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A Hard Lesson About Socialized Medicine

by Michael D. Tanner

This article appeared on cato.org on September 23, 1996.

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Europeans are now learning some hard facts of life about socialized medicine: there's no such thing as a free lunch. The question is whether Congress will learn from Europe's mistakes as it takes the next steps in reforming the American health care system.

For many years advocates of government-run health care pointed to Europe as an ideal, noting that America was the "only industrialized country without a national health care system." Now, however, the European welfare states are slashing benefits in the face of rising health care costs.

A recent front-page story in the New York Times detailed the European cutbacks. According to the article, Britain, France and Germany are all being forced to limit access to care. Rationing, already extensive, is increasing.

The Europeans have run into a very simple economic rule. If something is perceived as free, people will consume more of it than they would if they had to pay for it. Think of it this way: if food were free, would you eat hamburger or steak? At the same time, health care is a finite good. There are only so many doctors, so many hospital beds and so much technology. If people overconsume those resources, it drives up the cost of health care.

The same problem is besetting the American health care system. The vast majority of American health care is not directly paid for by the person consuming those goods and services. Instead, a third party, either the government or an insurance company, pays the bill.

Medicare is exhibit one. Medicare beneficiaries pay almost nothing out of their own pockets for health care. Under Medicare Part B, for example, the deductible is an absurdly low $100. (There is, however, a 20 percent copayment.) The deductible under Part A is higher, $716 on the first 60 days of hospital care for each spell of illness. There is also a copayment required for hospitalization of longer than 60 days. However, nearly 70 percent of the elderly have some form of "medigap" insurance that covers all or part of the deductibles and copayments.

Thus, recipients have little incentive to be good consumers and avoid unnecessary expenses or seek the best deal for their dollar. Guy King, former chief actuary for the Health Care Financing Administration, says that third-party payment is one of the primary causes of the rapid growth in Medicare expenditures. As King explains, "When people, either patients or doctors, are spending other people's money, they do not worry about the cost or number of services consumed."

The establishment has responded to this problem by trying to force seniors into managed care, thereby allowing insurance companies to ration care. But managed care does not change the underlying incentive structure created by pervasive third-party payment. Any reduction in costs is achieved by limiting access to treatment.

A report by the Department of Health and Human Services' inspector general found "pervasive" quality problems throughout managed care programs for Medicare, including difficulties in gaining access to care. Managed care programs are significantly less likely to use diagnostic tests, such as MRI and CAT scans, than are fee-for-service plans. Doctors report that managed care organizations pressure them to save money even at the cost of quality. One-third of doctors surveyed by the American Medical Association in 1988 stated that patients were harmed by delays or nontreatment as a result of managed care.

Although the election season has temporarily taken Medicare off the table, the issue will be back to haunt the president and Congress next year. Indeed, the most recent report of the Medicare system's Board of Trustees warns that the program faces bankruptcy in just five years.

The question is whether we will recognize the problems of third-party payment and restore consumer incentives by increasing deductibles and allowing recipients to choose medical savings accounts or follow the European example and ration the health care that our seniors depend on.

For years we've been told to look to Europe for lessons about health care. This time, maybe we should.