Capitalism and Health Care

Earlier this month, Prof. Thomas Wellock, the latest to join our “group of four,” used his first column to argue that capitalism is to blame for our current health care crisis. As Charlie Brown would say, “Good grief!” If such an argument had been put forth in a letter to the editor, I would have just rolled my eyes. But since it came from trained historian, it made me want to beat my head against the wall. Rather than do that, I thought I should instead use this month’s 600 words to offer an accurate history lesson explaining why America has such high health care costs.

Let’s start with the idea that capitalism is to blame for high health care costs. Capitalism has been the dominant organizing principle in America since the late 1600s, yet we didn’t get a health care crisis until after WWII. If capitalism can cause a health care crisis we would have had one in the 1700s. We didn’t. Here is an idea. If the health care crisis began to emerge after WWII, maybe we should look at events around that time period for an explanation, not events that took place during the reign of King Charles II.

As almost all social scientists know, something did happen during WWII that started our decline into a health care crisis. (Hint: we didn’t invent capitalism in WWII). No, we created, due to government interference in capitalism, a “third-party payer” system—a system where a third party (insurance companies) pays the supplier (the doctors) for what the purchasers (patients) consume. Once a third-party payer system is established, consumers no longer inquire about prices, and therefore, producers no longer have any incentive to hold them down.

It is important to remember that Americans do not buy health care. They buy health insurance. Therein lies the problem. When you buy a car, you ask the dealer about the price. You shop around. You find the best deal. Why? Because you will be paying the dealer directly. Not so with health care. We don’t pay the doctor for what we buy, the insurance company does. We never ask a doctor how much an X-ray costs. We never compare one doctor’s price to another. We don’t shop around because we don’t pay (directly) for the health care. Because we don’t ask about price, doctors have no incentive to offer lower ones.

Imagine if by purchasing auto insurance you got to take any car you wanted off the lot. Would you ask about price? No. Would you take the most expensive car there? Of course you would. Would car dealers compete with each other by lowering prices when you don’t even ask “How much?” In fact, when consumers don’t see the price they are paying, there is actually an incentive for producers to increase prices. The third-party payer system encourages doctors to raise prices because they have no fear it will lead to lost customers. You don’t get the bill, the third-party payer does.

How did such a terrible system come about? During WWII the Roosevelt administration interfered with the market system and established extensive price and wage controls. It became illegal for most firms to give pay raises. Yet, pay raises are how companies compete for labor. Without the ability to offer higher salaries, companies instead started offering “fringe benefits” to entice workers to their field. The most popular fringe benefits offered were “free” health care benefits.

The problem was magnified when the IRS ruled that salaries were taxable, but health care benefits were not. This led workers to prefer health care benefits to wage increases, even after the wage and price controls were dropped. A $1,000 pay raise with a 20% tax gives you an extra $800. But, a $1,000 non-taxable health care premium gives you an extra $1,000. After WWII, everyone began to prefer employers that provide third-party payer health care benefits.

Now we are paying the price for Roosevelt’s foolish market interference. He inadvertently created a system where consumers do not inquire about price and doctors do not lose customers by raising prices. In such a system, is there any wonder why health care costs are going up?