Medical Analysis By Milton Friedman
Originally Posted At Forbes
By Peter Robinson
June 19, 2009
President Obama, the press, all the Democrats and a fair number of the Republicans in Congress share the same assumption about health care. Whatever you believe should be done about the problem, it sure is complicated.
Yet one man figured it out.
In 2001 the economist Milton Friedman read up on health care, discovered that the inefficiencies in our system trace back to a single policy mistake, worked out a policy test that would help us correct it and then described his findings in a few thousand words of plain English.
Since the end of the Second World War, Friedman explained, medical care in the U.S. has displayed three features: technological advances, increases in spending and rising dissatisfaction.
The first of the three was common to one sector of the economy after another. Agriculture, manufacturing, electronics, communications--all had experienced technological progress. Yet the two final features proved unique to health care. While we were paying less and getting more when buying food or computers, in health care the opposite was happening.
Why?
Because, Friedman saw, most payments for medical care are made not by the patients who receive the care but by third parties, typically employers. Since, in Friedman's phrase, "nobody spends somebody else's money as wisely as he spends his own," this third-payer system by its very nature introduces inefficiencies throughout the health care system.
The reason for this wasteful third-party system? The tax code. Money spent on health care is exempt from the income tax only if the health care is provided through an employer. "We have become so accustomed to employer-provided medical care," Friedman wrote, "that we regard it as part of the natural order. Yet it is thoroughly illogical."
The policy mistake that produced this illogical mess took place during World War II, when the government imposed wage controls. Unable to compete for workers by paying them more, employers began providing medical care, and the new benefit spread rapidly.
When the Internal Revenue Service caught on, requiring employers to include the value of medical benefits as part of the wages they reported, workers, who had grown accustomed to the benefits, protested. Congress responded with legislation that made employer-provided medical benefits tax-exempt.
By the time the 1960s arrived, Americans were used to having third parties pay their medical bills. Thus the enactment of Medicare and Medicaid--under which the government, rather than employers, acted as the third party--seemed perfectly reasonable.
Friedman wrote: "Third-party payment has required the bureaucratization of medical care. ... A medical transaction is not simply between a caregiver and a patient; it has to be approved as 'covered' by a bureaucrat. ... The patient has little ... incentive to be concerned about the cost since it's somebody else's money. The caregiver has become, in effect, an employee of the insurance company or, in the case of Medicare and Medicaid, of the government. ... An inescapable result is that the interest of the patient is often in direct conflict with the interest of the caregiver's ultimate employer."
In that one paragraph of under 100 words, a diagnosis of our ailment.
What should we do about it? Ideally, Friedman argued, we should reverse the mistake that started all the trouble, repealing the tax exemption of employer-provided medical care. Yet Friedman was a realist. Vested interests, he recognized, would make such a radical reform impossible. Instead he believed we should seek incremental changes, asking of each proposal simply whether it would move health care "in the right direction."
Expanding savings accounts that allow individuals control over relevant spending, Friedman argued, would move health care in the right direction. So would extending the tax exemption to all medical expenses, whether they are paid by employers or individuals. A "sweeping socialization of medicine [such as that] proposed by Hilary Clinton"--and, now, by Barack Obama--would not.
Wherever possible, reduce the role of third parties. Increase the autonomy of individuals. Get the government and vast, bureaucratic insurance companies out of the way, permitting the free market to work its effects in health care, just as it does in virtually every other sector of the economy.
That's not too complicated, now, is it?
Peter Robinson, a research fellow at the Hoover Institution atStanford University and contributor to RobinsonandLong.com, writes a weekly column for Forbes.
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