The Effects of Government Control on Healthcare Costs

In my previous article, I explained that the underlying cause of this country’s transition to socialized medicine was the progressive movement and the collectivist/altruist premise underlying that movement.

One of the main arguments used by the adherents of socialized medicine is its high cost and therefore the inability of people in the lower income brackets to pay for it. But what is the cause of this high cost? Medical care used to be much less expensive than it is today. In fact, one article claims that in 1958 per capita health expenditures was $134; equivalent to 15 days of work at the average salary of the time.  But by 2012 that had risen to $8953, equating to about 58 days of work at the average salary in 2012. Costs relative to income have almost quadrupled in that time. In this mixed economy/welfare state society with some freedom and some government control, is the cause of this massive increase the free element or is it government control?

The cost of any product or service is subject to the law of supply and demand. Therefore some factor caused the demand for medical care to increase, or the supply of medical care to decrease, or both.

Let’s start with demand. During World War II, the government imposed wage and price controls as an emergency measure. The referenced article states “in order to attract labor, the employers offered a range of such fringe benefits as pensions, medical insurance, paid holiday. . .” These benefits were not considered wage increases and allowed employers to attract the best available labor in the market. After the war, government backed labor unions began seeking benefits of this kind as part of their negotiations with employers. Additionally, in 1965 Medicare and Medicaid legislation was passed. As a result, the third-party payment system came to dominate the medical field.

What happens to demand when most of the cost of a product or service is paid by someone other than the consumer? Demand will skyrocket. And that is what happened in the medical field. Instead of budgeting their medical expenses, as one would do with food, shelter or other necessities, people increased their medical care demands well above what they would be if they had to pay out-of-pocket. Medical shopping sprees such as trips to the doctor for minor ailments that would heal over time, and demands for a myriad of expensive tests became commonplace.

Now let’s look at the supply of medical care. The progressive movement’s desire to “solve social problems” included attempting to improve the quality of medical care. This spawned the Flexner Report which recommended reducing the number of medical schools and increasing the educational standards at the remaining schools. Unfortunately, these goals were implemented with government controls. The AMA, committed to improving educational standards, lobbied for state mandated Boards of Medical Examiners, mostly staffed by AMA members, to license doctors and set medical school standards. The AMA also lobbied to reduce the number of medical schools, and restrict admissions to these schools, claiming there was a glut of doctors on the market. Backed by government coercion, the number of schools plummeted from 162 in 1910 to 69 in 1944. Today there are 141 medical schools offering M.D. degrees. Since 1910 the population of the U.S. has increased approximately 3.5 times and yet there are still fewer schools today.  The result has been the establishment of a government enforced “medical guild” restricting the supply of doctors, reducing competition among doctors, and escalating the salary of doctors.

With demand skyrocketing, and supply restricted, is it any wonder that medical costs have increased so much? As late as the 1960’s doctors used to make house calls and competent medical care was affordable to almost everyone. With government controlled medical care, those days are long gone. Demand for medical care is so high relative to the number of doctors; the doctors have no time or inclination to make house calls.

I will examine the consequences on the quality of medical care under socialized medicine in a future article.

1 comment to The Effects of Government Control on Healthcare Costs

  • JP Miller

    I’d like to add a point to Glenn Jorgensen’s informative discussion on the effect of government on healthcare costs. The kinds of plans promoted by government encourage or mandate the submission of bills directly to the insurance company or Medicaid and Medicare. The result is that almost no one with these plans asks how much something will cost.

    How many times have you asked how much it would cost to repair your car and whether it was safe to drive without the repair, then made a decision to go to another repair shop, to defer the repair or to simply not do it?
    With health insurance paid by our employer or the taxpayer how often do we ask the cost of a procedure and whether we can safely live without it? How often do we then go looking for a cheaper doctor? If almost no one asked about the cost of auto repairs and all the bills were submitted for us and paid by some insurance company or the government the costs would go through the roof. So it is with health costs.

    No one really knows the health care cost. I had an ultrasound scan for blood clots recently. The doctor billed $570. Insurance approved $152. Insurance paid $120 and I paid $32. What was the cost? I don’t know. Do you?