Market Medicine

We don't have it. But we could.


"The shambles that is our health system proves incontrovertibly that care cannot be left to uncontrolled private enterprise," The San Francisco Chronicle editorialized last May.

"The American myth is that free markets and laissez-faire will take care of the health-care problem," Rep. Bob Wise (D–W.Va.) said at a press conference later that month. "It will not, and clearly that's been demonstrated."

Notwithstanding the casual assumptions of these and other reformers, the U.S. market in health care is not free, and the government's approach in this area is anything but laissez-faire. A myriad state and federal laws and regulations restrict who may provide what health-care services and products to whom under what circumstances. Adult Americans are not free, by any stretch of the imagination, to purchase the health care they want from the providers they choose.

Indeed, for most Americans, a free market in health care is close to unthinkable. It would mean an end to the medical monopoly, to the licensing of health-care providers, to mandatory insurance coverage, even to the distinction between prescription and nonprescription drugs. It raises the specter of injury and death from brain surgery in the garage, inappropriate self-medication, and misplaced trust in the healing powers of magic crystals. But a free market in health care is worth thinking about nonetheless, if only because so many pundits are sure it could not possibly work.

Three decades ago, in Capitalism and Freedom, Milton Friedman used the medical monopoly to illustrate the costs of occupational licensure. Although ostensibly intended to protect consumers from the unscrupulous and the incompetent, he wrote, licensure instead reduces choice, raises prices, and rewards a select few at the expense of their customers and potential competitors. He described how the American Medical Association, through the powers granted it by licensing laws, restricts entry into medicine, allowing its members to earn more than they could in a free market.

Friedman argued that "licensure has reduced both the quantity and quality of medical practice; that it has reduced the opportunities available to people who would like to be physicians, forcing them to pursue occupations they regard as less attractive; that it has forced the public to pay more for less satisfactory medical service, and that it has retarded technological development both in medicine itself and in the organization of medical practice. I conclude that licensure should be eliminated as a requirement for the practice of medicine." He recommended that anyone be "free to practice medicine without restriction except for legal and financial responsibility for any harm done to others through fraud and negligence."

Although Friedman's proposal remains controversial, research and practical experience during the last 30 years have bolstered the case for a free market in health care. One major source of waste cited by Friedman—the use of overtrained personnel to perform routine medical tasks—is today widely recognized. "Health care is a very labor-inefficient enterprise," says Arthur Caplan, director of the Center for Biomedical Ethics at the University of Minnesota. "You have highly trained people doing things that could be done by others."

To the extent that personnel are overqualified for the work they perform, consumers are paying more than they would in a free market. Say you have a dental appointment. You see the dentist for about 30 seconds. Most of your time is spent with the dental hygienist, who examines your gums and cleans your teeth. But you still have to pay for the dentist's training and overhead, so the visit costs $50 to $100. If dental hygienists were allowed to operate independently, the same service might cost half as much.

Ross Korves, an economist with the American Farm Bureau Federation, estimates that expenses for health-care professionals account for about 50 percent of the money spent on health care. Nearly 20 percent of the $604 billion spent in 1989 went to physicians. Labor expenses represented more than half of the $233 billion spent on hospital care.

There is reason to believe that much of this spending is unnecessary. For example, physician assistants, who generally undergo two years of training, can perform about 80 percent of the primary-care tasks that would otherwise be performed by physicians. These include taking medical histories, doing physical examinations, ordering lab tests, removing stitches, and advising patients about diagnosis and treatment. Salaries for physician assistants are one-quarter to one-third the salaries earned by doctors. A 1988 study published in The Journal of Human Resources concluded that physician assistants, first introduced in the late 1960s, are still underutilized in group practices.

Nurse practitioners—registered nurses with additional training—can fill the role of family doctors, providing basic health services at a lower price. A national survey conducted by the American Academy of Nurse Practitioners in 1988 found that, depending upon specialty, patients' first visits to nurse practitioners cost 12 percent to 45 percent less than comparable visits to physicians. "They're an underutilized, untapped resource that could help reduce the cost of health care significantly," Caplan says. In particular, he suggests, nurse practitioners can serve rural and inner-city markets where physicians prefer not to practice. "N.P.s could do an excellent job at primary care in these areas. The only obstacle is that doctors want to exercise their monopoly power."

Nurse practitioners are hampered by laws that require physician supervision and limit their ability to prescribe drugs. Of the 33 states that give nurse practitioners some authority to prescribe, all but three require a doctor's input. Largely because of such restrictions, only 3 percent of nurse practitioners have independent practices. (Most work in hospitals, HMOs, clinics, or doctor's offices.)

Competition-conscious physicians are worried even by the limited success of nurse practitioners. As a recent story in Medical World News put it, "What unnerves organized medicine about all this is the specter of nurses in independent practice being paid directly for evaluating patients and deciding what action to take without consulting physicians. The AMA Board of Trustees, in a report at the 1990 annual meeting, detailed the warning signs of independent practice: direct reimbursement, prescription-writing privileges, and nursing students being trained in freestanding ambulatory clinics."

If nurse practitioners are setting off alarm bells at the AMA, they must be doing something right. The more worried the medical establishment, the greater the potential for consumer savings. For example, both nurse practitioners and physician assistants can play an important role in caring for the elderly and for patients with AIDS, two groups with chronic conditions that will be consuming growing shares of health-care spending in the next few decades. Physicians are attempting to stake a claim in this area, Caplan says, although M.D.s are inappropriate for such long-term care, which requires the ability to tend the day-to-day needs of homebound patients rather than extensive technical expertise.

In addition to nurse practitioners and physician assistants, M.D.s resist competition from osteopaths, podiatrists, chiropractors, optometrists, acupuncturists, midwives, and pharmacists—all of whom earn less money, on average, than physicians; all of whom can perform at least some of a physician's functions just as well or better; and all of whom are hobbled by protectionist legislation. For example, optometrists in many states may not prescribe eye drops, and in 24 states only physicians may perform acupuncture.

One of the medical privileges most prized by health-care providers who try to compete with physicians is the authority to prescribe drugs. A free market in health care would mean not only that non-physicians could prescribe to others but that adults would be free to prescribe for themselves as well. Until the late 1930s, in fact, Americans accepted self-medication as perfectly natural. Why go to the doctor if you can treat yourself?

In 1938, the head of the Food and Drug Administration emphasized that the pending Food, Drug, and Cosmetic Act was intended to assist, not prevent, self-medication. In practice, however, the FDA's regulations under the law cut consumers off from information about drugs and imposed mandatory prescription. The effects of this policy have been profound: Americans now assume that they need a doctor's permission to take a drug, unless the FDA decides otherwise. Hence the cost of a doctor's visit is automatically tacked on to the cost of obtaining any prescription drug. The price of the drug is also raised by the extra cost of dispensing it one package at a time rather than in bulk. And the prescription requirement may prevent the drug from reaching a wider market, which could reduce the price still further.

In a 1983 paper published in the Journal of Health Economics, MIT economist Peter Temin estimates the benefits of switching particular drugs from prescription to over-the-counter status. For topical hydrocortisone, which became available without prescription at the end of 1979, he estimates that the benefits exceeded the costs by more than $200 million in 1980 and more than $400 million in 1981. If penicillin were made available over the counter, he suggests, consumers could save on the order of $1 billion a year in doctor visits.

The examples I've cited so far suggest that a free market in health care has the potential to save consumers and insurers a lot of money. But could it work? One obstacle is third-party payment. Although employers shop for health plans and insurers try to keep a lid on costs, employees who receive free health-benefit plans rarely bear the cost of their health-care decisions. Consequently, they have little incentive to shop around or to forgo optional treatment. As long as the government taxes direct income but not health benefits, employees will prefer the former to the latter, and most Americans will continue to "purchase" health care without the benefit or discipline of price signals.

Another objection to a free market in health care is more fundamental. Many economists argue that health care is special. You can trust the free market to deliver corn flakes and car washes, they say, but not something as complicated and essential as health care.

In the 1970 book Profession of Medicine, sociologist Eliot Freidson put it this way: "If we believe that medicine possesses science and integrity markedly superior to competing occupations, we would not be inclined to invite the competition [Milton] Friedman calls for because of the suffering which could follow upon uninformed consumer choices in a truly free health care market."

This is not simply paternalism. For Freidson and like-minded academics, the "information problem" is not merely that consumers will err; it's that they generally will not know enough to make wise choices. Hence the market will not function properly. This claim is superficially plausible. After all, medicine is complicated. But is it uniquely so?

If we had to rely on our own expertise, we would make many purchasing decisions in the dark. On my own, I would be hard pressed to choose between radiation and surgery for the treatment of a tumor, or to decide whether to take penicillin for an infection. But I would also have no idea which computer to buy, or how to stop the knock in my car's engine. Consumers routinely rely on the advice of others to make decisions. They glean information from advertising, the press, sales people, competing businesses, consultants, referral services, friends, and relatives.

The current health-care system already requires consumers to choose doctors, select health plans, and consent to treatment. They do so with the help of books, second opinions, recommendations from acquaintances, and so on. Abolishing the medical monopoly would not close off these sources of information. Nor would it eliminate the credentials by which people judge health-care providers. You could still insist on being treated by an AMA-approved M.D. or a certified specialist. But you would also be free to select someone with different training—an osteopath, a chiropractor, a faith healer, an acupuncturist, a nurse practitioner—certified by a different professional association, or not certified at all. Furthermore, the demand for medical information would support new businesses aimed at helping consumers make health-care choices by offering laboratory tests, referrals, ratings of practitioners, and treatment track records.

Many people would probably rely on intermediaries—hospitals, insurers, health-maintenance organizations—to make sure that everyone treating them was competent. In 1962, Friedman envisioned department stores of medicine that would cost-effectively combine facilities, equipment, and personnel with various skills to provide health-care packages for a fixed fee. Health-maintenance organizations such as Kaiser Permanente are increasingly playing that role. In choosing a package, consumers rely on the I name and reputation of the company, rather than investigating the qualifications of every employee or contractor.

A lack of adequate information is the major justification for the regulation of medicine. But it is also one of its main consequences. For example, the FDA forbids drug companies to tell consumers about most of their products. Similarly, a professional code enforced by the medical monopoly forbids doctors to advertise. Rather than make sure that consumers are fully informed, the law limits their ability to make intelligent choices, creating an artificial dependence on officially approved experts.

The potential benefits of health-care advertising are illustrated by optometry. In a 1975 study published in The Journal of Law and Economics, Lee and Alexandra Benham found that prices for eyeglasses were 25 percent to 40 percent higher in markets with greater professional control over information, including restrictions on advertising, promotion, and location. In his 1980 study of optometry, Professionalism and the Public Interest, economist James Begun found that prices for optometric services in restricted markets were higher than could be justified by greater quality, even as defined by the optometrists. The Federal Trade Commission overturned state bans on the advertising of eyeglasses and contact lenses in 1979; by 1982 the average price of a pair of soft contact lenses had dropped by about $100 in real terms.

If there really is an "information problem" in the healthcare market, current regulations only serve to make it worse. But health care is considered special not only because it is complex but also because it is important. In some ways, health care is a basic requirement of life, like food, clothing, and shelter. There's one crucial difference: It's relatively easy to define the minimum amount of food, shelter, and clothing that a person needs to survive. The need for health care, on the other hand, is potentially open-ended.

The expenditure necessary to keep someone alive varies tremendously depending upon the person's condition. The resources needed to stop a baby from dying of dysentery are nothing compared to the resources needed for a heart transplant to extend the life of a 65-year-old. Moreover, in addition to preserving life, health care may serve to improve one's faculties or relieve anxiety and discomfort. Are these also basic needs?

Health care is something we would like everyone to have, even if they can't afford it because their income is too low or the cost is too high. At the same time, it cannot be provided to everyone on demand in unlimited quantities. These constraints will prevail no matter how health care is organized. Whether we keep the current system, adopt a free market, or move toward socialized medicine, we will still have to deal with the question of how to provide health care to the poor or to those overwhelmed by catastrophic illness.

"It's much easier to turn away than to confront hard rationing decisions, to trust in the invisible hand and our tattered patchwork of support programs rather than in some new government bureaucracy," Public Citizen's Nancy Watzman wrote in The Washington Monthly last October. "Trouble is, the invisible hand isn't known for its compassion. As a result of the laissez-faire approach to medical care, we already have a rationing system in place—one based not on need but on ability to pay."

In addition to making the familiar but mistaken assumption that the United States has a free market in health care, Watzman confuses economics with philanthropy. By now there should be no question that rationing based on "ability to pay" (capitalism) is more efficient than rationing based on "need" (socialism). And the more efficient the system that provides health care, the more people will be able to afford it, and the easier it will be to provide for those who can't, whether through private charity or public assistance. The government can help people pay for health care without socialized medicine, just as it can help them pay for food without nationalizing supermarkets.

Activists like Watzman worry that the current health-care system favors the rich because it allows them to buy better health care than the poor. But the real problem with the system is that it does not allow enough variation in quality. As Friedman noted 30 years ago, doctors "look solely at technical standards of performance and argue in effect that we must have only first-rate physicians, even if this means that some people get no medical service." In his study of optometry, Begun calls this attitude the "quality-at-any-cost ethic of the professions," with quality defined, of course, by the professionals.

Most of the health-care reform plans being tossed around in Washington focus on cost control. But the key to cost control is quality control—specifically, the power to define the quality of health care and decide how much it's worth. Would-be reformers should consider the possibility that the customer may be right after all.

Jacob Sullum is associate editor of REASON.