitals actually charge. So, overall hospital prices are high and hence profits are far above the market rate of return. What about quality and supply? Are the rooms and services both good and available? Well, most are of adequate quality at best, and in many locations there is indeed a substantial wait for a room or a surgery. Now, honestly, don't all of these symptoms describe the monopoly condition I described above? Absolutely, for one thing we all know is that high prices, high profits, poor quality, long waits, and consumers being treated shabbily are sadly the very hallmarks of hospitals these days.
What about physicians, most of whom make in excess of several hundred thousand dollars per year? That's essentially their "profit margin", and it is indeed high in that I would expect that in a truly free market, one where anyone who was qualified could become a physician, one would find physicians earning salaries in line with most other professionals with similar levels of education, experience and responsibility. After all, those are the three characteristics that ultimately determine what most jobs nominally pay in a free market. I'm thinking a general practice physician in a free market would earn on the order of $100,000/year, which is more or less what a good engineer would earn. That works out to about $50/hour, so even adding in a physician's office overhead and staff, a 10 minute visit at $20 would reasonably cover the total intrinsic cost and would also be affordable to all Americans, even those who are poor or have no insurance. So, it would seem that the one to three hundred dollars for a few minutes that physicians currently charge is far more than the intrinsic free market cost of providing their services, too. What about quality and quantity? Well, while most physicians are reasonable while physically treating you, that's usually where the good part of the experience ends. Indeed, waiting weeks or months to get a few minutes with a physician is the norm these days, and even an appointment on a given day and time often requires the inconvenience of hours of waiting on the day. So, it would seem that the market in physicians also has - for a variety of reasons - all of the symptoms of being an extreme government-enabled monopoly. Take my word for it, this sort of abuse and the prices they charge simply would not occur in a truly free market in medical care.
Next, let's briefly examine the health insurance companies that charge individuals and families hundreds and even thousands of dollars per month for a policy. Here, the price is obviously high, the profit margins huge, the quality relatively bad, and the choice very limited (as in many cases one must simply accept the insurance one's employer chooses for them). Well, it looks to me like this industry has all of the symptoms of a government-enabled monopoly, too.
Finally, the infamous pharmaceutical companies. They charge high prices for pills that cost little to manufacture, and on average just a few hundred thousand dollars to develop (the average "cost" of $10 billion and 10+ years to get a drug to market is one imposed by government, not the actual business of developing pharmaceuticals themselves). They also typically have huge profit margins, and it is only the less regulated generic producers that provide us quality, variety and affordability. Clearly, what one observes shows that most pharmaceutical companies, too, are evidently government-enabled monopolies.
So, hopefully, you now understand how monopolies differ from free markets: the former are essentially government forcefully impoverishing you via the facade of corrupt private businesses, while the latter allow you to prosper as you will and make your own decisions. And that hospitals, physicians, and health insurance and pharmaceutical companies exhibit all of the quintessential characteristics of government-enabled monopolies and hence are NOT free markets. Indeed, at this point I think it's beyond obvious that we're all suffering from one giant, industry-wide, government-enabled health care monopoly wherein nearly 65% of health care dollars are already spent monopoly-fashion by government at some level, and the remainder of the monopolized, pseudo-private market is regulated, politicized and bureaucratized by government to the point that it might as well be government itself. Indeed, as Lew Rockwell of the free market Ludwig von Mises Institute notes, "Clearly the biggest monopolist of all is the U.S. government. No competition is allowed, the quality of output is continually falling, the prices are continually rising and the consumer is treated shabbily." And that fact alone lays waste to the socialist idea that government can or does actually care about us, for the game government always plays only concerns increasing its money and power, and it gets both only by taking them from citizens.
What should we do to rectify things? Well, for everyone to have access to quality, affordable health care, I would say the most important thing we could do would be to replace the present government monopoly with as free a market as possible by eliminating Medicare and Medicaid, deregulating nearly everything, making the tax code cast a blind eye on health care, and getting our employers out of the business of taking care of our health care needs. This would force hospitals, doctors, and insurance and pharmaceutical businesses to serve consumers directly instead of serving themselves or the government. As Ayn Rand stated, "It is a free market that makes monopolies impossible.", and in such markets consumers would tend to consume health care wisely because they make their own spending decisions and - importantly - directly pay for their own health care (as opposed to government or their employers paying). Do these things, and I'd guarantee that "greedy" hospitals, doctors, insurance and pharmaceutical businesses would immediately race to offer us the health care products and services that we want and need at a price that we can all afford. We would see more, better and more affordable hospitals, doctors, pharmaceuticals and insurance. Quantifying the outcome is just basic economics, and I'd estimate that a truly free market would immediately cut the cost of health care by an order of magnitude or so (to perhaps 1/10th of what it costs now)! Interestingly, adjusted for inflation, a reduction of that scale would restore real price levels to more or less what they were 60 years ago - before government got involved much, and when doctors made house calls and hospitals, insurance and pharmaceuticals were affordable to the average citizen. So, it would seem that a totally free market is a time-proven solution to our runaway medical expenses, for it has worked well in the past. After all, free markets efficiently and reliably provide us with a nearly infinite quantity and variety of other types of (even critical) goods and services, so why not health care?
Beyond getting government totally out of the health care industry, I would also observe that the rational consumption of health care goods and services would be further incentivised by making sure that health care does NOT become recognized as a right or entitlement. While this may sound cruel, realize that a "right" to health care means that some citizens would be literally enslaved (via government taking the fruits of their labor) to provide "free" medical care for others, and I think we can all agree that slavery has no place in a moral society. Like it or not, health care is a service that has a real cost that must be paid by someone - rightly the one who consumes the service - and in the end by a reduction in the prosperity of our society. In any case, such slavery would not be necessary in a free market, as health care would be cheap enough for nearly all to easily afford, and in a moral society charity would care for those few who couldn't.
Do these simple things which only require that government get completely out of the health care business, and the free market will almost instantly create an affordable health care future for all. So, stand up and say NO to both government and private, government-enabled health care monopolies exploiting us, which is our sad current state of affairs wherein everything gets both worse and more expensive as time passes. And say NO to the "public option", which is in reality the socialist, hyper-monopoly "government option" that would drive prices up and quality and innovation down even more than the current system. And say YES to the low prices, innovation and high quality of the free market by getting big government completely out of health care!
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[Other articles may be accessed via the Archive page.]