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Socialism and Medicine, Part 2


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Costs and third-party payers









The wrong diagnosis





The last statement will come as a shock to people who are convinced after reading Paul Krugman’s New York Times columns that medical care in this country is pure free enterprise and that it is free enterprise that is driving up the costs. In a recent column, Krugman declared that medical care in the United States is costly because of high-quality medical capital such as MRI and CAT scan devices. His reasoning goes as follows:

  • Those devices are expensive.
  • Doctors charge a lot for tests from those machines, since the devices are costly.

Because the tests are expensive, they drive up health care costs.If Krugman were not an economist, perhaps he could be forgiven for constructing such a faulty chain of economic logic. First, and most important, he is not examining what the CAT scan and MRI devices replace. They permit doctors to quickly engage in exploratory surgery in which they are able to quickly diagnose different disorders. Before the advent of these devices, doctors had to perform invasive procedures for which there was a recovery period; today, they are able to quickly diagnose problems at a fraction of the total costs that once were involved in such examinations.In other words, when one factors in time, as well as the fact that the devices ensure more-accurate diagnoses, as well as increase survival rates from certain kinds of illnesses, one can see that they are not the source of high-cost medical care. Instead, they improve the quality of medical care and, when one looks at the big picture, actually lower real medical costs.Second, Krugman wrongly appeals to the discredited cost-of-production theory of value, which dominated economics until “marginalists” such as William Stanley Jevons and Carl Menger in 1871 independently produced path-breaking works that demonstrated conclusively that demand for the final product is what gives value to the factors of production and capital goods, not the other way around. While this may look to be “technical” economics talk, it actually is something that is very important in explaining why Krugman and others like him are so wrong when they advocate government medical care.
Capitalism and socialismAccording to Krugman and others, medical care in the United States is expensive because it costs a lot of money for people to have tests done by means of MRI or CAT scans. Thus, if you wish to have less-expensive medical care, then you do away with such expensive items or more strictly ration them.

For example, I work in Allegany County, Maryland, and we have three MRI devices in this county of about 80,000 people. I have had two MRIs done, which were performed the same week my doctor scheduled them for me. Montreal, Canada, on the other hand, has about 3.6 million people in its metropolitan area, and there also are three MRI devices, one for more than a million people. Anyone needing an MRI there has to wait at least six months.

Why the difference? The answer lies in the somewhat obscure fact that under a socialistic system, capital becomes a liability rather than an asset. The reason is that under a system of private profit, capital is used by its owners to provide an income; in socialism, capital does not provide an income to anyone. Rather, it is an expense item and nothing else.

The owners of the MRI devices in Allegany County charge a fee for their use. In my case it was $1,200. The alternative would have been for doctors to open my knee and look inside and then decide whether or not to do surgery. Such a procedure not only would be invasive and have resulted in my being laid up for several weeks, but it also would have been much more expensive in total costs that would be paid, including costs my employer (and I) would have had to bear, since I could not have been in a classroom for several days.

As it was, I missed no time from work to have the MRI, and when it showed a tear in the medial meniscus, my surgeon was able to home in immediately on the problem. When I had surgery, I was out of work for just a couple days. If one looks just at the cash outlays for the surgery (paid by my insurer, of course), there is no doubt that the entire procedure was more expensive than it would have been in Canada. If one looks at the opportunity cost of waiting, of invasive surgery, and of time off from work, the numbers no doubt are much closer together.

The owners of the MRI devices in Allegany County earn an income from those devices, which obviously cost more than a million dollars apiece. Thus, as long as it is profitable to the owners to purchase and employ them, they will do so.

Take the sets of incentives faced by a hospital administrator in Canada, however. Because he cannot charge for any services, an MRI device will not provide any income for his hospital; thus, it represents only an expense. Furthermore, such capital expenditures would serve to take money away from other expenses, such as increasing salaries for unionized nurses.

In a capitalist system, such decisions are made within the nexus of economic calculation, in which one makes economic choices based on the prospect of profit. For example, if it could be shown that a new MRI or CAT scan could have a good return on investment, it would make sense for a medical center to purchase such a device. However, in a system such as those that exist in Canada and European countries, other factors govern whether or not such devices are purchased, and the factors almost always are political.

It has long been understood that politically connected people are moved to the front of the line for special medical procedures, which causes no small amount of envy among Canadians who might have to wait six months for an MRI and more than a year for knee or hip replacements. (Even supporters of Canadian medical care acknowledge that there are long waiting times, but insist that government “is doing something about it.”)

Jane Orient, a practicing physician who has written volumes on socialism and health care, writes,

It [medical care in the United States] is a two-trillion-dollar pot of gold, one seventh of the American economy. It is certainly a great magnet and motivation for all types of people. It attracts people because of fear and greed, and it attracts people because of their better instincts. It is also the third-rail of politics. Once people are given some sort of entitlement to medicine, it can never be taken away. Let us not blame the free market for that; there has been no free market in medicine for at least 60 years, thanks to the public-private partnership, the federal tax code, and all types of government intrusions and incentives.

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This article originally appeared in the June 2008 edition of Freedom Daily.

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