The healthcare black hole

Today, the Cato Institute published an article by Michael Cannon entitled, "Let Customers Control the Money and Market Will Cure Health Care." We believe he is right on track, and in very good company.

In 2001, the late Milton Friedman wrote an exceptionally clear explication of the economics behind the problems with health care in the United States.

In 2006, the Hoover Institution at Stanford University, where Dr. Friedman was a fellow, published a shorter version, entitled "How to Cure Health Care" -- an excellent resource for anyone who wants to know how we got to where we are today, and how to fix the problem.

In the article, Professor Friedman repeats a simple truth that he brought out over and over in his Free to Choose television series (both the 1980 and 1990 versions of which are available in their entirety on the Internet here). That truth is "that nobody spends somebody else’s money as wisely or as frugally as he spends his own."

The article demonstrates that over fifty percent of healthcare costs are already subsidized by the government in the US, when the tax deduction for health insurance costs available to employers is considered as what it is: a government subsidy.

This hybrid structure -- halfway private and halfway public -- leads to the conditions we have today, in which the cost of healthcare is paid for by employers.

Because of this government-induced situation, citizens in the US spend more on healthcare than they would if they were paying for it directly themselves (17% of the national income -- no other nation in the world comes close), in which the costs of medical treatment have increased by an astronomical 3,900% in the fifty years from 1946 to 1996 (while the cost of other economic goods such as automobiles and electronic technology went down even as their quality went up over the same timeframe), and in which more people are without health insurance* than otherwise would be (because the market for health insurance is artificially skewed towards employers, making it much harder to obtain for those who work for themselves or who are in between jobs -- data shows that 63% of uninsured workers are self-employed or work for small firms).

In fact, the convoluted situation of the past sixty years -- in which freedom to choose has been taken out of the individual's hands -- follows the pattern of Gammon's Law, after British physician Dr. Max Gammon, who formulated it after extensive study of the British medical system in the 1960s. Dr. Gammon determined that when freedom to choose is trumped by government bureaucracy, the result is like a black hole. He said that in any "bureaucratic system [. . .] increase in expenditure will be matched by fall in production. [. . .] Such systems will act rather like ‘black holes,’ in the economic universe, simultaneously sucking in resources, and shrinking in terms of ‘emitted production.’"

Friedman found Gammon's Law operating in many other areas of life in which freedom to choose had been overtaken by government bureaucracies, such as the school system. In fact, if you watch this video of Friedman's 1980 discussion of the problems with the US school system, you will be struck by how many parallels exist between it and the US healthcare system.

The most important lesson from Professor Friedman's piece is the central role that government interference has played in creating the problems in the US healthcare system we have today, because it takes away the individual's freedom to choose. The real solution to the problem will be to pull back from the black hole by restoring the freedom to choose, rather than diminishing it more and plunging even further into the black hole.


* One additional point on the number of uninsured: data shows that the numbers often thrown about for the number of Americans who "can't get healthcare" are grossly overinflated. This piece from the Wall Street Journal cites evidence that demonstrate that about half of the people without insurance are either eligible for public insurance or could afford insurance on their own, but for their own reasons elect not to do so.

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For later posts on this same subject, see also:


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