Thomas Sowell On
The Economics Of Medical Care

Introduction

The high cost of medical care has been a recurrent theme in countries around the world. In the United States, medical expenses absorb about one-sixth of the total annual output of the economy.

Medical care is one of many goods and services that can be provided in a wide variety of ways. At one time, it was common for sick people simply to pay doctors and buy medicine individually with their own money.

Today, both the medicines and the medical care are often paid for by third parties through either political or market institutions — that is, either by insurance companies or government agencies, or both, with or without some portion being paid by the individual patient.

Only 13% of Americans' medical care costs are paid for directly out of pocket, with 35% being paid by private health insurance, 17% by Medicare, and the rest from various other sources.

In some cases, medicines and medical care have both been provided by government at no charge to the patient in Canada and some other countries, as they once were in China under Mao Zedong and in the Soviet Union under Stalin.

Other countries have had, and some continue to have, various mixtures of government payment and private payment, with varying elements of voluntary choice by patients and physicians.

Since governments get the resources used for medical care by taking those resources from the general population through taxation, there is no net reduction in the cost of maintaining health or curing sicknesses simply because the money is routed through political institutions and government bureaucracies, rather than being paid directly by patients to doctors.

Clearly, however, the widespread popularity of government-financed medical care systems means that many people expect some net benefit from this process. One reason is that governments typically do not simply pay whatever medical costs happen to be, as determined by supply and demand.

Governments impose price controls in order to try to keep the costs of medical care from absorbing so much of their budgets as to seriously restrict other government functions. Government-paid medical care is thus often an exercise in price control, and it creates situations that have been common for centuries in response to price controls on many other goods and services.

One of the reasons for the political popularity of price controls in general is that part of their costs are concealed — or, at least, are not visible initially when such laws are passed. Price controls are therefore particularly appealing to those who do not think beyond stage one — which can easily be a majority of the voters.

Artificially lower prices, created by government order rather than by supply and demand, encourage more use of goods or services, while discouraging the production of those same goods and services. Increased consumption and reduced production mean a shortage. The consequences are both quantitative and qualitative.

Even the visible shortages that follow price controls do not tell the whole story. Quality deterioration often accompanies reduced production under price control, whether what is being produced is food, housing, or numerous other goods and services whose prices have been kept artificially low by government fiat.

Quality declines because the incentives to maintaining quality are lessened by price control. Sellers in general maintain the quality of their products or services for fear of losing customers otherwise.

But, when price controls create a situation where the amount demanded is greater than the amount supplied — a shortage — fear of losing customers is no longer as strong an incentive.

For example, landlords typically reduce painting and repairs when there is rent control, because there is no need to fear vacancies when there are more tenants looking for apartments than there are apartments available.

Nowhere has quality deterioration been more apparent — or more dangerous — than with price controls on medical care.

One way in which the quality of medical care deteriorates is in the amount of time that a doctor spends with a patient. This was most dramatically demonstrated back in the days of the Soviet Union, which had the most completely government-controlled medical system:

At the neighborhood clinics where 80% of all patients are treated, the norms call for physicians to see eight patients an hour. That is 7.5 minutes per visit, and Soviet studies show that five minutes of each visit is spent on paper work, a task complicated by chronic short supplies of preprinted forms and the absence of computers.

"Our heads spin from rushing," said Pavel, the silver-haired chief of traumatology at a Moscow clinic, who, like some other Russians interviewed for a 1987 article in the Wall Street Journal, won't give his last name.

A dozen patients with splints and slings sit in a dark corridor awaiting their turn at a 1950s-vintage fluoroscope. "We wind up seeing the same patients several times over," the doctor goes on, "when one thorough examination could have solved the problem if we had the time."

Although the Soviet Union was an extreme example, similar policies have tended to produce similar results in other countries. Under government-paid medical care in Japan, patients also have shorter and more numerous visits than patients in the United States.

Under a Korean medical care system copied from Japan, a study found that "even injections of drugs were often split in half to make two visits necessary," because "the doctor can charge for two office visits and two injection fees."

After Canada's Quebec province created its own government health plan back in the 1970s, telephone consultations went down, office visits went up and the time per visit went down.

In other words, medical conditions which neither the doctor nor the patient previously thought serious enough to require an office visit, before price controls, now took up more time by both the patient (in travel time) and the doctor (in the office), thereby reducing the time available to people who had more serious conditions.

In general, where the doctor is paid per patient visit, then a series of treatments that might have taken five visits to the doctor's office can now take 10 shorter visits — or more. Therefore political leaders can proclaim that price controls have succeeded because the cost per visit is now lower than it was in a free market, even though the total costs of treating a given illness have not declined and — typically — have risen.

Skyrocketing costs, far beyond anything projected at the outset, have marked government-controlled medical care systems in France, Britain, Canada and elsewhere. Responses to such runaway costs have included abbreviated doctors' visits and hospital stays cut short.

The costs in Britain's government-run medical system have increased sharply, both absolutely and as a percentage of the country's rising Gross Domestic Product. The National Health Service in Britain absorbed just under 4% of the country's GDP in 1960 and rose over the years until it absorbed 7% of a larger GDP by 2000.

Nevertheless, the number of doctors per capita in Britain was just half as many as in Germany, where half the hospital beds were still in private hands, despite a large role for government financing there.

Quality deterioration has many aspects. According to the British magazine The Economist, "patients in other rich countries can get prompt treatment with state-of-the-art medical technologies in clean rather than dirty wards."

Apparently not in Britain, where quality deterioration is part of the hidden cost that does not show up in statistics.

Britain's Healthcare Commission "painted a bleak picture of teeming wards where overworked nurses didn't even help patients to the bathroom," according to the Christian Science Monitor, which also noted that the country's Health Secretary "was forced to apologize in Parliament this week after it emerged that at least 90 patients in southeast England died as a result of infections picked up in the hospital."

Britain has one of the oldest government-run medical care systems in the world, so it is far beyond stage one in the emergence over time of the qualitative problems associated with price controls in other contexts.

Its medical care bureaucracy has also had time to become more bureaucratic, including job protection for hospital staff members to the point where it is hard to force any employee to do the work properly — in a situation where not doing the job right can entail pain, infection or death to patients.

The British newspaper the Daily Mail reported on some of the reasons behind the widely complained of lack of cleanliness in British hospitals:

Unlike the "modern matron," her old-style predecessor exercised control over every nurse, cleaner and porter and she knew every patient under her care — because she understood that it was her care they were under and for which she was accountable.

She ran her wards like a military exercise. Today, that is impossible because nurses find that approach anachronistic and unacceptable. The result is sloppiness, a culture of excuses, gross dereliction of managerial duty and patient infection.

Another British newspaper, the Evening Standard, reported on the manager of the emergency treatment department in a London hospital:

She spent only one fifth of her time with her patients. Cleaning and maintenance took up most of her energy, to very little effect. Despite all the meetings, she had no authority over her cleaner. If a patient vomited in the waiting room, she had to clean it up because the cleaner refused to touch it.

Among the other common characteristics of bureaucracy that are especially harmful in a medical setting are ever growing numbers of meetings and ever growing paperwork requirements, leaving patients waiting while their doctors and nurses perform bureaucratic chores and rituals.

Another symptom of bureaucracy is pompous language, the country's Chief Medical Officer citing as a factor in the dangerous dirtiness of British hospitals a "paucity of hand hygiene agents" — that is, not enough soap and water. Such bureaucratic behavior is not simply irrational.

Paperwork, meetings, the hiring of more bureaucrats and the appointment of committees and task forces all provide protective cover for the authorities if critics accuse them of not knowing about problems or not doing anything about them. While such things help protect the careers of medical care bureaucrats, the time and resources they use up tend to reduce the care of patients.

The United States is at the other end of the spectrum in terms of government control of medical care. Some fault medical care in the United States for an average American life expectancy that is exceeded in a number of other countries.

However, medical care is not the same as health care, even though the two are often equated. Many things that shorten human life — including homicide, drug overdoses and obesity — are more a result of individual choices rather than the state of medical care.

There is relatively little that doctors can do about such things, which tend to be worse in the United States than in some other Western countries.

When international comparisons of medical care, as such, are made, the United States usually ranks higher than countries with government-run medical systems on such things as waiting times to see primary care physicians, waiting times to see specialists or have surgery, and cancer survival rates.

A study by the Organisation for Economic Co-operation and Development found that 23% of the patients having elective surgery in 2001 in Australia waited more than 4 months for that surgery. So did 26% of the patients in New Zealand, 27% of patients in Canada, and 38% of the patients in Britain. In the United States, only 5% of patients had to wait that long. The conclusion:

Waiting lists for elective surgery generally tend to be found in countries which combine public health insurance, with zero or low patient cost sharing and constraints on surgical capacity. Public health insurance and zero cost sharing remove the financial barriers to access to surgery.

Constraints on capacity prevent supply from matching demand. Under such circumstances, non-price rationing, in the form of waiting times for elective surgery, takes over from price rationing as a means of equilibrating demand and supply.

Elective surgery, incidentally, was not limited to cosmetic procedures but included cataract surgery, hip replacements and coronary artery bypass surgery.

Moreover, although a four-month waiting period was used by the OECD as a benchmark for collecting statistics, in Britain 3,592 patients waited more than six months for a colonoscopy and 55,376 waited more than six months for an audiology diagnosis, according to a report in the British Medical Journal in 2007.

In Canada, according to a provincial government website, 90% of Ontario patients needing hip replacements waited 336 days. In Britain, the wait is a year.

As for technology, a 2007 study by the Organisation for Economic Co-operation and Development (OECD) showed that the number of CT scanners per million population was 7.5 in Britain, 11.2 in Canada and 32.2 in the United States.

For Magnetic Resonance Imaging (MRI) units, there was an average of 5.4 MRIs per million population in Britain, 5.5 per million population in Canada and 26.6 per million population in the United States.