Old 12-18-2013, 06:20 PM   #1
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Default How Government Regulations Made Healthcare So Expensive

“Those who cannot remember the past are condemned to repeat it,” declared philosopher George Santayana. The U.S. “health care cost crisis” didn’t start until 1965. The government increased demand with the passage of Medicare and Medicaid while restricting the supply of doctors and hospitals. Health care prices responded at twice the rate of inflation (Figure 1). Now, the U.S. is repeating the same mistakes with the unveiling of Obamacare (a.k.a. “Medicare and Medicaid for the middle class”).

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Figure 1: An Indexed Comparison of Health Care Inflation and Consumer Price Index in US from 1935 to 2009 (Source: US Census 2013)

Nobel Prize-winning economist Milton Friedman wrote that medical price inflation since 1965 has been caused by the rising demand for health-care coupled with restricted supply (Friedman 1992). Robert Alford explained the minority view: “The market reformers wish to preserve the control of the individual physician over his practice, over the hospital, and over his fees, and they simply wish to open up the medical schools in order to meet the demand for doctors, to give patients more choice among doctors, clinics, and hospitals, and to make that choice a real one by public subsidies for medical bills” (Alford 1975).

The majority of policymakers support either monopolization (e.g. typically Republicans) or nationalization (e.g., typically Democrats). Both have claimed “physician supply can create its own demand,” which means increasing the supply of doctors and hospitals will just motivate them to convince “ignorant” consumers to order more unnecessary and expensive health care. During the 1970s, Frank Sloan, a Vanderbilt University health care economist, explained the success of the most influential pro-regulation health care economist, Uwe Reinhardt: “His theories are highly regarded because he is so clearly understood. Unfortunately the evidence for them is not good; it is not bad either, it is just not there. And it would be a shame to see federal policy set on such a poor, unscientific basis.”

Since the early 1900s, medical special interests have been lobbying politicians to reduce competition. By the 1980s, the U.S. was restricting the supply of physicians, hospitals, insurance and pharmaceuticals, while subsidizing demand. Since then, the U.S. has been trying to control high costs by moving toward something perhaps best described by the House Budget Committee: “In too many areas of the economy – especially energy, housing, finance, and health care – free enterprise has given way to government control in “partnership” with a few large or politically well-connected companies” (Ryan 2012). The following are past major laws and other policies implemented by the Federal and state governments that have interfered with the health care marketplace (HHS 2013):

In 1910, the physician oligopoly was started during the Republican administration of William Taft after the American Medical Association lobbied the states to strengthen the regulation of medical licensure and allow their state AMA offices to oversee the closure or merger of nearly half of medical schools and also the reduction of class sizes. The states have been subsidizing the education of the number of doctors recommended by the AMA.

In 1925, prescription drug monopolies begun after the federal government led by Republican President Calvin Coolidge started allowing the patenting of drugs. (Drug monopolies have also been promoted by government research and development subsidies targeted to favored pharmaceutical companies.)

In 1945, buyer monopolization begun after the McCarran-Ferguson Act led by the Roosevelt Administration exempted the business of medical insurance from most federal regulation, including antitrust laws. (States have also more recently contributed to the monopolization by requiring health care plans to meet standards for coverage.)

In 1946, institutional provider monopolization begun after favored hospitals received federal subsidies (matching grants and loans) provided under the Hospital Survey and Construction Act passed during the Truman Administration. (States have also been exempting non-profit hospitals from antitrust laws.)

In 1951, employers started to become the dominant third-party insurance buyer during the Truman Administration after the Internal Revenue Service declared group premiums tax-deductible.

In 1965, nationalization was started with a government buyer monopoly after the Johnson Administration led passage of Medicare and Medicaid which provided health insurance for the elderly and poor, respectively.

In 1972, institutional provider monopolization was strengthened after the Nixon Administration started restricting the supply of hospitals by requiring federal certificate-of-need for the construction of medical facilities.

In 1974, buyer monopolization was strengthened during the Nixon Administration after the Employee Retirement Income Security Act exempted employee health benefit plans offered by large employers (e.g., HMOs) from state regulations and lawsuits (e.g., brought by people denied coverage).

In 1984, prescription drug monopolies were strengthened during the Reagan Administration after the Drug Price Competition and Patent Term Restoration Act permitted the extension of patents beyond 20 years. (The government has also allowed pharmaceuticals companies to bribe physicians to prescribe more expensive drugs.)

In 2003, prescription drug monopolies were strengthened during the Bush Administration after the Medicare Prescription Drug, Improvement, and Modernization Act provided subsidies to the elderly for drugs.

In 2014, nationalization will be strengthened after the Patient Protection and Affordable Care Act of 2010 (“Obamacare”) provided mandates, subsidies and insurance exchanges, and the expansion of Medicaid.

The history of medical cost inflation and government interference in health care markets appears to support the hypothesis that prices were set by the laws of supply and demand before 1980 and perhaps 1990. Even the degree of monopolization and nationalization promoted by politicians before 1965 was not enough to cause significant cost inflation and spending increases (Figure 2) until demands created by Medicare and Medicaid outstripped the restricted supply of physicians and hospitals.

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Figure 2: Health Care Spending in U.S. by Sector from 1960 to 2005 (Source: US Census 2013)

Spending on prescription drugs didn’t accelerate until after pharmaceutical monopolies were strengthened in 1984. Spending has increased even less for administrative, net cost of private health insurance and nursing home care, and not much at all for dental, structures, equipment, public health, other personal and professional care, home health care, research, non-prescription drugs and durable medical equipment.

Since the 1980s, the government has used its buyer monopoly power, through its Medicare and Medicaid programs, to effectively set price and quality controls (e.g., underpayments) on physicians and hospitals (Stagg-Elliot 2012). For the same purpose, the Federal and state governments promoted the concentration of private insurance into buyer monopolies (e.g., HMOs). The government has also encouraged clinics and hospitals to respond by merging into concentrated provider monopolies (while continuing to limit the supply of doctors and hospitals).

These government-private partnerships called “managed competition” resemble centrally-planned fascism (Richman 2013). Government sets prices, which has predictably led to reduced quality, rationing and other perverse gaming. Moreover, the bureaucracy has brought standardized care, higher administrative costs and high executive salaries. Although costs have continued to rise at the same double the rate of inflation, it is questionable the extent to which prices are now set by the laws of supply and demand.

Obamacare is expected to expand coverage by about 22 million people with subsidies and another 17 million through Medicaid. Regardless how the current problems with mandates play out, demand will likely skyrocket without increasing supply proportionately (Fodeman 2011). Higher prices and costs and/or lower quality can be expected to result in calls for nationalization (e.g., “single payer”) by Democrats while Republicans counter with private insurance and tort reforms.

The search for alternative economic systems should include free markets through a closer reexamination of the health care marketplace before 1980 to 1990 to determine whether prices offered by physicians and hospitals were ever set by the laws of supply and demand. Economist Henry Hazlitt provides the following description: “Prices are fixed through the relationship of supply and demand…..When people want more of an article, they offer more for it. The price goes up. This increases the profits of those who make the article. Because it is now more profitable to make that article than others, the people already in the business expand their production of it, and more people are attracted to the business. This increased supply then reduces the price” (Hazlitt 2013).


In 1965, Congress enacted the Medicare and Medicaid programs (Figure 3). From 1966 to 1980, Medicare provided health insurance for about 20 million elderly. By 1980, Medicaid was covering about 12 million poor people. (U.S. 1985) M. Stanton Evans claimed that by dumping “demand into our medical system, these government programs bid up all the factors of supply” (Evans 1977).

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Figure 3. Medicare and Medicaid spending as part of total U.S. healthcare spending as percent of gross domestic product. (Source: Congressional Budget Office)

Other factors that also contributed to an escalation in demand for physician and hospital services before and after 1965 have included a growing and later aging population, rising personal incomes, private health insurance, breakthroughs by the American drug industry, and advances in electronic and mechanical devices. Unmet demand for physician services have persisted in rural and poor urban areas, preventive care, geriatrics, house calls, cost management, computerized medicine, entrepreneurism, medical supply, environmental, public-health services, mental institutions, prisons, drug programs, and military and foreign service.

Physician services became the number one growth industry. Health-care industry experts agree that the major service provided by the health care industry is rendered or overseen by physicians. Protected by licensure laws from competition by non-physicians, physicians control an estimated 80 percent of all health care expenses (Goodman 2013), including 70 percent of hospital costs (Norman 2013).

While some proposed reforms for reducing excessive demand have merit, their unpopularity has only served as an excuse to delay a supply response. Some have blamed government for subsidizing health care, and call for taxing employee benefits and even eliminating government programs. Others have blamed the unhealthy living habits of consumers, but it has proved difficult trying to deny them the freedom to choose how to live their life.

Between 1965 and 1980, it is unlikely physicians and hospitals were creating their own demand since they were busy meeting the additional demands created by government. In addition, patients subsidized by Medicare remained concerned purchasers that spent an average of 20 percent of their income on medical care, including purchasing insurance.

Many blame third-party insurance for making consumers less accountable for spending. But consumers seek to spread risk by purchasing health coverage from third-party payers. Moreover, third-party insurance existed long before the health care cost crisis (Figure 4). Since the 1930s, hospital groups like Blue Cross and physician groups like Blue Shield had been offering fee-for-care insurance programs to employers, who then offered them to their employees for premiums. The non-profit Kaiser Permanente contracted with companies to meet all of the medical needs of employees for premiums.

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Figure 4 Number of people with employer-provided health insurance 1940 to 1960. (Source: Sourcebook of Health Insurance Data 1965)

A free competitive market can still exist with third-party payment. Consumers want the most benefits for the lowest health care premiums and also want to limit employee wages assigned to health care coverage. Insurance companies and self-insured employers want to pay the lowest amount possible to physicians and hospitals. If the health care industry was indeed competitive at all supply levels, suppliers would aggressively offer insurers competitive prices for high quality services. Insurers would have no trouble selecting health care policies for their policyholders that encouraged them to obtain the best service they could for the lowest cost. Consumers would protect themselves from unethical providers by taking their business to those who had a good reputation for quality work at reasonable prices without unnecessary services. In a competitive market, providers are forced to obtain this reputation or they go out of business.

The supply and demand curves are both price-inelastic, as illustrated by mostly vertical plots (Figure 5). The demand for physician care is a classic example of a necessity with no close substitutes (i.e., licensing restrictions prevent substitutions from non-physician practitioners). The price elasticity of demand is only 0.31 for medical insurance (Samuelson 1992). This means the quantity that consumers demand will not change much with changes in price or the method of financing (i.e., people will pay whatever they can). The supply curve is also price-inelastic and not very responsive to price because physicians require many years of training.

Since 1965, the demand curve has shifted toward more quantity demanded at each price. For example, the equilibrium point as shifted from E1,1 to E2,1. Since the supply and demand curves are price inelastic, increases in demand are amplified into larger increases in medical prices.

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Figure 5 Graphic Illustration of a Price-Inelastic Demand Increase to Higher Price for Health Care


Since 1965, medical prices have exploded with physician fees (Figure 6). From 1965 through 1993, the price for medical care increased by 699% and physician fees 675% compared to only 359% for all goods and services measured in the Consumer Price Index. Today, medical prices and physician fees continue to grow at about twice the rate of inflation. Hospital prices have increased at almost four times. U.S. health-care spending has increased from 6% of the Gross Domestic Product in 1965 to 18% ($3 trillion) today.

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Figure 6 An Indexed Comparison of Inflation of Total Medical Prices (-) and Physician Services (- – -) from 1950 to 1993 with Base Year 1950. (Source: US Census 2013)

Jay Winsten of the Harvard School of Public Health wrote: “The solution lies…in examining the forces driving the medical-care delivery system. This examination must focus on physicians” (Winsten 1983). Economist Lawrence Baker reported that HMOs aren’t achieving their goal of increasing the efficiency of the delivery of medical services because physicians have too much market power for the development of competition (Baker 1994).

Cost control incentives encouraged by competition for clients has been limited in health care because client demands have grown more than physician supply since 1965. Even when physicians work for health institutions like hospitals, physician number can limit the volume of patient care rendered and thus the extent to which competition for patients occurs between institutions. In the absence of competition, not only physician fees but prices for every element of health care that physicians control inflated because there was little incentive to efficiently manage costs. The highly paid and hurried work week has reduced cost-saving and quality-improving innovative incentives placed on physicians.

The lack of competition between hospitals and other health care institutions also limited cost control incentives placed on executives. The lack of competition between both medical institutions and the doctors that control most of their spending could explain why hospital costs have been inflating twice as fast as even physician fees. Hospitals are loaded with waste and inefficiency. For example, a hospital stitch costs more than $500 today.

Health care may be the only industry in which suppliers blame technology for high costs. But researchers at the Robert Wood Johnson Foundation reported that small medical expenses controlled by physicians, such as blood tests and ordinary x-rays, were responsible for medical inflation, not complex technologies. The article stated that if the annual operating costs of the nation’s more complex technologies – kidney dialysis, coronary bypass, electronic fetal monitoring, and computerized x-rays – were reduced one-half, the net savings would be less than one percent of the nations medical bill. They proposed income incentives for physicians as motivation for cost control (Robert 1979).

Some market opponents disputed that a free market could create competition since they claim a “surplus” of doctors in some medical fields and geographic areas had not brought price competition. However, evidence of this is limited to secondary care physicians, such as surgeons. Secondary care physicians, who derive more of their patient load from referrals, cannot compete on the basis of price unless the primary care physicians, that refer patients to them, are under competition to care about costs. Few primary care physicians would refer a patient to a physician taking aggressive price cutting steps because they would be viewed as “rocking the boat.” The higher-paid secondary care physicians may experience some unemployment before a competitive surplus of primary care physicians can develop. Geographic studies involving cities with a “surplus” supply are based on physician-to-population ratios and do not take into account the fact that demand may be much higher in the cities.

The collapse of demand during economic downturns has provided evidence that physicians cannot create their own demand. The AMA had to respond to low physician incomes caused by the Great Depression by cutting medical school admissions (and not creating their own demand). During another temporary decrease in demand caused by the severe recession during the early 1980s, the Wall Street Journal reported: “good news, however to free-market advocates, who note that in a few cities price wars have cut medical costs … doctors are also alarmed by the increasing number of physicians … fear they won’t be able to compete with other doctors” (Editor July 1983).


The increase in demand allowed physicians to expand their practices to serve more patients. Since physicians actually worked a few hours less per week, the increased number of patients received far less attention and quality deteriorated.

In 1972, the Journal of the American Medical Association reported that, “The average patient load and the average volume of units of patient care for the average physician has increased dramatically in the last five to six years. Medicare, Medicaid and the increased coverage of medical and hospital insurance have produced a skyrocketing rise in effective demand for medical services…the demand could be met only by the existing number of physicians providing more units of patient care.” They claimed the doctor shortage had increased the possibility of the kind of breakdown in the patient-doctor relationship that can lead to a lawsuit (Ribicoff 1973).

Overworked practitioners have been rendering hurried, poor quality medical care, dangerously understaffed hospitals and medical facilities, waiting lines, and 36 hour shifts squeezed into 120 hour work weeks by many residents at hospitals. Many doctors have freely admitted to being too busy healing to keep abreast of new techniques and research ideas. It has been suggested that the long, hurried work week of physicians contributed to the high incidences of fatigue, depression, alcoholism, drug addiction, and suicide among doctors (Harris 2011). The lack of competition has failed to drive out the estimated five percent of the physicians considered unfit to practice medicine. Recently, Harvard University’s Lucian Leape has estimated there are approximately 120,000 accidental deaths and 1,000,000 injuries in U.S. hospitals every year.

The physician’s lack of time to communicate effectively depersonalized care. The Wall Street Journal reported, “Many doctors concede that the increasingly impersonal tone of medical care makes bringing a (malpractice) claim easier” (Editor, September 1983). In 1994, a study reported in the Journal of the American Medical Association found that doctors could reduce the chances of being sued for malpractice by not acting rushed or being impersonal with patients.

The consumer revolt to the quality deterioration was dubbed “the malpractice crisis.” While the total dollars spent on health care in the United States increased about 100% from 1966 to 1972, malpractice insurance increased 400% for all physicians and 425% for surgeons (Figure 7). Higher rates were a response to increased losses by insurance companies. For example, Aetna’s indemnity losses for both doctor and hospital malpractice suits in the United States went from $300,000 to $9.5 million per year between 1965 and 1968, respectively.

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You NEVER change things by fighting the existing reality. To change something, develop a new model that makes the old model obsolete.
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Old 12-18-2013, 08:32 PM   #2
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Default the answer

Start tinkering with legislation, while monitoring the screams of the Special Interests. Do that which causes the most screaming- you'll be on the right track.

Or: abolish all economic legislation, while wearing ear protection.
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Old 12-19-2013, 01:33 AM   #3
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I'm most worried about the govt being allowed to tell a private insurance company what to do about ANYTHING, including telling them they have to cover preexisting conditions. Either take it out of the private sector, or leave it in there. With the govt telling the companies what to do, why then can't they tell walmart what prices to set? Obamacarenis the worst of all worlds as far as I'm concerned.
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