Market Failure in Health Care? 
By John McClaughry

Four years ago then-Senate President Peter Welch, now Congressman, declared, not for the first time, that "the private sector approach [in health care] has failed." That assertion has been echoed repeatedly by all of the advocates of increased government control over health and medicine, culminating in a wholly government run health care system.

It never seems to occur to such people that, while there remain private actors in the health care sector, that entire sector has been distorted, restricted, mandated and indeed corrupted by decades of government meddling.

A century ago the American Medical Association, concerned that a glut of new doctors would drive down doctors’ fees for service, conspired with doctor-dominated state medical licensing boards to restrict access to medical schools and limit the number of emerging MDs.

Through most of the 20th century – and even still - the physician’s guild successfully pressured their state boards to strictly control routine medical duties provided by nurses, deny licenses to doctors working on contract for fraternal lodges and cooperative hospitals, and discipline doctors using new technology that threatened to lower treatment costs and thus fees.

Responding to pressure from interest groups, legislatures have insisted that health insurance policies cover over a thousand specific treatments. These include such things as in-vitro fertilization, hair replacement, pastoral counseling and childbirth – even for single men, infertile women, and couples in their sixties.

Even more premium-inflating are guaranteed issue and community rating. The first of these requires insurers to accept all comers, even those who skip buying insurance until they get sick.

The second requires young people, just at the lower-income beginning of their working careers, and paying for college loans, home mortgages, and child rearing, to pay sharply higher premiums for the benefit of their sixtyish parents and grandparents who are almost inevitably better able to pay health insurance premiums. These "Robin Hood in Reverse" features are key provisions of ObamaCare.

Then there is the disparate tax treatment of medical expenses. Thanks to wartime wage and price controls imposed by the Roosevelt administration in 1943, employer-provided health insurance became tax free to the employees. That benefit tied health insurance to employment, gave the power of choice to the employer, and denied portability when employees changed jobs. Individual insurance buyers must pay their premiums out of (diminished) after tax income.

Tax free Health Savings Accounts, authorized by Congress in 2003, unfortunately cannot be used to pay premiums on the associated consumer driven health plans.

Local citizen groups – based on churches, unions, fraternal lodges, and coops - might want to form health insurance buying pools and negotiate with insurers for good rates. State governments have made that illegal since the 1930s.

Why not let Vermonters buy health insurance from carriers in the many states with far more reasonable insurance regulation? Many thousands of younger working people could save over two thirds of the cost of premiums they are now paying to Vermont’s two remaining carriers. Forget it. No state presently allows its licensed carriers to accept bargain-hunting out of state customers.

Modern pharmaceuticals can work wonders, but the cost of gaining FDA approval of a new drug runs well over $800 million. That’s because the 1962 Kefauver amendment requires new drugs not only to be proven safe, but also effective. This ambiguous requirement dramatically escalates the cost of clinical testing, much of it now done in cheaper Third World countries. The large drug companies are happy with this requirement, however, because it erects an enormously expensive entry barrier to new drugs developed by their smaller competitors.

Government drives health care costs far above market prices by sending millions of Medicare and Medicaid patients to health care providers, and paying far below the actual cost of the services rendered to them. Hospitals, required by the Hill-Burton Act to accept every patient that comes in the door, have no choice but to shift their losses into the price of care provided to patients with private insurance. This is the single most important factor in driving up private health insurance costs – far, far larger than the unpaid bills of uninsured patients.

In most states, many doctors – especially obstetricians, anesthesiologists and neurosurgeons – face staggering medical malpractice premiums. This results from courts and juries imposing extravagant pain and suffering awards. The threat of malpractice litigation also leads doctors to run up the costs ("defensive medicine").

The high costs of health care and health insurance are due to market failure? Let’s call it what it is: it’s the failure of government, politicians and interest groups to allow competitive and efficient markets to satisfy consumer desires.

John McClaughry is vice president of the Ethan Allen Institute (www.ethanallen.org)