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Subsidizing Sickness

Mises Daily: Friday, July 21, 2000 by

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This speech was delivered before the annual convention of the Association of American Physicians and Surgeons, St. Louis, Missouri, October 26, 2000.

Throughout the 19th century, socialist ideology gained ground among intellectuals attempting to revive ancient dreams of a total state that managed every aspect of people's lives. The critics, too, weighed in to explain that socialism has ethical and practical limitations. If you abolish private property, which socialism proposes to do, you abolish economic exchange, which is a source of social peace. In addition, you eliminate the profit motive, which is a major factor in spurring people to work and produce.

The major limitations to this dominant mode of criticism is that it was narrowly focused against the idea of completely eliminating private property. In addition, the 19th century economic criticisms of socialism did not get to the heart of the matter, which is that any attempt to curb the workings of economic exchange forces resources into uneconomic uses. An economy is defined as a system in which human energies and resources are employed toward their most productive purposes. Not only socialism, but all interventions in the free market redirect resources in ways that are counterproductive – away from the voluntary sector of society and into the state sector.

The history of socialist theory is bound up with policies toward the medical marketplace. To control people's access to medical care is to control their very lives, so it is no wonder that this is the goal of every state. In the course of a century we have taken a long march from a largely free system of medical provision to one dominated by unfree programs and mandates.

And yet, I'm sorry to report, the US, despite huge interventions on a scale unimaginable in an era of free markets, remains freer than most places in the world. Privatization of medical provision isn't on the radar screen of the world's politicians, even after manifest failures. Even after the collapse of all-out collectivism in the Soviet Union and Eastern Europe, there has been precious little movement towards reform in the medical sector.

We are a long way from clear thinking on the subject of medical care and the realization that the provision of medical services of every kind is best left to the forces of the market economy and the charitable sector than placed in the hands of the regulating, taxing, intruding state.

Ludwig von Mises was socialism's greatest critic, having written the decisive attack in 1922. His book is usually credited for proving why Soviet-style socialism could never work. But less known is the fact that he attacked the entire panoply of what he called "destructionist" policies, which included the medical policies of the social welfare states in the German-speaking world at the time. Mises has a way of getting to the heart of the matter, so his comments on socialized health insurance apply to our own situation. Reviewers at the time noted his opposition and decried them as the ravings of an extreme classical liberal. If so, I am happy to rave myself.

Allow me to quote his remarks in full:

"To the intellectual champions of social insurance, and to the politicians and statesmen who enacted it, illness and health appeared as two conditions of the human body sharply separated from each other and always recognizable without difficulty or doubt. Any doctor could diagnose the characteristics of 'health.' 'Illness' was a bodily phenomenon which showed itself independently of human will, and was not susceptible to influence by will. There were people who for some reason or other simulated illness, but a doctor could expose the pretense. Only the healthy person was fully efficient. The efficiency of the sick person was lowered according to the gravity and nature of his illness, and the doctor was able, by means of objectively ascertainable physiological tests, to indicate the degree of the reduction of efficiency.

"Now every statement in this theory is false. There is no clearly defined frontier between health and illness. Being ill is not a phenomenon independent of conscious will and of psychic forces working in the subconscious. A man's efficiency is not merely the result of his physical condition; it depends largely on his mind and will. Thus the whole idea of being able to separate, by medical examination, the unfit from the fit and from the malingerers, and those able to work from those unable to work, proves to be untenable. Those who believed that accident and medical insurance could be based on completely effective means of ascertaining illnesses and injuries and their consequences were very much mistaken. The destructionist aspect of accident and health insurance lies above all in the fact that such institutions promote accidents and illness, hinder recovery, and very often create, or at any rate intensify and lengthen, the functional disorders which follow illness or accident.

"Feeling healthy is quite different from being healthy in the medical sense, and a man's ability to work is largely independent of the physiologically ascertainable and measurable performances of his individual organs. The man who does not want to be healthy is not merely a malingerer. He is a sick person. If the will to be well and efficient is weakened, illness and inability to work is caused. By weakening or completely destroying the will to be well and able to work, social insurance creates illness and inability to work; it produces the habit of complaining – which is in itself a neurosis – and neuroses of other kinds. In short, it is an institution which tends to encourage disease, not to say accidents, and to intensify considerably the physical and psychic results of accidents and illnesses. As a social institution it makes a people sick bodily and mentally or at least helps to multiply, lengthen, and intensify disease."

Thus spake Mises. He is observing that there is a moral hazard associated with socialized and subsidized medicine. Because there is no clear line between sickness and health, and where you stand on the continuum is bound up with individual choice, the more medical services are provided by the state as a part of welfare, the more the programs reinforce the conditions that bring about the need to make use of them. This one insight helps explain how socialized medicine takes away the incentive to be healthy, and maximizes the problem of overutilization of resources. Hence, socialized medicine must fail for the same reasons all socialism must fail: it offers no system for rationally allocating resources, and instead promotes overutilization of all resources, ending in bankruptcy.

And now consider the presidential campaign of the year 2000. The most medically dependent group in the country are seniors, who also happen to be, at once, the most government-addicted and financially well-off members of society. Their medical care is largely paid through public dollars. And yet this group is nearly united in the claim that it is not enough. They demand that their drugs be free or at least be as cheap as fruits and vegetables at the grocery store. And the candidates respond not by pointing out the unreality and illegitimacy of their demands, but by competing to see who can provide free drugs more quickly through one or another central plan.

Can anyone doubt that Mises was right, that socialized medicine has led to a sickly frame of mind that has swept and now dominates the culture? The habit of complaining is endemic to this sector of society. Never have so many rich people who have been given so much by government demanded so much more. And the politicians are not pilloried for pandering to them but rewarded to the degree that they can dream up central plans that accommodate the complaining class through ever more freebies.

And when does it stop? When the coffers run dry. Until then, the subsidies work to distort the market and distort people's sense of themselves. And no one has pointed out during this presidential campaign what this program would mean for drug manufacturers. It would essentially nationalize them by mandating that they work first for the government that is subsidizing drug purchases and only second for the consumer. But this is the path that all steps toward socialized medicine take: instead of physicians and patients engaging in cooperative exchange, we get government standing between them and dictating medical care.

Now, it is sometimes said that medical care is too important to be left to the market, and that it is immoral to profit from the illnesses of others. I say medical care is too important to be left to the failed central plans of the political class. And as for profiting from providing medical care, we can never be reminded enough that in a free society, a profit is a signal that valuable services are being rendered to people on a voluntary basis. Profits are merely a by-product of a system of private property and freedom of exchange, two conditions which are the foundation of an innovative and responsive medical sector.

In the recent century, however, these institutions have been attacked and subverted at every level. In the medical-care market, the process began in the late 19th century with the policies of Germany's Otto von Bismarck, who sought a third way between the old liberalism and communism. As the originator of national socialism designed to foil international socialism, he claimed credit for being the first to establish a national health care system – thus adopting the very socialism he claimed to be combating.

Politicians ever since have followed this lead, continuing with Emperor Francis Joseph of Austria-Hungary, William II of Germany, Nicholas II of Russia, Lenin, Stalin, Salazar of Portugal, Mussolini of Italy, Franco in Spain, Yoshihito and Hirohito of Japan, Joseph Vargas of Brazil, Juan Peron of Argentina, Hitler, and FDR. What a list! As individuals, most have been discredited and decried as dictators. But their medical care policies are still seen as the very soul of compassionate public policy, to be expanded and mandated, world without end.

In each case, the national leader advertised the importance of centralized medical welfare for the health of the nation. But what was always more important was the fact that such policies reward the politicians and parties in power with additional control over the people, while dragging the medical profession – an important and independent sector that is potentially a great bulwark against state power – into a government system of command and control.

Before coming to power, Hitler's party, for example, made statements condemning socialized medicine and compulsory social insurance as a conspiracy to soften German manhood. But once in power, they saw the advantages of the very programs they condemned. As Melchoir Palyi argued, Hitler saw that the system was actually a great means of political demagoguery, a bastion of bureaucratic power, an instrument of regimentation, and a reservoir from which to draw jobs for political favorites. By 1939, Hitler had extended the system of compulsory insurance to small business and tightened the system in Austria. One of his last acts in 1945 was to include workers from irregular types of employment in the system, socializing medical care even in his last days.

After the war, the Social Democratic Party charged with de-Nazification immediately expanded his system to further centralize the medical sector. On the medical care front, Hitler may yet achieve his 1,000-year Reich.

The Soviet Union adopted a more radical course. This was the first country to adopt all-round socialized medical care – the dream of the Democratic Party in this country. In 1919, Lenin signed a decree that said every Soviet citizen had a right to free medical care. By 1977, this right had dramatically expanded to become the right to health itself – language now regularly employed by US politicians.

In the in-between years, the Soviet Union became host to one of the most backward, murderous, and coercive systems of medical provision ever concocted. The country trained more doctors than any in the world, but the vital statistics showed a more complete picture. Lifespans averaged 10 to 20 years less than in western countries. Infant mortality was twice as high. By the time of the collapse of socialism, 80 million people were said to have chronic illnesses, and up to 68 percent of the public was health-deficient by international standards. Mental retardation afflicted nearly a quarter of the children – a consequence of serious deprivation.

It was impossible for ordinary people to have access to decent drugs. Stores carried only the most primitive medicines. However, the country was flooded with penicillin, as ordered in the central plan, a plan which was not altered even after the citizens became resistant to it. The hospitals housed 12 to 16 patients per room. More than a third of rural hospitals had no running water. Syringes were reused an average of 1,000 times. To keep up with the planned death rate, hospitals routinely threw people out before they died so that the hospital wouldn't go beyond its quota.

Of course most real care went underground, where bribing for anaesthesia was common. Former Soviet economist Yuri N. Maltsev points out that this method was even used in the case of abortion, which was the most common surgical procedure in the Soviet Union. After Maltsev emigrated to the US, he was astonished to see that the US was adopting many of the principles that drove the old Soviet system. But in the US, it is not called socialism or communism. It is called insurance.

All Western systems have been based on a deeply flawed notion of insurance. After Hillary's outrageous medical plan came out in 1993, I appeared on panels at National Review and the Claremont Institute on the subject, and explained what insurance is and what it is not. Hillary's plan was not insurance. It was regimentation through welfare. Other panelists were aghast that I was criticizing not just Hillary's plan but the very principle of government insurance, dating back to Bismarck. So that we are not confused, let me explain.

The world is full of risks, among which are those that are inherent in the nature of things, and those which can be increased or decreased according to human will. The risks against which you can insure yourself are those over which you can have no control. You can't stop a hurricane from destroying your house. The chances of this happening are random. Hence you can be protected against losses through insurance with reasonable rates, set according to the risk factor. If you take actions that bring about the destruction of yourself and try to collect, however, you are committing insurance fraud. That is because outcomes that can be directly controlled are not random and thus are not insurable.

The risk of getting sick combines random and nonrandom variables. Catastrophic illnesses can be randomly distributed and thus insured against. But routine maintenance follows many predictable lines that must be reflected in premiums. The most cost-effective way to pay for medical care is the same way car maintenance is paid for: a fee for service. In a free market, this would be the dominant way medical care is funded. Prices would be aboveboard and competitive, and there would be a range of quality available for everyone. There would be no moral hazard. This was largely the system before the Blues, of course.

What is called health insurance in the US consists of two types: one provided by employers in which the insurer is not permitted to discriminate too severely in light of individual risks. The other is not insurance at all but a straight-out welfare payment mandated by the state: this is Medicare, Medicaid, and the huge range of programs delivering aid to individuals. None has much to do with a free-market provision of medical services.

As a result, the consumer has fewer rights than ever. Physicians are caught up in an awful web of regulations and mandates. Business is saddled with huge burdens that have nothing to do with satisfying consumer demands. And innovation is limited by an array of penalties, subsidies, and regulations. The failures of the present system create constant pressure for ever more legislation that further socializes the system, which produces more failure and so on and so on.

For the most part in the US, the long march toward medical socialism has taken the path of least political resistance. Public outrage at the Hillary Clinton health-plan of 1993 was a beautiful thing to behold, and with the help of the Association of American Physicians and Surgeons (AAPS), this outrage forced the administration to back down. But in the meantime, the regulatory state has taken steps toward imposing some of the mandates Hillary favored.

In some ways, the Republicans are as bad as the Democrats. For instance, throughout the 1990s the GOP has backed legislation that can best be described as Hillary-lite, complete with restrictions on the ability of insurers to discriminate, premium caps on some groups, penalties for noncompliance, mandatory portability, and on and on. As bad as the legislation passed in the 1990s has been, we can be thankful that gridlock prevented a comprehensive plan from passing.

Government intervention in the US medical market began in the late 19th century, first in form of government regulations on medical schools. No one dreamed where this would eventually lead. Moreover, no one would have thought to call such interventions a species of socialism. Socialism, it was believed, was Plato. It was Marx. It was not the American Medical Association. The AMA is about insuring quality, not equalizing wealth or expropriating the expropriators.

In fact, the empowerment of this physician cartel was the original sin of American medicine. Through its ability to limit supply and outlaw competition, organized medicine has punished its customers, although the word is never used so as to disguise what is, after all, an economic relationship.

Competition among providers leads to rational pricing and maximum consumer choice. But this is exactly what the AMA has always sought to prevent. The AMA, organized in New York City in 1848, advanced two seemingly innocent propositions in its early days: that all doctors should have a "suitable education" and that a "uniform elevated standard of requirements for the degree of MD should be adopted by all medical schools in the US." These were part of the AMA's real program, which was openly discussed at its conventions and in the medical journals: to secure a government-enforced medical monopoly and high incomes for mainstream doctors.

Membership in the new organization was open only to "regular" physicians, whose therapies were based on the "best system of physiology and pathology, as taught in the best schools in Europe and America." Emphatically not included among the "best" were the homeopaths. How the "regulars" came to crush the homeopaths and other competitors, and penalize patients in the process, is a story of deception and manipulation, of industry self-interest and state power. The organization knew it needed more than persuasion to secure a monopoly, so it also called for a national bureau of medicine to oversee state licensing and other regulations.

In those limited-government days, however, the idea went nowhere. But in the statist Progressive Era after the turn of the century, anticompetitive measures became respectable, and the AMA renewed its drive for a cartel, spurred on by the popularity of self-medication and the increasing number of medical schools and doctors. Then the AMA's secretary N.P. Colwell helped plan (and some say write) the famous 1910 report by Abraham Flexner. Flexner, the owner of a bankrupt prep school, had the good fortune to have a brother, Simon, who was director of the Rockefeller Institute for Medical Research.

At his brother's suggestion, Abraham Flexner was hired by the Rockefeller-allied Carnegie Foundation so that the report would not be seen as a Rockefeller initiative. AMA-dominated state medical boards ruled that in order to practice medicine, a doctor had to graduate from an approved school. Post-Flexner, a school could not be approved if it taught alternative therapies, didn't restrict the number of students, or made profits based on student fees.

The Flexner Report was more than an attack on free competition funded by special interests. It was also a fraud. For example, Flexner claimed to have thoroughly investigated 69 schools in 90 days, and he sent prepublication copies of his report to the favored schools for their revisions. So we can see that using lies to advance political goals long predated the Gore campaign.

With its monopoly, the AMA sought to fix prices. Early on, the AMA had come to the conclusion that it was "unethical" for the consumer to have any say over what he paid. Common prices were transmuted into professional "fees," and the AMA sought to make them uniform across the profession. Lowering fees and advertising them were the worst violations of medical ethics and were made illegal. When fees were raised across the board, as they frequently could be with decreased competition, it was done in secret.

Then there was the problem of pharmacists selling drugs without a doctor's prescription. This was denounced as "therapeutic nihilism" and the American Pharmaceutical Association, controlled by the AMA, tried to stamp out this low-cost, in-demand practice. In nearly every state, the AMA secured laws that made it illegal for patients to seek treatment from a pharmacist. But still common were pharmacists who refilled prescriptions at customer request. The AMA lobbied to make this illegal, too, but most state legislatures wouldn't go along with this because of constituent pressure. The AMA got its way through the federal government, of course.

By the end of the Progressive Era, the AMA had triumphed over all of its competitors. Through the use of government power, it had come to control education, licensure, treatment, and price. Later it outcompeted fraternal medical insurance with the state-privileged and subsidized Blue Cross and Blue Shield. The AMA-dominated Blues, in addition to other benefits, gave us the egalitarian notion of "community rating," under which everyone pays the same price no matter what his condition.

The rest of the story wrote itself. A cartelized profession is one that is easier to control and nationalize. Thus the New Deal brought us massive national subsidies. The Great Society brought us the disastrous welfare systems of Medicare and Medicaid. There were also the HMO subsidies from the Nixon administration's monstrous Health Care Financing Administration. The employer-mandates that make life so difficult for small business and led to the creation of more HMOs resulted from the lobbying of large corporations wanting to impose higher costs on their competitors, and labor unions attempting to cartelize the labor force and keep out low-price labor services.

And today, both major parties say all this apparatus is wonderful and should be protected and expanded until the end of time. It is true that there are some wonderful efforts afoot to resist further socialization of medical care. But there are no active political movements alive that are making any progress toward a fully free market in medicine, toward a full de-Nazification, a complete de-Sovietization, and a total de-AMAization.

What kind of program should we adopt?

Several years ago, in the midst of the early 1990s medical care battles, UNLV economist Hans-Hermann Hoppe developed a plan that is extreme in its simplicity and radical in its implication. Let me present that plan to you today.

1. Eliminate all licensing requirements for medical schools, hospitals, pharmacies, and medical doctors and other medical-care personnel. This would cause the supply to increase. Prices would fall, and a greater variety of medical care services would appear on the market, many provided the way they are now but others provided through innovative new techniques. Many underground treatments would appear above ground.

And, yes, quackery would thrive. But as with other professions, competing voluntary accreditation agencies would take the place of compulsory government licensing, because consumers care about reputation, and are willing to pay for it. Consumers can make discriminating medical care choices, just as they make discriminating choices in every other market.

2. Eliminate all government restrictions on the production and sale of pharmaceutical products and medical devices. This means no more Food and Drug Administration, which presently hinders innovation and increases costs. Costs and prices would fall, and a wider variety of better products would reach the market sooner, particularly through online delivery sources. The market would force consumers to act in accordance with the market's risk assessment. And competing drug and device manufacturers and sellers, to safeguard against product liability suits as much as to attract customers, would provide increasingly better product descriptions and guarantees.

3. Deregulate the medical insurance industry. A person's health or lack of health lies increasingly within his own control, thanks to the proliferation of health information. Instead of subsidizing uninsurable risks, "insurance" would involve the pooling of individual risks. "Winners" and "losers" are distributed randomly. There would be unrestricted freedom of contract: a health insurer would be free to offer any contract whatsoever, to include or exclude any risk, and to discriminate among any groups of individuals. On average, prices would drastically fall, and the reform would restore individual responsibility in medical care.

Also, patients would be free to sign contracts with their doctors agreeing not to sue except in the case of real negligence, and never for a less-than-happy outcome.

4. Eliminate all subsidies to the sick or unhealthy. As Mises said, subsidies create more of whatever is being subsidized. Subsidies for the ill and diseased breed illness and disease, and promote carelessness, indigence, and dependency. If we eliminate them, we would strengthen the will to live healthy lives, and to work for a living. In the first instance, that means abolishing Medicare and Medicaid. Because medicine is an economic service, rules of demand and supply apply to it as they do to everything else.

So long as those choices are made in an unhampered market, and as long as people needing medical care can freely choose among alternatives, the system will work as smoothly as any other market. The so-called crisis in medicine stems not from any peculiarities in the service itself but rather in the way that politicians have decided that medical care will both be produced and distributed.

We need to reject the principles that drive socialized medicine. These include the ideas of equality and universal service as mandated by the state, as well as the view that it is the responsibility of business and not that of the individual to pay the costs of medical care. Above all, we need to get beyond this idea that medical care is a right. It is not. It is service like any other.

What about those who cannot afford much needed services? During the campaign, George W. had finished his speech and a hand shot up from a young lady who proceeded to complain that she could not afford a special device that would permit her to overcome her visual disability. Still relatively new to the campaign trail, Bush asked her how much the device would cost. She responded that it would cost about $400. W. then asked for someone in the audience to help this girl with the expenses, and in a few minutes, there was enough money pledged to make it possible for the girl to purchase the device.

The national press hooted and howled at the incident. They claimed that he missed the point, which was not to provide for the girl's particular need but rather to develop a national plan using the girl as a political prop. Actually, I liked Bush's idea better. He was suggesting that the girl had no natural right to the device. He believed it ought to be provided in the way all such luxuries are provided in a free market – through purchase or charity.

The Future

Judging from his more recent behavior, I don't believe we are justified in being optimistic about his plans for medical care. Neither do I believe that there is much hope in reforms that pretend to use market principles to better distribute medical care in the present system. Realistically, the best we can hope for is legislative gridlock, based on the principle that, first, do no more harm. To live by this principle means that you must ignore the partisan slogans that dominate the rhetoric of any proposed reform. Instead, you must live by this rule: carefully read any legislation before you offer your support.

Quite often some reforms sound great in principle – and I'm thinking here of gimmicks like educational vouchers and social security privatization – but once you look at the details, you find that the legislation would make the present system even worse. This was the case with the Republican health bill of the mid 1990s, which the AAPS fought so valiantly. I have no doubt the same is true of various proposals for Medical Savings Accounts. The power elite love nothing better than to turn a good reform idea into a cover for an increase in state power. Keep a watchful eye, and never believe the rhetoric until you see the bill itself.

So, yes, I am pessimistic about the legislative process. However, in the long term, I am cautiously optimistic about our overall situation. The exploding power of the market economy, and its ability to outrun and outperform the planners, is as evident in medical care as in every other industry. We've already begun to see the way in which the web has presented serious challenges to conventional forms of medical-care delivery.

The future will offer other opportunities. And we should seize each one, on the principle that all forms of welfare and state regulation deserve to be tossed in the dustbin of history along with the ideological system that gave them birth.

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Lew Rockwell is president of the Mises Institute and editor of LewRockwell.com. Rockwell@mises.org. See his Lew's Columns on Mises.org.