Fear of the Free Market -- Part I

In So When Are We Going to Get That Free-Market Health Care Everyone's Complaining About?, Trent McBride guesstimates that with the addition of the prescription drug benefit to Medicare "our health care system will be paid for by explicit or implicit public funds at a rate of 65-70%." By "explicit or implicit public funds" he means direct payments (e.g., Medicare, Medicaid, and the VA) plus the sundry regulatory activities (e.g., FDA approval of new drugs) that are funded by taxes. McBride therefore characterizes the health-care system as "marginally nationalized." He asks, "if we have a nationalized health-care system now, and that system is [considered] broken, is more nationalization the way to go?"

Sasha Volokh objects to McBride's characterization of the health-care system as "nationalized" because what matters is not only "who pays but also...who controls." Apparently, in Sasha Volokh's view, Medicare doesn't count as a form of nationalization because beneficiaries get to choose their doctors. In this regard, it's important to recall the old variation on the Golden Rule: "Them what has the gold makes the rules." I might get to choose my doctor from a government-approved list, but all good doctors won't be on that list, nor will all the treatments I might like to have. It would cost me more to go to doctors who aren't on the list and to receive non-approved treatments, but I may not be able to afford either because my wealth has been depleted by many years of paying into Medicare. Bottom line: Medicare is most certainly a form of nationalization.

Government's effective control of the health-care system is only a notorious example of government's distortion of free-market mechanisms. It is easier to list those markets in which the government doesn't intervene (namely, "black markets") than it is to list those markets in which the government does intervene. There simply isn't a lawful business activity that isn't affected by government regulation.

If, for example, I wished to turn this blog into a business by selling advertising space on it, I would (or should) get a business license from the city, pay property tax on my computer (as a piece of business equipment), keep a set of business books for tax purposes, file a special income tax return (Schedule C, at a minimum), and pay additional Social Security taxes at the rate for self-employed persons. If business thrived and I hired someone to help me produce the blog (or handle the paperwork), that would compound my compliance problem and the cost of dealing with it.

Alternatively, I could ignore the law and run the risk of being caught and fined or even imprisoned. That's a risk that I might take for the sake of a low-profile blog. It's not a risk that I would take for the sake of making big bucks as an untrained, unlicensed M.D., though it is a risk that others (sometimes trained but unlicensed doctors) have been willing to take.

In summary, government intervention in the market for any product or service tends to reduce the supply of that product or service.

But, but, but…the proponents of regulation say…if government didn't require doctors to pass licensing exams people wouldn't know if they were being served by "good" or "bad" docs (not to mention lawyers, electricians, plumbers, and beauticians). Similarly, if the FDA didn't approve drugs, people wouldn't know if they were buying efficacious drugs or snake oil. And so on and so forth.

Are all medical school graduates equally competent? Are all medical school graduates who pass licensing exams equally competent? Is the doctor who barely passes the exam significantly better than the doctor who barely flunks it? The correct answer in every instance is "no."

Do medical licensing exams weed out a large percentage of incompetent doctors? It's not obvious that they do. Statistics for takers of the U.S. Medical Licensing Examination in 2002 indicate that about 85% of first-time takers of the exam from allopathic (conventional) medical schools in the U.S. and Canada successfully complete all three steps of the exam. With re-takes, the percentage successfully completing all three steps is expected to be 97%. Osteopaths have a lower success rate -- 60% for first-takers -- but they represent only 2% of the first-takers from U.S. and Canadian medical schools.

The only real weeding-out takes place among graduates of medical schools outside the U.S. and Canada. First-takers from those medical schools have only a 34% success rate. This weeding-out may reflect incompetence in English -- even though applicants had to pass an English-language proficiency exam -- as much as it does incompetence in medicine. These results suggest a simple strategy of avoiding doctors who weren't trained in the U.S. or Canada -- a strategy that many Americans follow instinctively.

As for graduates of medical schools in the U.S. and Canada, you're on your own. When you go to a licensed doctor for the first time you will probably have no clue about that doctor's competence. You can avoid the relatively few doctors who have been disciplined because most States now make such information available online. You can get recommendations from family, friends, and acquaintances, but those recommendations may tell you more about a doctor's "bedside manner" than about his or her competence. And in some large cities you can find lists in local magazines for the "best" doctors, by specialty, though you will have no idea of the criteria underlying such lists. In the end, you'll simply hope that your doctor is competent, if not warm and fuzzy.

You'll learn from experience whether your doctor seems competent, just as you'll learn from experience whether your auto mechanic is competent (and honest) or merely a smiling face. So much for licensing as a boon to consumer choice.