The Flawed Economics of Socialized Medicine

Author's note: This revision of an earlier article was spurred by valuable input from Dr. Paul Hsieh. Although he commented on the previous version, he did not review this article prior to posting.
National politicians are maneuvering to pass health care reform that amounts to a dramatic increase in government intervention in the name of social justice. They look to states like Massachusetts for guidance, and seem to be growing concerned that, after promising health care coverage for all, people are unable to get an appointment with a doctor. In response, "Obama-administration officials have reportedly become alarmed by doctor shortages," notes Juliet Lapidos at Slate.com, and she goes on to explain why, in her mind, there is a looming shortage of primary care doctors.

Her answer? Baby boomer doctors are retiring, and baby boomer consumers are getting old and increasing demand.

While she is right that the baby boomer generation has certain impacts on the overall health care picture, she doesn't adequately address why there has been such a drop in medical students planning on going into primary care, and more importantly, whether this drop plus the baby boomer effect is the root cause of the "shortage." She also seems to make the common mistake of equating the simple number of doctors to the actual supply of health care services, ignoring the wider effects of economics, the market, and most significantly in this case, the government. It is a mistake similar to the one of equating health insurance to health care. As we will see, though everyone might have insurance, and a state might have a high ratio of doctors to patients, that doesn't guarantee availability of services.

But let's take Lapidos' example on face value, assuming that the shortage of access to care is simply one of a lack of supply of doctors. On a free market, doctors would go where the demand was, but while demand for the service is in fact increasing, the producers (doctors) are not increasing supply in response, and even if they are, it's having no impact on the shortage. Why not?

In her opening paragraph—partially quoted above—she started down the trail of the real answer without realizing it.
Obama-administration officials have reportedly become alarmed by doctor shortages, especially since millions of previously uninsured people would gain coverage—and therefore increase demand—if the president manages to pass national health care reform. [link dropped, bold added]
Such health care reform policies will flood the market with new customers, seeking care at a government-controlled price. Thus, we must analyze this from economics to understand the consequences.

Impact of Price Control Scheme on Health Care

The socialized health care policies currently advocated increase demand nominally by giving millions of new patients insurance. But in practice these planned policies, in addition to existing subsidized care through Medicare and Medicaid, are fundamentally an imposition of price controls. As a grand scheme of price controls on the health care market, we are left with a classic price control/shortage/reduction of supply situation. For details, let us consult George Reisman and his fascinating study of the destructive nature of price controls in "The Government Against The Economy." (all of which was later included in CTIE)

When one looks at health care services, not as some magical "non-commercial essential need" that transcends markets, supply and demand, and price, nor as a right gauranteed on the backs of doctors and taxpayers, but instead just like any other good or service, it should be easy to see how Reisman's example translates to the "doctor shortage":
A shortage is an excess of the quantity of a good buyers are seeking to buy over the quantity sellers are willing and able to sell. In a shortage, there are people willing and able to pay the controlled price of a good, but they cannot obtain it. The good is simply not available to them. Recalling the gasoline shortage of the winter of 1974 should make the concept real to everyone who experienced it. The drivers of the long lines of cars all had the money that was being asked for gasoline and were willing, indeed, eager, to spend if for gasoline. Their problem was they they simply could not obtain the gasoline. They were trying to buy more gasoline than was available. [all emphasis added]
Without price controls—i.e. on a free(er) market—prices would have gone up, demand would have gone down, and a shortage would not have occurred. The market would have leveled out, people would have made other arrangements or paid the higher price for gas. In other words, because those who would have been willing and able to pay for gas could have puchased it. No shortage.

With price controls, there was artificially inflated demand because everyone could afford gas at the much-too-low controlled price, and supply ran out. Shortage.

To apply this economic lesson, one distinction must be stressed: at issue is not a shortage of doctors, but a shortage of health care services offered at the government-controlled price, under the government's regulations. With that in mind, if we substitute the supply of gasoline and its price controls with the availability of primary care appointments (supply) and Medicare/Medicaid-controlled prices, the clear picture emerges.
The preceding discussion showed how price controls create shortages by artificially expanding the quantity of a good demanded. To the degree that the controlled price is below the potential free-market price, buyers judge that they can afford more of the good with the same monetary wealth and income. They judge that they can carry its consumption to a point of lower marginal utility. In this way, the quantity of the good demanded comes to exceed the supply available, whether that supply is scarce or abundant. [bold added]
What this means is that no matter how much gas, or how many primary care doctors you have, if the price of a good (gas) or service (health care) is controlled, there will be shortages. Supply will not keep pace with artificially inflated demand.

Under Price Controls, No Number of Doctors is Enough

At a controlled price, the supply of a good, no matter how abundant, can never satisfy the inflated demand for it. The idea of a "doctor shortage" comes into play here again. It's convenient to look at the surface effects and blame the large numbers of retiring baby boomer doctors. But the fact is, we would still face long waits and shortages without the loss of their services on the market, especially as "universal health care" programs control prices further resulting in ever-increasing demand.

This is exactly what is happening in Massachusetts, the home of the mandatory insurance law that many lawmakers are looking to for inspiration. As Dr. Paul Hsieh notes in The Objective Standard,
Patients face long waits for basic medical care—in some cases more than a year for a routine physical exam. These long waits are not due to a shortage of doctors. As the New England Journal of Medicine notes, Massachusetts "has the highest physician-to-population ratio of any state, in primary care as well as overall.” [bold added]
To deal with the wait times, some practices and plans are employing group visits for primary and preventive care. The Boston Globe article just linked found a number of patients and doctors who are quite enthusiastic about the group visits, but for now such visits are voluntary.

As has been shown, long wait times -- a shortage of access to certain health care services -- are not caused by a physical shortage of doctors. Dr. Hsieh writes of one low-income patient who, "called more than two dozen primary care doctors for a checkup. All of them turned her down, leaving her with no choice but to rely on the community free clinic." So, there is no shortage of practicing doctors, but there is a shortage of those physicians willing to offer their services. Why? Let's look again to the economic principles discussed by Reisman:
Price controls also reduce supply, which intensifies the shortages they create.

In the case of anything that must be produced, the quantity supplied falls if a price control makes its production unprofitable or simply of less than average profitability.

It is not necessary that a price control make production unprofitable or insufficiently profitable to all producers in a field. Production will tend to fall as soon as it becomes unprofitable or insufficiently profitable to the highest-cost or marginal producers in the field. These producers begin to go out of business or at least to operate on a smaller scale.
A marginal producer is defined as an "individual producer who is just barely able to remain profitable at current levels of price and production." With the advent of "universal coverage," increased red tape, price controls, and everything else, more and more primary care physicians will fit this definition. Why would someone going into medicine want to live like that if they could go into the relatively unregulated field of plastic surgery, for instance? Economics states that price controls cause a reduction in supply. Dr. Hsieh provides a real-world example highlighting this:
Because of its own rising costs, the [Massachusetts] state government has cut payments to doctors and hospitals. According to family physician Dr. Katherine Atkinson, the state insurance reimbursements often do not cover her expenses: “[E]very time I have a Medicaid patient it’s like handing them a $20 bill when they leave.”

As a result of these rising costs and falling revenues, access to medical care has dwindled for many patients. Fewer doctors are willing to take on new patients for fear of losing even more money.
So far, we have concentrated on the economics of price controls, and assumed that doctors are free agents in the marketplace. Most of the above assumed that the supply of physician services is fully up to the physicians themselves, and that a prospective doctor can pick and choose his specialty at will, practicing medicine where he chooses.

Would Easing Price Controls Be Enough?

Let's switch assumptions for the moment and pretend that government eased price controls somewhat such that primary care doctors could make a profit, but demand was still relatively high for their services and wait times were longer than consumers were happy with. One would think that many doctors, previously discouraged from primary care despite their desire to practice in that field, would move back into primary care.

Not so fast. In a personal email, Dr. Hsieh stressed another significant barrier to the natural workings of the market, saying, "The supply of doctors in general is restricted by the government through medical licensing as well as controls on residency training programs. So unless the government repeals those laws, there's no way for supply to rise to meet demand." (See here and here for more detail about the negative impact of government licensing.)

In a related example, Lapidos concludes her article in Slate with a nearly perfect case of how government intervention in the market -- specifically the attempts at central planning -- wreaks havoc on the actions and plans of rational individuals and institutions responding to the conditions of a free market.
Ironically, just a little more than a decade ago, there was a doctor surplus. In 1996, a committee of the Institute of Medicine warned that the United States had a surfeit of doctors caused by foreign-trained physicians coming here to work and recommended freezing med-school class sizes and limiting first-year residency positions. A year later, Slate ran an article on an alternative strategy for reducing the number of doctors approved by the federal Health Care Financing Administration. Under the Graduate Medical Education Demonstration Project, 41 teaching hospitals received $400 million in exchange for not training between 20 percent and 25 percent of the medical residents they would otherwise have trained over the next six years. [bold added, links dropped]
While she sees the irony in this tragicomedy, Lapidos' article demonstrates that she suffers under the same profound misunderstanding of free markets and government intervention as do the majority. While she sees how poorly this plan worked, she and the Obama administration and nearly all politicians in this country, on both sides of the aisle, take away only the lesson that "if they had just picked the right plan, it would have worked!"

The Right Plan is Freedom

Government planning, in any market, is doomed ultimately to fail. There is no good balance of controls and freedom. The solution is not picking the right government plan, nor is it manipulating the market in the false interests of social justice. The government cannot pick the "right number" of doctors, nor the "right price" for health care services. All such attempts to evade the reality of economics and the individual rights of consumers and producers result in disaster.

The only solution to the "doctor shortage," and the only reform that will respect the rights of all involved, is the total separation of economy and state. Price controls did not work for the gasoline industry in the 1970s and they have not worked in health care. They cause an artificial rise in demand that no amount of supply can satisfy and strongly discourage marginal producers, like primary care doctors, who simply stop producing. Government licensing further distorts the market by keeping free producers from entering the market and practicing medicine in the way they see fit.

Richard Salsman quoted Atlas Shrugged in a 1996 article, [HT: Doug Reich]
Dr. Thomas Hendricks, the brain surgeon...who flees from socialist medicine, explains his choice as follows: "I have often wondered at the smugness with which people assert their right to enslave me, to control my work, to force my will, to violate my conscience, to stifle my mind--yet what is it that they expect to depend on, when they lie on an operating table under my hands? Let them discover the kind of doctors that their system will now produce. Let them discover, in their operating rooms and hospital wards, that it is not safe to place their lives in the hands of a man whose life they have throttled. It is not safe, if he is the sort of man who resents it--and still less safe, if he is the sort who doesn't."
The only solution is to establish the only moral economic system that leaves doctors and patients, producers and consumers, free to trade value for value on an open market without government coercion; laissez-faire capitalism.

(2/5/2010) Welcome OJHS students! Please feel free to post comments and ask questions or request additional resources/links to other relevant sources.


Anonymous said...

I posted this in a separate blog back on March 22nd right after Obama set the pens down. Thought it pertained well to this as well...

NATIONAL HEALTH just voted transatlantic!

I now both work WITH and have been treated BY the UK’s NHS with mixed experience. Great immediate attention from GPs but truly lacking proper number of Specialists. Here a recent wait for an MRI for me dropped from 12 weeks to only two weeks after presenting a private insurance card. Mind you, there is a very big difference between the US & the UK - the US Department of Motor Vehicles is an admitted embarrassment while getting a driver’s licence in the UK was purely professional & pleasant (some surprised?)

Back to healthcare, State-side I remember fondly my US health savings account set up with my employer. There, I was the single-payer for my family and price v value was determined by me every step of the way. There I was part of a market of thousands of fellow healthcare choosers/buyers that naturally pushed value up and prices down. Both regular care & catastrophic care were well covered, while we were responsible for a bridge amount between the two. Unspent money even rolled into other years. Our personal healthy decisions began to pay dividends!

Honest questions then - Will the US Gov’s soon central-planning of their medical industry stifle or expand innovation? Will it decrease or increase quality access or costs? Will it further incentivize excellence & commitment?

All those powerful decisions will now move from the macro-dynamic-nature of mainstreet to the micro-political-power of Washington DC’s K-street. Some have warned … You think your healthcare is expensive now, just wait ‘til it’s FREE!

...This article answers the honest questions & adds a lot of teeth to the arguement.

Expat Al

C. August said...

Thanks for the comment, Al. Glad you got value out of the post.

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