Milton Friedman on Health Care: "Nobody spends somebody else's money as wisely as he spends his own"

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At Forbes, Peter Robinson argues that Congress and the president should look to Milton Friedman to understand the real origins of America's health care woes:

Since the end of the Second World War, Friedman explained, medical care in the U.S. has displayed three features: technological advances, increases in spending and rising dissatisfaction….

The policy mistake that produced this illogical mess took place during World War II, when the government imposed wage controls. Unable to compete for workers by paying them more, employers began providing medical care, and the new benefit spread rapidly.

When the Internal Revenue Service caught on, requiring employers to include the value of medical benefits as part of the wages they reported, workers, who had grown accustomed to the benefits, protested. Congress responded with legislation that made employer-provided medical benefits tax-exempt.

By the time the 1960s arrived, Americans were used to having third parties pay their medical bills. Thus the enactment of Medicare and Medicaid–under which the government, rather than employers, acted as the third party–seemed perfectly reasonable.

Read the rest here.

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33 responses to “Milton Friedman on Health Care: "Nobody spends somebody else's money as wisely as he spends his own"

  1. This time though, this time we’ll get it right. The Lightbringer wouldn’t let you down.

  2. Well duh Morgan…the Right People Are In Charge?

  3. Government mandated minimum wage laws, imo, give wages an artificially low base. Without a minimum wage law, I suspect average minimum wages would actually be higher.

  4. How does this merit a post? Is there anyone involved in the health care debate that even disputes this fact?

  5. How does this merit a post? Is there anyone involved in the health care debate that even disputes this fact?

    Which fact? If you’re referring to Milton Friedman’s assertion in the title, then I have to ask: are you kidding me?

  6. Employer-paid medical care is ultimately as much of a mistake as employer-funded pensions. Company pension funds tend to go bust when the company can no longer compete against younger firms that don’t have the unproductive overhead. Or when the industry simply goes into a natural decline.

    Similarly, a company that can cut costs on health insurance is going to have a competitive advantage, meaning that whatever coverage you get is likely to be rigged in ways that are not under your immediate control. The same thing goes for government care – the state will cut corners no less than an insurance company, at the behest of forces not under your control.

    You are always safer and better off planning your own retirement and funding your own health care. There is no free lunch. At least with the decisions in your own hands you can maybe use those genetic predispositions to tailor coverage to your own specific needs. You will know exactly what you are getting and you won’t have arbitrary decisions made by others (government or employers) affecting what you get.

  7. RE:Government mandated minimum wage laws, imo, give wages an artificially low base. Without a minimum wage law, I suspect average minimum wages would actually be higher.

    Not across the board, workers are always an expense & businesses always want to limit their expenses

  8. What if one doesn’t have a lot of money or no money. How is one supposed to manage something they don’t have ?

    One serious illness can impoverish a family even with the current insurance coverage we have.

    How is free market rationing better than “government” rationing ?

  9. Because of our history of having 3rd parties pay for our health care, I don’t think that most Americans have an intuitive sense that they have to budget for health care.

    People have an intuitive sense that they have to budget for housing, food, clothing, transportation, entertainment etc so when they even think about their personal finances they reflexively allocate for those needs. They don’t do the same for medical care because most of us have never had to pay directly for our health care. People shop carefully for big ticket items such as housing and cars and they save for months or years to get what they want but they don’t do the same for medical care.

    I think that most people believe that they can’t “afford” medical care because they’ve mentally allocated all their budget to other things. They intuitively think of health care as an fluke expense, something that an ordinary person wouldn’t allocate money for.

    In reality, all but the truly indigent can afford medical insurance but we would have to accept the tradeoff of reduced consumption in other areas. We would have smaller houses, smaller cars, less entertainment etc.

    In 1900, transportation was considered such a trivial expense that the census didn’t even check for it. Now it consumes 20% of the average households budget. People learned over the decades that they would have to budget for transportation so this shift in budget allocation seems natural and normal today. However, if 3rd parties had paid for our cars all these years, then people would spend their money on other things and would believe that they couldn’t “afford” transportation.

  10. Will,

    How is free market rationing better than “government” rationing ?

    Because in free-market rationing individuals make their own detailed choices about how to allocated their own resources. This increases happiness because each individual is a better judge of their needs than anyone else. The free-market processes many orders of magnitude more information than does any political system. The free-market notes the fall of every economic sparrow while the political system operates on stripped down abstractions of dubious accuracy.

    What if one doesn’t have a lot of money or no money. How is one supposed to manage something they don’t have ?

    Just because some people cannot afford to pay for their own health care does not mean that it would be better if the government took over the entire health care system. A minority of citizens cannot pay for their own housing does that mean we would be better of with Federal politicians micromanaging the entire housing market?

    The vast majority of people today pay for their own health care it is just that the cost of health care is deducted from their salary by their employers. In addition to their own health care, they pay for the health care of the poor and elderly as well. See my post above. People just don’t have the psychological slot for budgeting for health care.

  11. Will,

    Wages are an expense and companies do want to lower their expenses, but companies are also competing with each other to get better and more qualified workers. Talk to anyone in Human Resources and they will tell you over and over that finding “good people” is very very difficult. There is competitive pressure to raise wages as much as is necessary to get good people. This is – notably, why (as Friedman pointed out) people started getting other “benefits” from their employers. When employers weren’t allowed to simply pay more for better people – they came up with creative ways to attract better talent that was outside the monthly paycheck.

    Controlling wages at a above-market clearing level – just like setting high price-controls on anything, simply lowers demand. This means… Increased unemployment. It’s really really really simple.

    And also – What Shannon said.

  12. Also – Will, ask yourself… How is free-market “rationing” better than government rationing of personal computers? Televisions? Bacon? Eggs? Milk? Korg Triton digital keyboards? Automobiles?

    Does no one ever bother to check their reasoning even past the first step anymore? Gah.

  13. What would be the effects of price controls on health care? (For example,laws making it a crime to charge more than one dollar for a bottle of aspirin, making it a crime to charge more than fifty dollars for an X-ray, or making it a crime to charge more than twenty-five thousand dollars for a coronary bypass.)

  14. Steve Forbes has used this analogy: Assume groceries are bought as health care is now. Your employer gives you a card to take to the grocery store. When you check out, you hand the card to the clerk and someone (your employer) takes care of the bill.

    Do you think you’d look for the sale items and specials? Or would you load your basket with the best stuff you can find, regardless of price? Not much question.

    So long as pricing is detached from the services acquired, the consumer will opt for the most expensive services. Thus, the contradictory factors Friedman states: Highest prices combined with lowest satisfaction.

  15. How is free market rationing better than “government” rationing ?

    Because it is based on actual market forces. The same reason that free market rationing of potato chips works.
    Or free market rationing of cars (pre-Government Motors).

    You can get as much of X as you can afford to buy.

  16. What would be the effects of price controls on health care? (For example,laws making it a crime to charge more than one dollar for a bottle of aspirin, making it a crime to charge more than fifty dollars for an X-ray, or making it a crime to charge more than twenty-five thousand dollars for a coronary bypass.)

    As with every other good, a price cap like that would lead to shortages. If the price is capped below the free market value, then demand will exceed supply and there will be shortages.

    Also, a black market will form where people will pay full price for aspirin/bypass surgery to avoid waiting in line.

    Econ 1001. (My school had 4 digit course numbers)

  17. Also, corruption will increase as bureaucrats funnel aspirin to their pals who then sell it for a nice profit on the black market.

  18. Highest prices combined with lowest satisfaction.

    The reason for the low satisfaction is that the company forces me to shop at Kroger, even though Wal-mart is closer. And they may not carry the same selection as Valu (the one near me has lots of ethnic food that I dont know what it is – but Im sure some appreciate that selection).

  19. If the price is capped below the free market value, then demand will exceed supply and there will be shortages.

    In the case of health care, it would not be so much demand rising above supply but supply falling below demand.

    People are not going to have more heart attacks because coronary bypasses are twenty-five thousand instead of thirty thousand.

  20. I just don’t get it….

    Why is it that everyone seems to believe the basic laws of economics don’t apply to medicine? This is just ridiculous. When you put caps on prices there are shortages, when you hold wages higher than the market would offer, you cause unemployment. It doesn’t matter if you’re putting caps on the price of cheese, or the price of televisions or the price of viagra.

    When prices go down, that signals to consumers that there is wider availability and more people want to buy. When more people want to buy any commodity, and there isn’t any more in circulation….. BAM! Shortage.

    Shortages created by price controls in Medicine will subsequently lead to rationing, and government bureaucrats, rather than doctors & patients deciding who the medicine goes to. This is even worse than the system as it currently is.

    But Michael, you hit upon a really important point that Thomas Sowell talks about a lot… the very conception of “demand” is kind of artificial and silly. Demand is more or less infinite. But resources aren’t. If I could have 600,000 sq ft house with a recording studio in the basement and a swimming pool overlooking the ocean, I’d probably take it. Cept… I can’t. Say at some point in my life I am able to have that… My “demand” didn’t change – merely my ability to afford what I wanted. This is one of many reasons using free market competition to attack problems of scarcity through innovations in efficiency of production, which reduce prices – is vastly superior to using government.

  21. Steve Forbes has used this analogy: Assume groceries are bought as health care is now. Your employer gives you a card to take to the grocery store. When you check out, you hand the card to the clerk and someone (your employer) takes care of the bill.

    Do you think you’d look for the sale items and specials? Or would you load your basket with the best stuff you can find, regardless of price? Not much question.

    Oh, I’m sure that system would work if your employer’s grocery company made a deal with Safeway that it would only pay them the “usual, customary, and reasonable” price for each item, and if Safeway agreed not to try to collect any more than that, in return for being included in the grocery company’s “network.”

    And I’m sure that employees would learn not to waste their grocery benefits if they were required to shell out a $10 “co-payment” each time they went to Safeway.

    Yeah, that’s the ticket. [/Jon Lovitz voice]

  22. “What if one doesn’t have a lot of money or no money. How is one supposed to manage something they don’t have ?

    One serious illness can impoverish a family even with the current insurance coverage we have.

    How is free market rationing better than “government” rationing ?”

    No perfect answers, but:
    1) Hopefully when people manage their own care, doctors will be compelled to lower prices; even patented drugs may see lower prices. This will make easier for those people on the border between self-sufficient and not.

    2) Lower prices from #1 and a high deductible and co-pay on major medical insurance should be affordable and will help prevent unforeseen illnesses from wiping out families. Foreseeable problems will require that families act and spend as though the health care problems could spike up at any time — this means higher saving, and effectively a lower standard of living compared to others with the same income. It isn’t fair, but it isn’t really society’s fault that they are predisposed or born with an expensive medical condition either. As a fallback, charities would probably be willing to help; if all else fails, government programs could work, but these sort of highly expensive cases are probably the least suited to the bureaucratic, regulated, rationed care that would be dealt by the government.

    3) Free market rationing is self-correcting — the more rich people spend on getting a better ration, the less wealthy they become. In an ideal free market system (not that we exactly have one), income corresponds roughly to the value one is adding to society through labor, so there is a utilitarian justification for this sort of rationing, versus “intrinsic human worth” rationing, which people will subvert regardless — I suspect that if we judge by spending under a government-run program, vegetables and the severely disabled will have less “instrinsic human worth”.

    @Seamus:
    A flat co-payment is mostly worthless; however, a percentage co-pay would motivate some patients to double check their bills and fight ridiculous charges. Other patients can free ride on the price-cutting benefits of their thrift.

  23. Neither the free marker nor the Govt is magical, they all depends on the good nature of who ever is in charge. Also I can make do with less potato chips or the latest gadgets.

    But if I need a heart valve replacement & just got laid off no work based insurance, no money coming in because let’s say I’m not Steve Jobs or Bill Gates or some Ayn Rand superman just a middle mgmt person in his or hers 40’s … what then.

    Nothing is perfect just go with what’s better.

  24. Employer arranged health insurance is not perfect, lord knows, but for a great many people it is better than trying to buy individual health insurance. If you have one of a number of illnesses, you can not buy insurance at any price. If you are able to purchase insurance, it might cover a particular expensive problem, but then you would probably be dropped by the insurance provider. Then you fall into the first scenario.

    If you are young and healthy, you can manage to find reasonable insurance. If you are ill, or likely over 50, you can not. (I use 50 as most people that I know over 50 have some form of illness due to age.)

    Why can’t there be a public insurance option for those people that insurance companies don’t want? It would not be free. Medicare is not free, especially if you need to purchase supplemental insurance.

    I am not unbiased. I was diagnosed at 24 with Crohn’s disease. The cheapest medicine always worked best for me (prednisone). But I can no longer take that medicine due its long term effects. The current medicine works well, but is about $20,000 a year. Now tell me how to adjust your life to include that much money into a budget with income of only $60,000?

    And by the way, as long as I have access to the medicine, I can work productively. Without it, I could not.

  25. “Now tell me how to adjust your life to include that much money into a budget with income of only $60,000”

    You live like people that make 40k (yes, there are one or two in our society) instead of people that make 60k.

  26. You live like people that make 40k

    How dare you use your math skills like that? Its unfair to those who cant see the obvious.

    Neither the free marker nor the Govt is magical, they all depends on the good nature of who ever is in charge.

    In the free market YOU are in charge. It isnt magical, but that is what makes it the best option.

    Nothing is perfect just go with what’s better.

    I agree, and the best option is that which maximizes liberty, which is the free market.

  27. You are only in charge as much as you can afford.

    Insurance companies will gladly take your money & fight tooth & nail to deny you coverage if you have need any expensive treatments. Insurance companies have the right not to cover you & the right to drop you. So you go shopping for another one & hopefully the clock isn’t ticking like you have an aggressive cancer or losing heart muscle etc.

  28. Govt run catastrophic might be an answer instead of universal coverage but that which will probably cause the private companies to drop their more troublesome customers.

  29. This increases happiness because each individual is a better judge of their needs than anyone else.

    Also, in this fantasy world, you don’t need doctors.

    Also, a black market will form where people will pay full price for aspirin/bypass surgery to avoid waiting in line.

    The black market already exists in the US. Not just pharmaceutical arbitrage in Canada and Mexico, but calling the sister-in-law who’s a doc for a prescription, or loading up on samples.

    The problem with Uncle Miltie’s line is that serious medical treatment is priced like Adobe CS4 or first-class air tickets: if you’re paying sticker price, you’re rich enough not to care. It ain’t priced for retail purchase. Items that are priced for corporate purchase, on the other hand, are subject to bulk discount and expense writeoffs.

    Sorry, libertarians, but the free free free market isn’t going to bring down the cost cancer treatment from the price of a small house to that of a small car. And people aren’t going to save up just in case of that cancer diagnosis, even if you (esp. Boyz like Shannon) act all haughty about the need to do so.

    In the free market YOU are in charge.

    All the way to an early grave. Woo hoo! Mahogany or teak for your coffin?

  30. Govt run catastrophic might be an answer instead of universal coverage but that which will probably cause the private companies to drop their more troublesome customers.

    Don’t you mean it would lower costs of insuring “troublesome” customers, thus causing private companies to take on more customers?

  31. if you’re paying sticker price, you’re rich enough not to care.

    And if you rtfa, you’d know that the sticker price is inflated due to government messing with the market.

    And people aren’t going to save up just in case of that cancer diagnosis

    This is why people buy insurance.

  32. if you rtfa, you’d know that the sticker price is inflated due to government messing with the market.

    Your imaginary friction-free market isn’t going to turn a course of chemotherapy or a heart bypass into something that is priced for retail purchase. Sorry about that.

  33. Have you seen the price on catastrophic coverage?$100/month for most people. If you can’t afford it, there is always Medicaid. Before you get excited about the government setting the price of everything, think about the possible negative effects.

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