A lot of people want the government to take charge of our health care problems. Before Obamacare, health care was outrageously expensive. It is understandable that people wanted change, and still do. So, then, why was health care so expensive before Obamacare was passed? After all, if we want to bring the cost down, then don’t you think we should address the reasons that the costs were high? If we just apply more of the same forces that made it expensive, then we should expect the situation to get worse, not better. That is exactly what happened with Obamacare. So what caused health care costs to be so high?
It began with tax incentives to get employer-sponsored health insurance. Wage controls were instituted during World War II, during a labor shortage, when men were off at war. Employers needed to attract workers, so they offered health insurance, which was deemed to not violate the wage ceilings. The IRS ruled benefits to be not taxed. Health insurance was therefore worth more than salary, because it did not have a third of it (or whatever fraction) taken away in taxes. The incentive, then, was for people to maximize their insurance. This led to people wanting to have simple, inexpensive, routine things covered by insurance. It is like getting auto insurance to cover gas fillups. Naturally, those small routine things became much more expensive as the third party processing added greatly to the cost. That is when health care costs began inflating. Between 1929 and 1940, annual health care expenditures per person inflated only slightly, from $383 to $472, in 2010 dollars (adjusted for inflation). This was only 1.9% per year of inflation. Then from 1948 to 1965, health care inflation hit 5% per year.
In 1965, Medicare and Medicaid were instituted. They created a regulatory quagmire for doctors. This was the beginning of heavy government control over the practice of medicine. It brought Soviet-style, central planning to our health care industry. Costs continued to inflate at 5.2% per year.
Then, to try to contain the rising costs, President Nixon asked Paul Elwood to “devise ways of constraining the rise in the Medicare budget. Out of those discussions evolved both a proposal to capitate HMOs for Medicare beneficiaries (which was not enacted until 1982) and the laying of the groundwork for what became the HMO Act of 1973.” Teddy Kennedy pushed it through the Senate. The government subsidized the expansion of health maintenance organizations. Employers with 25 or more employees were forced to offer an HMO plan if they offered any insurance. The ability of a patient to sue the HMO for damages was taken out of state courts into federal court, where it was severely limited by ERISA legislation. This new law made it legal to pay a doctor to ration care, whereas that was previously illegal in most states. The rise of the HMO from a small player in the insurance marketplace to a major force was thus another layer of government interference in the marketplace. It was clearly no free market mechanism.
Other layers of government interference include the Food and Drug Administration, the Emergency Medical Treatment and Active Labor Act, Clinical Laboratories Improvement Amendments, Stark laws, state insurance mandates on coverage, and many more regulations. We have not had a free market in health care in many decades. That is why health care has gotten so expensive, and it is also the reason we do not find the customer-friendly service in health care that we find in the rest of our economy. The patient is usually not the customer of the doctor. The insurance company is the customer, or in other words the one who pays the doctor. Before Obamacare, 86% of health care costs were paid by a third party – an insurance company or the government. Is it really reasonable to think that getting the final 14% covered is going to solve our problems?
Now people think that our free market has caused the problems that we have with cost and service. What free market? After reading about all those layers of government interference, how could you possibly call what we had a free market? If we want to see what a free market in medicine looks like, we have to look outside of typical American medicine of the past several decades.
Prior to government control, in the first half of the twentieth century, estimated longevity in these United States increased by 44%, even though spending on health care was staying low. Tremendous advancements were made before 1950, such as development of antibiotics, EKGs, xrays, new surgical techniques, and understanding of physiology. Surgeries were not prohibitively expensive. An uncomplicated appendectomy cost about $1100 after adjusting for inflation to today’s dollars. Delivery of a baby cost about $50 including a 4 day stay in the hospital, adjusting to about $450 to today’s dollars. Through medical tourism, people can now get major surgeries done for 10 – 20% of the cost in typical U.S. facilities. In my practice, I averaged $58 per visit in 2015, including labs, medications, and house calls. At the Surgery Center of Oklahoma, a surgery on my knee cost $3,740 including all fees. Care was excellent. These are free market oriented facilities, that do not take insurance.
The causes of high cost and poor service in medicine stem from government interventions. We clearly cannot solve those problems by just increasing government interventions further. That is like taking a patient who has been poisoned and giving him a larger dose of the poison in an attempt to cure him. We need an antidote. That antidote is not just repealing Obamacare, although that is a necessary start. We need to also peel back the layers of government interference that have been put in place over the past several decades, until we restore a free market. Read about the history of American health care in much more depth and detail in The High Price of Socialized Medicine. You will find references to back up all the things I have said. As a nation, we have a choice to make as to what direction we will take in health care. Choose freedom. Choose prosperity. Choose happiness.

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