How Capitalism Will Save Us

by Steve Forbes

  Third-party payment of health insurance was not the free market’s response to patient need. Some may be surprised to learn that the system really owes its existence to an entirely unrelated government policy—the wage and price controls of World War II. They were enacted by FDR to control wartime inflation resulting from the government’s printing so much money to pay for the war effort.

  Companies needed to pay their employees more than government wage controls would allow. They couldn’t do it with cash. So they did it through fringe benefits, principally health care.

  The distorting effects of third-party pay were amplified many times over when government got into the health-insurance business in the 1960s, launching its two monster programs—Medicare insurance, its mandatory program for seniors, and Medicaid for low-income people. Medicaid has since been expanded with the State Children’s Health Insurance Program (SCHIP), which began in 1997.

  Both third-party payment systems, Medicare and Medicaid, increased the demand for health care even further. But unlike private insurers, government was less willing to pay for it.

  Medicare and Medicaid only partially reimbursed doctors and hospitals. You couldn’t really blame them. After all, they were paying with taxpayer money and had to control their own costs. Doctors and hospitals, squeezed by Medicaid and Medicare, started charging privately insured patients more. Private insurers today subsidize Medicare and Medicaid in excess of $90 billion a year.

  Little wonder the cost of private insurance spiraled out of control after Medicare and Medicaid were established. Employers responded by offering plans that relied on cost-conscious health-maintenance organizations with networks of physicians who agreed to deliver care according to stringent guidelines set by insurers. The growth of Medicare and Medicaid since the 1960s thus led to the rise of bureaucratic managed care.

  One more problem snarling this convoluted market that we explore later in this chapter is the tangle of state regulations that rigidly dictate what kind of health insurance you are allowed to buy in each state. What if government forced you to buy twice the number of groceries you needed when you went to the supermarket? Your bills would be enormous. That’s essentially the effect that mandates have on the cost of insurance.

  The bottom line in the Real World is that today’s healthcare economy is not only overregulated but essentially governed by price controls—those low reimbursement rates imposed not only by government but also private insurers. We’ve already talked about the consequences of price controls and command-and-control regulation in places like the old Soviet Union, and in Soviet-style countries like Cuba and Venezuela. You get declining quality, shortages, and rationing.

  That’s what’s happened with healthcare delivery in countries like Canada, Britain, and the nations of Europe—and it is happening today, in varying degrees, throughout our system. The worst example is Medicaid, where the quality of care is demonstrably lower. Many doctors won’t treat Medicaid patients because of low reimbursement rates.

  The answer to health care is to bring back the consumer and restore a normal market where individuals, and not corporations, make the buying decisions.

  We see this starting to take place with the few consumer-driven solutions—like health savings accounts—that have managed to spring up despite the system and that are beginning to make health care more patient friendly and affordable.

  The Real World bottom line: government-run economies result in monopoly and rigidities that work against innovation and productivity. Think post office, public education, Amtrak. Do you really want government bureaucrats in charge of your medical care?

  Q WHAT’S SO BAD ABOUT A GOVERNMENT HEALTHCARE SYSTEM?

  A STATERUN HEALTH CARE IS RATIONED. IT’S “FREE,” BUT YOU OFTEN CAN’T GET IT—OR YOU HAVE TO WAIT TOO LONG.

  In 2009, the actress Natasha Richardson, skiing in a resort in Quebec, Canada, hit her head and eventually died from massive brain injury. Days later, many speculated whether she might have been saved if a medical helicopter like those common in the United States had been able to transport her to a trauma center. There are no medical helicopters in the province of Quebec.

  Fortunately, most of us won’t ever need a medical helicopter. But we will need to see a doctor. And in countries with staterun healthcare systems, needing to see a doctor, even for life-threatening conditions, can mean waiting months—or longer.

  As one Canadian citizen, Esther Pacione of Ontario, told the New York Times, getting even basic care in Canada means being put on a waiting list. “If you are not bleeding all over the place, you are put on the back burner,” Ms. Pacione said, “unless of course you have money or know somebody.”3

  That’s because care in these systems is rationed. In Canada, rationing forced a Quebec man to wait a year for a hip replacement. He took his case to the Canadian Supreme Court, which ruled in 2005 that “access to a waiting list is not access to health care.” The court struck down Quebec’s law banning private health insurance.

  It’s not coincidental that two of the leading opponents of government-run care, Dr. David Gratzer and Sally Pipes of the Pacific Research Institute, are both Canadians. Gratzer decided to write a book, The Cure: How Capitalism Can Save American Health Care, after experiencing a harrowing epiphany as a med student walking into a Canadian emergency room.

  Swinging open the door, I stepped into a nightmare: the ER overflowed with elderly people on stretchers, waiting for admission. Some, it turned out, had waited five days. The air stank with sweat and urine. Right then, I began to reconsider everything that I thought I knew about Canadian health care. I soon discovered that the problems went well beyond overcrowded ERs. Patients had to wait for practically any diagnostic test or procedure, such as the man with persistent pain from a hernia operation whom we referred to a pain clinic—with a three-year wait list; or the woman needing a sleep study to diagnose what seemed like sleep apnea, who faced a two-year delay; or the woman with breast cancer who needed to wait four months for radiation therapy, when the standard of care was four weeks.4

  And that’s just in Canada. In a 2007 article for City Journal, Gratzer noted that more than one million Britons must wait for some type of care, with two hundred thousand in line for longer than six months. In Britain’s staterun system, hospitals have been known to manage demand by imposing minimum waiting times of approximately six months. The London Daily Telegraph reports that hospitals are penalized for “treating too many patients too quickly.”5 The paper reports: “One gynaecologist said that he spent more time doing sudoku puzzles than treating patients because of the measures.”6

  Things aren’t any better in Sweden, where the wait for heart surgery can be as long as twenty-five weeks, and more than a year for hip replacements. According to Swedish policy analyst Johnny Munkhammar, some Swedes get so desperate they end up visiting veterinarians. Why? Because “veterinarians are private and there are many.”7

  Not only do patients in staterun systems have to wait for care, they have less access to advanced medical technology. CAT scans, for example, are three times more available in the United States than in Canada.

  Yes, drugs may be cheaper in countries like Canada. But that’s because their state systems keep the prices artificially low. (As we’ve noted, we pay for this in U.S. drug prices.) But people often don’t get the drugs that can cure them—because they’re banned by state healthcare bureaucracies.

  Sally Pipes has her own story about Canadian health care.

  [M]y uncle was diagnosed with non-Hodgkin’s lymphoma. If he’d lived in America, the miracle drug Rituxan might have saved him. But Rituxan wasn’t approved for use in Canada, and he lost his battle with cancer. A couple of years ago, I received an email from a woman in Ontario who had heard my uncle’s story. Her reason for writing?

  She wanted to let me know that Rituxan still wasn’t available—so she was about to embark on a trip to Michigan for the drug. That’s the grim reality of price controls—they lead to
rationing. Similar tragedies have played out over and over again in Britain, France, Italy, and virtually every other country that imposes price controls on drugs.8

  Labor shortages are a chronic feature of staterun health care in Canada, Britain, and France. A shortage of physicians and inadequate hospital capacity were said to be key factors behind the deaths of some fifteen thousand elderly citizens from a disastrous heat wave that struck France in August of 2003. Healthcare policy analyst Linda Gorman wrote in 2008 that doctor shortages have been recently reported even in nations such as Germany and Switzerland, whose systems are considered successful by supporters of staterun medical care.

  Why is rationing an inevitable consequence of staterun care? Because, as we’ve noted, staterun health care is a command-and-control system. In a market economy, consumer need drives what the market provides. But in a state system, politics determines what is produced—and who gets it. Practices and prices are rigidly imposed on the market—not developed spontaneously by people who are seeking to serve others’ needs.

  This is true whether the system is entirely staterun, like the British National Health Service, or state-financed, like Canada’s single-payer system, where government pays for care provided by private entities.

  The Golden Rule—“He who has the gold makes the rules”—applies to health care as it does to the rest of the Real World.

  For healthcare consumers, that means medical treatment is delivered based not on what you, the patient, need or want—but on what someone else thinks you should have. Healthcare News reported in 2007 that some British hospitals actually banned smokers and the obese from receiving treatments such as orthopedic surgery. Many people believe smokers and obese people have helped to put their own health at risk. That may be so. But should they actually be denied medical care?

  We noted in the introduction to this chapter that the problem with American health care lies in the rigidities imposed on the marketplace by layers of government regulation and bureaucracy. Far from fixing the problems of American health care, a staterun system, with price controls, rules, and rationing, would multiply them many times over.

  REAL WORLD LESSON

  By imposing price controls and bureaucratic constraints on the medical economy, staterun health care results in declining efficiency and quality throughout the system, as well as the rationing of medical care.

  Q WHY IS A PRIVATE-SECTOR HEALTHCARE SYSTEM CRITICAL TO QUALITY MEDICAL CARE?

  A BECAUSE ONLY THE PRIVATE SECTOR CAN FULLY DEVELOP INNOVATIONS AND BRING THEM TO THE GREATEST NUMBER OF PEOPLE.

  We noted before and need to emphasize again: U.S. health care is not a free market. It is government dominated and managed. But there is still a private sector. That is why U.S. health care, while expensive, is the most advanced in the world. Americans have higher rates of survival for a myriad of diseases. The highly respected British journal The Lancet found in 2008 that Americans have far higher survival rates for thirteen out of sixteen of the most common cancers—the reason that thousands of people come to the United States each year seeking medical treatment. But this lead in technology and quality will recede and ultimately vanish the more government control over health care expands.

  This may sound like a political statement. But it is the Real World economics of command-and-control economies. As we have explained, the more government controls a market, the less innovative and quality-conscious people and companies become.

  Why? Because state control means that government policies drive prices. Companies and people are prevented from generating the capital to invest in keeping up existing operations and also in developing new technologies. Government imposes rigid “protocols” that micromanage market activity. People are prevented from spontaneously developing new ways to respond to demand and meet patient needs.

  This happens not only in health care, but in any market. Remember our example of the Trabant. A product of East German central planning, the smoke-belching sedan was considered advanced when it debuted in the late 1950s. Then it was manufactured unchanged for three decades. The Trabant was so shoddy that it was thought to be made of cardboard; attempts to sell it in Western markets failed miserably.

  The Trabant may have started out as a decent car. But without any competition in East Germany’s government-run market, there was no reason to keep improving it. The rest of the world pulled ahead in the auto technology race. In much the same way, the healthcare systems of Canada and Europe stagnated after they fell under government control. Rigid government directives, minimal competition, tight funding constraints, and politically driven, punitive taxation kept doctors and hospitals from trying new ways to improve the delivery of health care.

  David Asman, anchor of Forbes on Fox, experienced Trabant-style socialized medicine several years ago when his wife had a stroke in London. In the Wall Street Journal, Asman wrote that while he appreciated the caring staffers at the British Health Service, it quickly became apparent that their level of skill was far below U.S. standards. Even after administering an MRI, doctors at University College of London Hospital weren’t certain of his wife’s diagnosis. After much string pulling, he managed to get her admitted to Queen’s Square Hospital for Neurology, considered the best neurological treatment center in England. Nonetheless, Asman reports,

  The conditions of the hospital were rather shockingly apparent…. [T]he smells wafting through the ward were often overwhelming.9 … Compared with virtually any hospital ward in the U.S., Queen’s Square would fall short by a mile. The equipment wasn’t ancient, but it was often quite old. On occasion my wife and I would giggle at heart and blood-pressure monitors that were literally taped together and would come apart as they were being moved into place. The nurses and hospital technicians had become expert at jerry-rigging temporary fixes for a lot of the damaged equipment. I pitched in as best as I could with simple things, like fixing the wiring for the one TV in the ward. And I’d make frequent trips to the local pharmacies to buy extra tissues and cleaning wipes, which were always in short supply.

  In fact, cleaning was my main occupation for the month we were at Queen’s Square. Infections in hospitals are, of course, a problem everywhere. But in Britain, hospital-borne infections are getting out of control. At least 100,000 British patients a year are hit by hospital-acquired infections, including the penicillin-resistant “superbug” MRSA. A new study carried out by the British Health Protection Agency says that MRSA plays a part in the deaths of up to 32,000 patients every year. But even at lower numbers, Britain has the worst MRSA infection rates in Europe. It’s not hard to see why.10

  After his wife got out of Queen’s Square, she was briefly treated in one of the city’s few remaining private hospitals. The contrast, Asman writes, was dramatic.

  Checking into the private hospital was like going from a rickety Third World hovel into a five-star hotel. There was clean carpeting, more than enough help, a private room (and a private bath!) in which to recover from the procedure, even a choice of wines offered with a wide variety of entrees. As we were feasting on our fancy new digs, Dr. Cullen came by, took my wife’s hand, and quietly told us in detail about the procedure. He actually paused to ask us whether we understood him completely and had any questions. Only one, we both thought to ask: Is this a dream?11

  Upon returning to the United States, Asman writes that the contrast with even Britain’s best hospitals was stark:

  The cleanliness of U.S. hospitals is immediately apparent to all the senses…. Cornell and New York University hospitals (both of which my wife has been using since we returned) have ready access to technical equipment that is either hard to find or nonexistent in Britain. This includes both diagnostic equipment and state-of-the-art equipment used for physical therapy.12

  The innovation and quality gap between America’s private-sector health care and European staterun systems is apparent in nearly every sector of health care. Europe once led the United States in drug development. But that is no longer
the case, as Valentin Petkantchin, research director for the Brussels-and Paris-based Institut économique Molinari, writes.

  During the last 20 years, the number of [drugs] launched by European drug firms has been reduced by half, going from an average of 97 [drugs] between 1988 and 1992 to 48 between 2003 and 2007.

  As a result, the center of drug innovation has shifted to the United States, where the drug market is generally less restricted than in Europe.13

  Why did Europe lose its lead? Price controls and taxes intended to punish “greedy” drug companies choked off the profits that would have generated capital for new drug research. In biotech alone, U.S. private-sector investment between 1989 and 2002 was four times greater than that of Europe.

  The fact that our healthcare economy continues to permit some free enterprise is the reason that Americans benefit more from new technologies—even when they have been invented elsewhere. The CT scanner, which provides advanced, computer-enhanced X-ray imaging, was invented in the 1970s in Britain, the land of socialized medicine. But today Great Britain has half the number of CT scanners per patient than the United States has.

  A study by the Organisation for Economic Cooperation and Development (OECD) in June 2007 found that the United States leads nearly every other nation except Japan in the availability not only of CT scanners but also of magnetic resonance imaging (MRI) machines.

  According to the Cato Institute’s Michael Tanner, far more Americans—44 percent—have access to cholesterol-reducing statins, drugs that protect against heart disease, than patients in Germany, where only 26 percent can get these drugs, or Great Britain, where 23 percent can get them, or Italy, where just 17 percent can.