The Road to Serfdom
By Friedrich A. Hayek
Quote from the condensed version as it appeared in the April 1945 edition of Reader's Digest
 
"There is no reason why, in a society which has reached the general level of wealth ours has, (the certainty of a given minimum of sustenance) should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision."

"The Road to Serfdom," the work of Nobel Laureate F. A. Hayek, has been one of the most influential books of the last century. It has been an inspiration to those who are opposed to socialism and who support free markets and libertarianism. And yet, Hayek has no objection to people organizing, as a matter of expediency, comprehensive systems of social insurance that rely on state taxes for their support rather than markets. Think of Social Secuity, Medicare, Medicaid.

I think you and Hayek have a different idea of what constitutes a "minimum" level of services provided by the government.

Furthermore, his point remains that competitive systems work better, not only because of a more efficient allocation of resources, but because of the insidious nature of government involvement in prices. When the government promises to pay for goods, inevitably it will begin to worry about controlling the price. As prices are controlled, other market actors are not able to make decisions about where to invest their time and resources. Eventually the system becomes more and more centrally planned, until there is little freedom left in the market. At that point you are relying on privilege and other political considerations for your health care.

This is why people are concerned about government-run health care.

I think you and Hayek might disagree with what constitutes "comprehensive systems of social insurance that rely on state taxes for their support rather than markets."

I discuss issues of economic theory with my younger brother who has a PhD In Economics. I have a degree in Philosophy.

Suffice it to say that modern markets do not exist ab initio. They are, in fact, heavily reliant on governments, i.e. the force of law and the use of force, for the protection of their property rights.

I too appreciate the writings of Hayek and Friedman but also of Galbraith and Keynes.. Surely, life is a question of balance.

Speaking to your concern for getting the government out of the market. If we want to get the government out of business, we will have to get businessmen out of the government lest our elected officials remain proxies for corporate interests and government remains a tool for corporate initiatives..

Lastly,

Capitalism should never be represented as a panacea for all human need. We don't want them owning our water... etc.

Currently, the recent collapse of the market tested market theories of deregulation. Likewise, the road we are on as regards health care is unsustainable and the theory of market efficiency is again being seriously tested in large part because the business model of health insurance companies is contrary to the needs of their clients and because "health care can't be marketed like bread or TV's."

Read our lastest Economics Noble Prize winner:

http://krugman.blogs.nytimes.com/2009/07/25/why-markets-cant-cure-healthcare/

Thank you for your intelligent response. I think what we can all agree on is that health care is currently NOT a free market. I mentioned the AMA and various state mandates for health insurance. And the issue of Medicare underpaying is real and causes costs to go up in the private market.

Krugman is way off in outer space with that column. He completely ignores the main reason why the market for health care has such high costs and poor results: 3rd party payers. This in turn is caused by the tax treatment of employer-based health coverage. Therefore, the solution is to either re-tax employer health benefits or completely exempt personal health spending. Unfortunately the current reform proposals do nothing to address this.

Hello again Mark O :)

The idea that 3rd party payers are the cause of rising health care costs (I'm thinking of Dr. Ron Paul whom I like very much) fails to distinguish between sufficient cause and necessary cause. Dr. Paul is right to note that health insurance companies are a necessary cause of rising health insurance rates. However, by themselves, they are not sufficient to cause the rise in overall health care spending.

Dr. Paul's argument is part and parcel to the argument of moral hazard which has been debunked in as much people don't get liver transplants because the cost to them has dropped to zero.

Every year my health insurance rates go up by over 15% on average and I'm as healthy as an ox. And every year my insurance company explains the increase is do to "the increasing cost of medical technology, the increase in claims, etc.." There is never any mention of Wall Street profits, or physicians fees.

The simple answer to why prices are rising in health care, pharmaceuticals, and health insurance was best put by  David Blumenthal M.D., director of the Institute for Health Policy at Massachusetts General Hospital, "We have high prices because people can get away with charging them. In our pluralistic system, no single purchaser has the market power or political authority to impose cost controls"

Mark O,

Do you mean to say we should "completely exempt personal health spending," including the cost of health insurance?

We could do a lot of things.. For instance, we could put a small state tax on over-the-counter drugs and use the proceeds to pay for the high cost of biologics and other expensive drug therapies.

I wonder, won't there come a day in which advances in nanotech, robotics, genetics, and information processing ultimately make modern medicine seem brutish? And won't the cost of health care be driven down, not unlike computers and LCD televisions? Maybe we have DARPA working on the wrong projects.

Zeus—

Since you have now posted the same comment twice verbatim, I figured I would address your questions in the hopes you will vary your verbiage – say, by even remotely addressing the discussion in the comments section you happen to post in.  For the rest of you, I apologize for the stunning breach of netiquette in including a comment this long.

You make a lot of great recommendations on way we can address costs in the health care system.  They’re so good, in fact, that a majority ARE IN THE BILL.

Zeus writes, “It does not fundamentally and realistically address how doctors and hospitals are reimbursed.”

Please read the entirety of Section C (Sections 1151 and beyond), which is devoted to this topic.

You will find:
•    Changing the reimbursement structure for hospitals with abnormally high readmission rates for its geographic area.  No matter will it be “as many admissions as you like” under Medicare, particularly when the patient is discharged with a treatable illness.
•    A bundling program for post-acute care:  paying for “episodes of care” rather than per service.
•    Bonus payments that reward quantity of care, not just quantity of care (Sec. 1162)
•

You will find for Medicaid:
•    Increasing test programs for the medical home model which has so successfully cut costs when implemented with Medicaid patients in North Carolina. (Sec. 1722)  Medical homes use a combination of captitated payments and bonuses for quality so long as the practice establishes transparency (i.e., isn’t denying care to line its own pockets.)
•    New requirements to cover preventative services, not just primary care. (Sec. 1711)
All of the above will recalibrate existing public spending, in most cases away from fee-for-service and towards primary care.

Zeus writes, “It does not address that doctors will still be allowed to own hospitals and expensive testing centers such as MRI facilities to which they then refer their own patients.”

Actually, it does.  Sec. 1156 specifically requires hospitals and physicians to report their relationships, particularly where a physician is owner or part-owner.  Self-referrals are then prohibited in Medicare, with only a few exceptions (usually in rural areas or areas of scarcity – but those exceptions have to be applied for.)

Zeus writes, “It does not address replenishing the ranks of the dying breed of general practitioners. The increase in physicians seeking more income and becoming specialists has increased dramatically over the last 20 years and has driven up the total cost of care.”

It is indeed, a big problem -- one we discuss frequently on this blog.  Which is why the bill contains sec. 2201 for more funding for the National Health Service Corps (loan repayment for guaranteed physician years as primary care or general surgery, particularly in areas of need.)  It contains sec. 2212 for a new program to repay student loans for primary care.  It contains sec. 2213-2215 with a host of investments to ramp up the training of physicians and other providers in family medicine, general internal medicine, general pediatrics, geriatrics, physician assistants, public health dentists, dental hygienists, and community health physicians.

You will also find dramatic increases in primary care reimbursement under Medicaid, which lagged behind even Medicare.  (Sec. 1721)

Finally, much of this work has begun outside of health care reform.  The Centers for Medicare and Medicaid studies has already begun implementing rules, that are not subject to legislation (unless Congress moves to block them) which will decrease compensation for most consultative and imaging specialists so that it can increase primary care providers.  This includes – you’ll love this – decreasing compensation of MRIs, CT Scans and other imaging equipment.  So not everything has to be done in the bill – a lot can and will be done within the Department of Health and Human Services.

Zeus writes,  “It does not address medical liability limits.”

I’ll concede this.  I’ll note, however, that the party that always proclaims medical liability needs to be addressed has opted to sit this bill out entirely.  It’s not unreasonable to imagine that if John Boehner went to Steny Hoyer and said, “We’re largely going to vote against your bill in a unified block.  But we’ll allow half-a-dozen moderate Republicans to ‘vote their conscience’ and give you the tiniest scrap of bipartisanship on one non-negotiable condition – you do XYZ on tort reform”  that Steny Hoyer would ever say no.

Zeus writes, “It does not adequately address the impact of 10 to 20 million undocumented workers on the health care system – this demographic group is even exempted from having to pay for coverage though they represent about 25% of the number reported as uninsured.”

They are also prevented from taking advantage of any of the benefits of health care reform, including subsidies, Medicare, Medicaid, SCHIP, the public option or any other public program.  You claim its political expediency to exempt them from an individual mandate.  Shutting an estimated 8 million people out of our universal health care system – and ticking off the millions of legal residents -- doesn’t seem expedient to winning a constituency to me.

Still, I curiously agree.  It is a great loss that undocumented workers are not covered by this bill and instead must be uncompensated care for hospitals and providers – a drain on our health care system worth tens of billions of dollars each year.

Zeus writes, “It does not address the weight epidemic.”

Tell you what – you come up with a solution other than giving people more access to prevention and wellness programs (sec. 3111 and following), and we’ll lobby to get it in there.  This is an area where you can lead a horse to water, but we haven’t yet figured out how to get it to drink light beer instead of Budweiser.  The Japanese have tackled this with mandatory waistline measurements in the workplace – I don’t think we want to go there.

Zeus writes, “It does not address limits on treatment. Yes, I will go there. Should in vitro fertilization be covered, as it is required in many state mandates, or should it be personal? Should $1 million courses of treatments be undertaken when the likelihood of success is less than 10% or the survival rate is a year or less?”

Comparative effectiveness research (sec. 1401) has been labeled the slippery slope to rationing from those who oppose this bill.  I don’t believe it’s that extreme, but the more of this research we do, the better equipped we’ll be to have doctors and patients answer question #2 for themselves in a private, well-informed manner.

Zeus writes, “It does not create a market-based solution in that it sets the federal government up to be both a competitor and the regulator.”

It’s fascinating to me that you spend so much time on reducing costs and bending the curve, and yet then move to discount the public option.  We know from the CBO estimate it will only cover 10-15 million people – hardly a situation in which private insurance will be driven under.  We also know that a health care reform package like HR 3200 containing a public option will cost $150 billion less over 10 years than one that does not contain a public option.  That’s the CBO’s estimate, not mine.  And yet you want to pass up those savings?

Indeed, here’s the big problem with HR 3200.  All of the above cost savings that you suggest and which the bill implements are only in Medicare, Medicaid and SCHIP.  The 160 million Americans in private insurance will indeed be stuck with the same old fee-for-service, the same old self-referrals, the same old unbalanced payment for primary and specialty care, etc. etc. ad nauseum.  The best chance to get private insurance to change their ways and adapt in ways that will lower costs is a.) regulate them to do so [and I can hear the howls of future protest now] or b.) introduce a competitor which will vie for customers along these lines. 
It is the perils of saying, “If you like what you have, you can keep it” and starting with the strengthening of employer-based insurance – which, to get back to the point of this blog post – is the direct result of political pandering to make health reform seem less “scary” and the intense lobbying of insurance companies like UnitedHealth.

So by my counting, it satisfies 5 of your 8 ideas for cost-savings in the system.  Not perfect.  Plenty good.

Now would it be so much for you to ask not to just cut and paste the same comment again, for the love of, well, Zeus?

"The best chance to get private insurance to change their ways and adapt in ways that will lower costs is a.) regulate them to do so [and I can hear the howls of future protest now] or b.) introduce a competitor which will vie for customers along these lines."

That sounds a little far fetched. I don't think you need to do either of these things. Check out the different scenarios under the Patients' Choice Act:

http://coburn.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=4a017cfc-f5b6-49e5-9bc6-ddbbf125823b

I've written about it at great length.  (Possibly more than most).

http://healthcare.change.org/blog/view/the_multiple_personalities_of_the_patients_choice_act

http://healthcare.change.org/blog/view/does_the_patients_choice_act_really_solve_anything_for_medicaid

And actually, the main behavioral change in the Patient's Choice Act is not just market competition but new government regulations.

The ideal solution would be repealing most regulations that have already been passed, as well as eliminating the tax exemption on employer-based health plans. Barring that, the PCA is a voluntary system which promotes competition, and fixes Medicare. I say give that a try for five years before introducing such radical reforms as HR 3200.

We do disagree on how well HR 3200 addresses the points I raised (at least until the very end of your post). I will self edit to five responses.

1. Do you believe that a 5% to 10% bonus will draw medical students into general practice when the earnings of a specialist is 200% - 1000+% more than a PCP? I dont. What needs to happen here is that fundamental change on how many specialists are allowed into practice so that a requisite number are directed to primary care. But would the AMA allow this and still supply their blessing? No. 

2. The savings you identify on the cost curve side are not “fundamental” or material (“post-acute”, “re-admission”, “Medicare only”, etc.). In my opinion they are low impact changes feathered around the edges of the current delivery model. As a matter of fact the CBO identifies $20 billion annually more in physician payments (1123, 1124, 1125, 1158, 1194, 1302, 1303, 1309). So like all things government this is a transfer payment from hospitals who have a less effective lobby) to physicians. 

3. On the demand curve side, those who are overweight or smoke add about 20% (and rising) to the national health care bill simply because of their lifestyle choice. Those whose choices drive up the cost of care should pay more or be excluded from the subsidized part of the program. This legislation does not address this. Another example. Those who do not take their prescribed medication are not penalized even if they often drive up the cost of their care in doing so. Lifestyle choice is an area where a lot of savings (or incremental premiums) are available and the legislation is moot on this very important point. Remember, this is 20%+ of the cost in the system. I also believe that patients in any subsidized program should be mandated to use a primary care physician to control costs since the American taxpayer is paying a majority of these bills. If someone wants to opt out of their PCP recommendation, they do so at their own or increased co-pay cost. Real reform should include changes required of the general American population, not just wealthier tax payers, providers, and insurers.  But it seems that we have developed an entitlement culture and we do not have the courage to ask as much from the beneficiaries of our programs as we are from everyone else. We are afraid to assign individual accountability any more and this bill is living proof.  Japan had the right answer - personal accountability for expensive lifestyle choices.       

4. Doctors will still be allowed to own shares in testing centers and hospitals, and to refer patients to the facilities in which they hold an equity share for a majority of their patients.

5. Undocumented workers will receive the same care they do today at no additional cost to them in this legislation, thus they will continue to have the same, and then expanding, negative effect on the system as they do today. Solution? Render only enough care in life threatening or acute situations to stabilize the patient and then deport the undocumented worker back to their country of origin for follow up and chronic care. Or require employers to register undocumented workers for health care premium payments at the same they are being registered for Social Security payments and decuct these "acute care" premiums.         

Tim, why did you spend so much time countering my points and then come clean only at the end of your post about how the proposed legislation  indeed is at best partial since it does not address about 60% of the population?  I may have posted similar text on two blogs, but at least I have been genuine.       

Bottom line. I do not believe HR 3200 is reform. Nor are it framers honest about the primary objective being cost reduction. It is about federalization in the end game, whether intentional or not, because a regulator cannot also be a fair competitor. Never will happen. And I personally do not trust the government to administer health care since our Congressmen and Chief Executives have, over decades and many administrations, deformed and then destroyed the financial integrity of social programs such as Social Security. If most people even began to understand how that fund has been plundered to pay current bills and issued IOUs that when cashed will spell near disaster for us monterarily there would be outrage. If our delegated leaders in D.C. cannot manage a trust fund, how can I trust them to administer health care?

I don't believe I have been disingenuous.  [Edited -- I was rushing] 40% of the health care market is substantial leverage to enact some change.  Do I wish it went further, even on the points where it does address your issues?  Of course.  But your initial post point-by-point used a phrase along the lines of "It does not address."  That was, simply, incorrect.

If you now wish to change it to, "It does not address enough," or "It does address but in a way that's inferior to XYZ", you should feel free. 

Timothy, your counterpoints only address at most 40%, sometimes less than 1%, and nowhere near 60%. I read your response read to be like " here at Government Motors we have this great SUV that can fit 12 people, can tow 5000 lbs, and gets 40 mpg - that is until you drive it".

How does a public plan keep insurance companies honest? I thought the health care bill pretty much mandates that they take all patients regardless of condition and not drop any sick patients. Is that what is meant by 'honest'? Because it seems the regulations accomplish that without a public option.

More to the point, I don't see why people should be afraid of having more choices in the market for health care. Part of the reason insurance is so expensive is due to regulations in place. I'm not too keen on simply mandating that an insurance company act more like an HMO; nobody likes HMO's. I'd prefer that the market transform into one where the majority of costs are routine and borne out of pocket, and everyone can afford catastrophic coverage for a small premium. In the case of pre-existing conditions, the government can help subsidize this "market failure" and I would not be too upset.

But simply treating everyone as the responsibility of the government will only lead to higher costs and more dependency on the government. Eventually this will lead to rationing when the money runs out.

Let me rephrase that last comment, it was a little confusing. State mandates for health insurance = fewer choices for customers and higher costs. If there were fewer regulations, there would be a greater variety of health insurance plans and they would be better tailored to individuals for a lower cost.

Meanwhile, a mandate to cover pre-existing conditions turns the insurance model into an HMO model. This is basically the model we have with employer-based coverage, since everyone is pooled in their employer's plan. The last few decades have shown this model to be unsustainable.

So the solution is not to mandate any company take anyone, but to shake up the market so people are more in control of their health care choices. Hospitals and doctors would start posting prices in response to the new market conditions.

I know people are afraid of the market but the current participants are acting completely rationally considering the constraints placed by the government and the legacy of 3rd party payment. I have heard that the tax exemption for employer-based plans is about $250 billion per year, essentially a subsidy which mainly goes to the middle- and upper-classes. I say, remove the exemption and use it to balance the budget and fix entitlements.

Which reminds me: Why isn't anyone trying to fix Medicare first before creating a huge new boondoggle? I assume the tax hike will come after re-election?

Now your sounding more like our friend John McCain, my second fovority Republican, next to Ron Paul..

Get back to you later. I'm off to the drug store to get a prescription. ;-)

Suffice it to say, I have a health insurance plan predicated on the new consumer driven model of health insurance championed by the Cato Institute. My rates are still going up too high to afford them in the near future. (I do like the tax deduction though) ;-)

Mark O said,

"If there were fewer regulations, there would be a greater variety of health insurance plans and they would be better tailored to individuals for a lower cost."

Tailored to the individuals genetic profile no doubt..

Then the LORD said to Cain, "Where is your brother Abel?" "I don't know," he replied. "Am I my brother's keeper?"

All are mortal. All get ill, and no one can foretell the future. Why not cease this gambling game with the insurance companies? How about everyone pays according to their income? Everyone pays a little more when they're young and healthy to pay a lot less when they're old and infirm.

There are several possibilities when it comes to fixing things. The choices we make will reflect both our heads and our hearts.

Life is hard. Resources are limited. There is no such thing as a free lunch.

Without markets there is no price signal. Doctors won't know which fields are high in demand, or how to budget their time and resources effectively. Suppliers will make bad investments and there will be oversupply here and shortage there.

So from a purely economic perspective, it does not make sense for the government to be the single payer, as that will eliminate the price signal and lead to inefficiencies and ultimately death. You may wonder how other countries are able to provide universal medical care without the free market. I suspect that United States medical advancements and prices form the basis of what those other systems do. In many real ways they are benefiting from our (mostly) free market for health care.

Philosophically, there is no right to health care either. If a state wants to provide universal coverage they can try, but the federal government is supposed to have limited and enumerated powers.

"Philosophically, there is no right to health care either."

I've said so much myself elsewhere. The same goes goes for life, liberty, and the pursuit of happiness. Just pretty words on a page. I tie rights to responsibilities and contracts .. One for instance can have a "social contract" where you have a right to utilize a thing because your taxes pay for it.

There is no evidence that Single Payer (which leaves doctors, hospitals, medical suppliers, and so on, independent) would disable market mechanisms.

Britain's NHS was an entirely socialized system up until recent reforms that have been a double edged sword.

Many more wealthy Britons now have some form of supplemental private health coverage. However, access to private specialists is controlled by NHS general practitioners.

NHS has recruted thousands more doctors and nurses (many from overseas, leading to charges of inadequate domestic training,) it has built hospitals with the private sector, revamped hospital funding, and encouraging competition between NHS hospitals for patients.

NHS doctors are not all happy with new recruitment and promotion rules. Some GPs are nervous about plans to open surgeries on weekends. Nurses want more pay.

The British people are still in love with the NHS.

As might be expected, most the wrangling about reform and all its troubles is between the government factions and doctors.

Sounds like a lot of problems the NHS has the the U.S. doesn't have. Why would we want to copy their mistakes?

This is from Milton Friedman's 1980 video Free to Choose:

http://video.google.com/videoplay?docid=-2253962402015490587

For an interesting Twitter experiment on getting feedback on the quality of Britain's NHS, just started today, please go here:

http://twitter.com/#search?q=%23welovethenhs

Again, I've read Milton Friedman. His views on the efficiency of free markets (taken as an abstraction) are well known and still widely read. As I said earlier, I've a brother with a PhD in Economics and I can assure you that while he and other economists appreciate Friedman's work, none view Milton Friedman as the be-all end-all of market theory. In point of fact, most economists regard Friedman's insistence that "free markets" preclude an economy from having socialist attributes, as opposed to a laissez-fare system, as quaint.

Like so many rules-to live-by, the rules that Friedman proposed, while being applicable as a general principle, have exceptions that are often brought about by what economists call externalities.

Scroll down the page...

http://www.economist.com/research/Economics/alphabetic.cfm?LETTER=E

My more or less philosophical take:

Suffice it to say that my conviction in the quest of a more cooperative commonwealth should be pragmatic rather than utopian, sober rather than romantic.

One of the benefits of getting rid of the notion of the intrinsic nature of reality is that you get rid of the notion that quarks and human rights differ in 'ontological status.' This, in turn, helps you reject the suggestion that any one science or theory should serve as a dominate paradigm for the rest of culture.

The advice to limit our concerns might go along with the happy belief in an 'invisible hand' or mechanism by which a number of independent agents, each acting on their own narrow concerns, in fact maximize the social good...This mechanism is the great buttress to free markets and laissez-faire capitalism. Unfortunately, there are situations in which instead of an invisible hand there is an invisible boot, ensuring that the same agents do worse than they would under a more generous regime of concern for each other.

Could you imagine, for a moment, a health care market unencumbered by government regulation? One where individuals are responsible for their own health decisions? I have seen the invisible boot, and its name is government.

And by the way, sorry for posting that video containing Donald Rumsfeld part of the way through. That won't help my case whatsoever :)

There is a scene in the first installment, in which a doctor treats a patient, carrying no government-issued license to be a doctor, and amazingly the patient doesn't die!

http://video.google.com/videoplay?docid=2024617864923164175

I've read Animal Farm, 1984, and other dystopian treatise of Big Brother...  One of my favorite Milton Friedman lines is  -- When you talk to a public servant, is there any question as to who's the servant? (paraphrasing)

Can I imagine a health care market unencumbered by government regulation? I presume by "unencumbered by" you mean "devoid of." Yes.

However, I can also imagine that such a situation would be untenable for modern medicine. Government regulation can be encumbering. It can also be facilitating.

I don't see how it's untenable. Rather than licensing, there would be "certification" by independent agencies, competing for the public's trust. Rather than mandates there would be competition for the most important services, which would expand services in line with demand. Rather than HMO's there would be catastrophic health insurance, and a few other contractual relationships you could get into, some with the help of your employer if you choose. The customer would be the final arbiter of quality, which naturally would lead to greater quality for everyone.

What about the poor, you may ask? Their choices will be greatly expanded. It's not like word-of-mouth doesn't work for poor people. Also, charitable hospitals would have lower prices due to greater competition in the rest of the market, so they could expand care.

I just don't get how people want greater government involvement when all these problems started with Medicare, HMO's, and so on, in the 60's and 70's. It's just not right that the same party which created these problems is now empowered to fix them.

Doctors are in some ways akin to modern shamans.