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M edical care is one of many goods and services that can be
provided in a wide variety of ways. At one time, it was com-
mon for sick people simply to pay doctors and buy medicine indi-
vidually with their own money. Today, both the medicines and the
medical care are often paid for by third parties”either insurance
companies or government agencies, or both, with or without some
portion being paid by the individual patient. In some cases, medi-
cines and medical care have both been provided by government at
no charge to the patient in Canada and some other countries, as
they once were in China under Mao Zedong and in the Soviet
Union under Stalin. Other countries have had, and some continue
to have, various mixtures of government payment and private pay-
ment, with varying elements of voluntary choice by patients and
physicians.
Since governments get the resources used for medical care by
taking those resources from the general population through taxa-
tion, there is no net reduction in the cost of maintaining health or
curing sicknesses simply because the money is routed through po-
litical institutions and government bureaucracies, rather than be-
ing paid directly by patients to doctors. Clearly, however, the




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70 APPLIED ECONOMICS


widespread popularity of government-financed health care means
that many people expect some net benefit from this process.
One reason is that governments typically do not simply pay
whatever medical costs happen to be, as determined by supply and
demand. Governments impose price controls, in order to try to
keep the costs of medical care from absorbing so much of their
budgets as to seriously restrict other government functions.
Government-paid medical care is thus often an exercise in price
control, and it creates situations that have been common for centuries
in response to price controls on many other goods and services.


PRICE CONTROLS ON MEDICAL CARE

One of the reasons for the political popularity of price controls in
general is that part of their costs are concealed”or, at least, are not
visible initially when such laws are passed. Price controls are there-
fore particularly appealing to those who do not think beyond stage
one”which can easily be a majority of the voters. Artificially
lower prices, created by government order rather than by supply
and demand, encourage more use of goods or services, while dis-
couraging the production of those same goods and services. In-
creased consumption and reduced production mean a shortage.
Even the visible shortages do not tell the whole story, however.
Quality deterioration often accompanies reduced production,
whether what is being produced is food, housing, or numerous
other goods and services whose prices have been kept artificially
low by government fiat. Quality declines because the incentives to
maintaining quality are lessened by price control. Sellers in general
maintain the quality of their products or services for fear of losing
customers otherwise. But, when price controls create a situation
where the amount demanded is greater than the amount
supplied”a shortage”fear of losing customers is no longer as
The Economics of Medical Care 71

strong an incentive. For example, landlords typically reduce paint-
ing and repairs when there is rent control, because there is no need
to fear vacancies when there are more tenants looking for apart-
ments than there are apartments available.
Nowhere has quality deterioration been more apparent”or
more dangerous”than with price controls on medical care. One
way in which the quality of health care deteriorates is in the
amount of time that a doctor spends with a patient. This was most
dramatically demonstrated in the Soviet Union, which had the
most completely government-controlled medical system:

At the neighborhood clinics where 80% of all patients are treated,
the norms call for physicians to see eight patients an hour. That is
7.5 minutes per visit, and Soviet studies show that five minutes of
each visit is spent on paper work, a task complicated by chronic
short supplies of preprinted forms and the absence of computers.
"Our heads spin from rushing," say Pavel, the silver-haired chief of
traumatology at a Moscow clinic, who, like some other Russians in-
terviewed for this article, won't give his last name. A dozen patients
with splints and slings sit in a dark corridor awaiting their turn at a
1950s-vintage fluoroscope. "We wind up seeing the same patients
several times over," the doctor goes on, "when one thorough exami-
nation could have solved the problem if we had the time."

Although the Soviet Union was an extreme example, similar
policies have tended to produce similar results in other countries.
Under government-paid health care in Japan, patients also have
shorter and more numerous visits than patients in the United
States. Under a Korean health care system copied from Japan, a
study found that "even injections of drugs were often split in half
to make two visits necessary," because "the doctor can charge for
two office visits and two injection fees." After Canada's Quebec
72 APPLIED ECONOMICS


province created its own government health plan back in the
1970s, telephone consultations went down, office visits went up
and the time per visit went down. In other words, medical condi-
tions which neither the doctor nor the patient previously thought
serious enough to require an office visit, before price controls, now
took up more time by both the patient (in travel time) and the
doctor (in the office), thereby reducing the time available to people
who had more serious conditions.
In general, where the doctor is paid per patient visit, then a series
of treatments that might have taken five visits to the doctor's office
can now take ten shorter visits”or more. Therefore political lead-
ers can proclaim that price controls have succeeded because the
cost per visit is now lower than it was in a free market, even though
the total costs of treating a given illness have not declined and”
typically”have risen. Skyrocketing costs, far beyond anything
projected at the outset, have marked government-controlled health
care systems in France, Britain, Canada and elsewhere. Responses
to such runaway costs have included abbreviated doctors' visit and
hospital stays cut short.
The costs in Britain's government-run medical system have in-
creased sharply, both absolutely and as a percentage of the coun-
try's rising Gross Domestic Product. The National Health Service
in Britain absorbed just under four percent of the country's GDP
in 1960 and rose over the years until it absorbed well over seven
percent of a larger GDP by 2000. Nevertheless, the number of
doctors per capita in Britain was just half as many as in Germany,
where half the hospital beds were still in private hands, despite a
large role for government financing there. Quality deterioration is
another response to rising medical care costs. According to the
British magazine The Economist, "patients in other rich countries
can get prompt treatment with state-of-the-art technologies in
clean rather than dirty wards." Apparently not in Britain, where
The Economics of Medical Care 73


quality deterioration is part of the hidden cost that does not show
up in statistics.
Just as artificially low housing prices have led many people to
seek their own separate housing units who would not ordinarily do
so, if they had to pay the full costs in a free market, so artificially
less expensive”in some countries, free”medical care has led many
people with minor medical problems to absorb far more of doctors'
time and expensive medicines and treatments than they would if
they had to pay the costs themselves. France is an example:

In every healthy Frenchman hides a sick one dying to be diagnosed,
goes a wry French saying. The trouble is that doctors are encour-
aged to give patients what they want”scans, blood tests, antibi-
otics, sick leave”for fear of losing their custom and thus earning
less. If they don't overload prescriptions to counter every conceiv-
able germ and depressive tendency, patients may shop around until
they find a doctor who does.

This is not peculiar to the French people or to medical care. More
of anything tends to be demanded at a lower price”and especially
when it is free. In Canada as well, a news story pointed out: "Since
the system sets no limits on demand, patients seek as much care as
they can get, driving up costs." In Britain, a twelve-year-old girl re-
ceived a breast implant, paid for by the National Health Service.
Excessive prescriptions were reported as "routine" under China's
government-provided health care and patients there "leave the dis-
pensary with bags, rather than bottles, full of pills." China has sub-
sequently moved away from government-provided medical care.
Not only patients, but doctors as well, have incentives to use
medical treatments more extensively when the government pays
the bills. Many diseases can be treated in a variety of ways, and
how often the most expansive”and expensive”treatments will
74 APPLIED ECONOMICS


be used can be affected by who is paying. In October 2002, for ex-
ample, the FBI seized the records of a San Francisco cardiologist
who was accused of doing far more open heart surgeries than were
called for by medical criteria, as a means of receiving more income
from government payments. One patient who was told by this car-
diologist that he needed triple by-pass surgery was told by every
other cardiologist he consulted that he needed no such thing.
The normal weighing of costs against benefits, which causes
more urgent things to be done ahead of less important things
when prices ration scarce resources, is less effective when costs are
paid by someone other than the actual decision-makers. This can
lead to less important things receiving medical attention while
urgent things get neglected. When patients pay for their own
medical treatments, they are more apt to establish priorities, so
that someone with a fractured leg is far more likely to go to doctor
than someone with a minor headache. But, when both are treated
free of charge to the patient, then people with minor ailments
may take up so much of doctors' time and medical resources that
those with more serious medical conditions must be forced to
wait.
When prices no longer ration, then something else has to ration,
since the underlying scarcity does not go away because the govern-
ment controls prices or provides things free of charge. One of the
alternative ways of rationing is by waiting. In 2001, more than
10,000 people in Britain had waited more than 15 months for
surgery. This is one of the ways in which the quality of goods and
services deteriorate under price controls. Waiting for medical care
is particularly costly in human terms, not only because of the need-
less pain that may be suffered while waiting, but also because the
underlying malady may be getting worse when the waiting is not
simply a matter of hours spent in a hospital's reception room but
months or even years spent on a waiting list before being able to
get treatment. People can die from conditions that were initially
The Economics of Medical Care 75

not very serious, but which grew progressively worse while they
were on waiting lists to receive medical care. A celebrated example
in Britain involved a woman whose cancer surgery was repeatedly
postponed until it had to be cancelled, because the cancer had be-
come inoperable in the course of all the delays. To call this quality
deterioration is, if anything, an understatement.
Another feature of price controls which applies with special
poignancy to medical care is the black market, which flourished in
China under government-supplied medical care:

Rather than wait in long lines for indifferent treatment, affluent
Chinese traditionally "go through the back door" for better service,
asking friends to provide an introduction to a doctor or giving gifts
or payments to physicians and nurses. This practice, though illegal,
can ensure faster, better and friendlier treatment. Mid-level hospi-
tal administrators tend to benefit most from this arrangement, as
they become engaged in the lucrative practice of providing access
to doctors.

A study found similar illegal payments in Japan, where "a $1,000
to $3,000 'gift' to the attending physician is common at top Tokyo
hospitals." Official statistics do not capture these illegal financial
costs, much less the even more important human costs of hasty di-
agnosis and treatments in abbreviated visits to doctors' offices and
the long time on waiting lists before even reaching a medical facil-
ity. Thus, in terms of publicly visible costs and benefits, a price-
controlled medical system may be a political success. For years, the
Soviet Union boasted of having the largest number of doctors and
hospital beds of any country in the world”all the while conceal-
ing the fact that it also had rising rates of infant mortality and a
declining life expectancy in its population as a whole, facts which
came out only in its last years under Mikhail Gorbachev's policy
ofglasnosf or openness.
76 APPLIED ECONOMICS


The unrecorded human costs of price-controlled medical care
are indirectly indicated by those who opt out. These include pa-
tients, doctors, and medical facilities. Patients in countries with
government-controlled medical prices have left the overcrowded
government sector to seek private treatment at their own expense,
either at home or in other countries. It is common for Canadians
to go to the United States for medical treatment, but rare for
Americans to go to Canada for such treatment. Doctors have also
opted out in various ways. Some have gone into private practice,
despite laws which make it illegal for them to do so if they treat
any patients at all who are enrolled in government plans. Some
Health Maintenance Organizations in the United States have
stopped accepting certain categories of patients for whom the gov-
ernment's reimbursement is inadequate to cover their costs. Some-
times the opting out occurs earlier, when fewer people enter
medical school after the rewards of being a doctor are reduced.
More than half the doctors in Britain, for example, were not
trained in British medical schools but have been imported from
many other countries, including Third World countries where the
training may not be up to the standards of British medical schools.
Paying less and getting less”whether less is defined quantita-
tively or qualitatively”is no bargain, least of all in the case of
medical care.


THIRD-PARTY PAYMENTS

Even in the absence of the price-control factor, having medicines
or medical care paid for by third parties changes the way individu-

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