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Why is Medical Care so Expensive?

Mises Daily: Tuesday, August 22, 2006 by

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Medical expenses are rising faster than the costs of any other service. They are climbing at rates that exceed not only those of inflation and dollar depreciation but even the Federal government itself. In fact, they are consuming an ever larger share of personal and national incomes.

Some 40 years ago American medical spending was estimated at 5 percent of national income; today it is calculated at some 16.5 percent and rising continually. Several reform proposals in Congress would boost the share ever higher.

Many observers offer lucid explanations of the medical-spending explosion. Some are convinced that the present generation of Americans, which enjoys a level of income and living standard higher than that of its forebears, is more mindful of health and wholesome living and, therefore, is spending a larger share of income on health care.

But critics prefer to point to the ever growing number of Americans who are overweight or even obese, which may breed physical disorders and afflictions and finally acquire medical attention. Other observers hold the endless stream of medical innovations responsible for rapidly rising health-care costs, such as new drugs and delicate tools for microsurgery. They lay most of the expense explosion at the feet of technology. But these writers never explain why new drugs and new tools should raise medical costs threefold and consume an ever larger share of national income. Technical innovations usually lower the costs of production.

A few writers believe that the primary reason for rapidly rising costs of health care is a massive expansion of medical insurance which foots doctors and hospital bills. They like to use an inordinate terminology that diverts the reader from the actual causes. They broaden the concept of insurance to encompass Medicare and Medicaid, which are government programs providing medical care for the aged and needy, and then hint at insurance as the driving cost factor.

In reality, the number of Americans with health insurance actually is declining; rising health-care costs and a declining number of employer-sponsored benefits are steadily reducing the number of insured Americans. At the present, some 47 million Americans are bereft of any coverage.

Few observers dare to state that spiraling health-care costs are the inevitable consequence of a 1965 Social Security amendment molding Medicare and Medicaid. It provided a basic welfare program that covers most persons aged 65 and older as well as all needy individuals. Soon after its passage some four million patients rushed to seek treatment and some 18 million Americans registered to have 80 percent of doctor and surgeon bills paid by the new system.

By now, in 2006, Medicare provides health benefits for 41 million elderly and disabled persons, and Medicaid, a joint federal-state program, serves some 50 million poor beneficiaries. It is the fastest-growing item in most state budgets and accounts for some 20 percent of total state spending.

The program undoubtedly has saved lives as it has enabled elderly and poor people to receive medical treatment they were not able to afford on their own. It has raised the quality of living for many. But its sponsors completely ignore some undesirable consequences such as the soaring costs and the rising number of people who therefore choose to forego any health insurance coverage.

Surely, it has saved some lives but also may have cost some. It has doubled, tripled, and quadrupled many phases of the health-care industry but also kept other service industries smaller than they would have been in a free service economy. It has helped administrators of hospitals and extended-care facilities to embark upon substantial expansion and has stimulated development of many home-care services. But there cannot be any doubt that the massive injection of political funds and the growing role of legislators and regulators have radically changed the very nature and structure of the health-care industry.

Medicare and Medicaid are political handiwork forged by legislators and regulators, fashioned by politicians who recast it in every national election. It is a very popular political issue passed and argued about without ever being settled. Politicians representing the beneficiaries are demanding ever more outlays, others speaking and acting for the people who are forced to cover the deficits are opposing the charges. Facing ever rising costs, some want to reduce the cost-of living increases in benefits, others plan to increase the wage subject to payroll taxation. In 2005 the benefit-politicians raised the maximum earnings subject to Social Security tax exactions to $90,000 with the tax rate at 12.4 percent, borne equally by employer and employee. In 2006 they raised the maximum to $94,200; in coming years they will boost it to $100,000 and more.

Medicare and Medicaid stand in the center of attention in every national election as both parties may seek to outbid each other in promising more benefits. In 2003 Congress was persuaded to add prescription drug coverage to Medicare, starting in 2006. Most of its costs, estimated at some $700 billion over the next 10 years, are to be paid by taxpayers. But soaring costs are the least portentous consequences of the transformation of the health-care industry.

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This academic observer is dismayed and disheartened by the role played by politics in such an important industry. In a free and unhampered economy businessmen always seek to adjust their production to anticipated consumer demand; the wishes and choices of consumers are paramount. When government takes special interest in an industry, political judgments and motives take preference to the people's choices.

When government on all its levels enters health care, the industry has to adjust to every dollar spent and every order given. Surely, there are pains of readjustment but no particular economic crises. People readily accommodate. While they are not free to choose in the market place, they may plead and supplicate in the halls of politics.

Some courageous observers may even point to needless expenditures and waste as every health-care administrator may want to expand and improve his facilities. After all, they no longer are limited by market orders but only by political considerations and favors.

Politics is likely to shape the future of medical care as far as the eye can see. It builds upon popular political ideas, on old habits and predispositions, even resentment and envy. It inflicts pain without end.


Hans F. Sennholz, Professor Emeritus Grove City College is an Adjunct Scholar of the Mises Institute. See his articles. Comment on the blog.

See also Professor Sennholz's book The Underground Economy (1984), available in PDF. A tribute to Professor Sennholz , by Joseph Salerno, Quarterly Journal of Austrian Economics, Vol. 5, No. 4, dedicated to Hans Sennholz, Austrian Economics Newsletter interview with Hans Sennholz ( PDF), and Lew Rockwell's essay on Sennholz.