Should Self-Interest Have A Role In Health Care?

Former Democratic candidate Bernie Sanders wants to remove “profit” from health care. AFP via Getty…

Should Self-Interest Have A Role In Health Care?

Bernie Sanders wants to take “profit” out of health care.

It may surprise you to learn that for roughly 100 years, the American Medical Association agreed with him – but for a totally different reason.

The AMA was established in the middle of the 19th century with one overriding goal: to increase the incomes of physicians. For the first 50 years of its life, its main concern was medical licensing. In those days, anyone could hang out a shingle and claim to be a doctor. You didn’t have to have a medical degree. You didn’t have to have any training at all.

By the first decade of the 20th century, however, the AMA had succeeded in convincing virtually every state in the union to put an end to free entry into the practice of medicine. Going forward, if you wanted to be a doctor you had to have a license issued by government. Even today, the medical profession has the strictest licensing requirements of just about any profession or occupation in the economy.

Fresh off that achievement, the AMA set its sights much higher. As I explained in Regulation of Medical Care: Is the Price Too High? (Cato, 1980), the AMA’s broad object was to eliminate for-profit institutions from the medical marketplace. That included medical schools, hospitals, insurance companies and just about any other business that impacted the income of physicians.

Like a typical medieval guild, organized medicine understood that the surest way to keep practitioner incomes high is to restrict entry into the profession. Medical schools that had no purpose other than profit maximization, by contrast, had an incentive to train as many medical students as were willing to pay the tuition. By the end of the second decade of the 20th century, the for-profits were regulated out of existence. The non-profit schools that replaced them were heavily influenced by the AMA’s notions about how many physicians the country really needed.

By the middle of the century, almost all hospitals were nonprofit. Their boards were filled with doctors, of course, and the ability to practice in them was often denied to doctors who ran afoul of local medical society views on behavior that constituted proper and improper competition.

Once the hospitals were under control, the next target was health insurance. Blue Cross was created by the hospitals and Blue Shield by the doctors. The goal of these nonprofit insurers was not to maximize their own profits. Rather, it was to make sure that hospitals and medical practices received enough income to cover their costs, including the cost of patients who couldn’t or wouldn’t pay their bills. Commercial insurers, by contrast, had an incentive to pay only the bills of their own policyholders.

Once the Blues dominated the market, hospitals could refuse to deal with commercial insurers who didn’t pay the same way the Blues paid. So organized medicine gained control not only of how hospitals were run but also of how they got their income.

Since all these actions were very public, the AMA needed a public explanation. Medicine, the organization claimed, is an altruistic profession. It’s about caring and sacrifice. The very nature of the profession is inconsistent with the pursuit of self-interest. (By the way, almost any medieval guild would have said much the same thing.)

Here’s the problem. In the non-profit health care system shaped and molded by the AMA, there was one very significant omission: doctors themselves. Physicians were free to maximize income without restraint. And physician control of all the other institutions invariably biased their decisions in the direction of increasing provider incomes even more.

By the mid-1980s it was clear to almost everyone that something was amiss. Costs were not only rising at an unaffordable rate, they were getting increasingly out of line with what other countries were paying. So, the concerns of the doctors were pushed aside and, much to the doctors’ future regret, public policy began to encourage the emergence of for-profit hospitals, for-profit clinics and for-profit insurance plans.

Unlike the stodgy non-profits, which tended to be wasteful and inefficient, the new entities competed aggressively. They literally changed the entire nature of their industries in a short amount of time.

And that produced a new set of problems.

Remember, year after year, decade after decade, we suppressed normal market forces in health care. So much so that no one ever sees a real price for anything. No doctor. No patient. No employer. No employee.

When people face artificial prices that are significantly different from real prices, they invariably face perverse incentives. And aggressive competition in the face of perverse incentives can produce outcomes that are even more perverse.

So, Bernie Sanders isn’t completely wrong when he says the profit motive is a problem in health care. But he has no solution.

Virtually everyone in health care today – outside the radical left – understands that we need the private sector. That is why two-thirds of Medicaid patients and more than one-third of Medicare patients are in private plans. If we want to achieve efficient, high quality care, we need competition and we need the profit motive. Firms must bear the cost of their bad decisions and reap the benefits of their good ones.

Yet unwise government policies have created perverse incentives that are harmful to the patients most in need of care. In a normal market producers and sellers seek out customers with problems and they compete to solve their problems. Increasingly in health care, the opposite is happening.

For the most part, no one really wants to enroll someone with expensive-to-treat health problems these days. No Obamacare plan, no Medicaid plan and no employer plan and more often than not, no hospital.

That needs to change.

Adam Smith had this exactly right. If you want your needs met, don’t count on the altruism of the caregiver. To make your life better, make meeting your needs in the self-interest of the caregiver and the hospital and the insurance company and the employer and everyone else who is involved.