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This past week, Senator Bernie Sanders of Vermont proclaimed in a New York Times op-ed that the time has come to create a program of “Medicare for all,” a government-run single-payer healthcare system that would over a four-year period displace all existing private healthcare plans. His new program, rightly denounced as delusional, purports to provide to over 325 million Americans coverage that would be more extensive and costly than the rich benefits supplied to the 55 million Americans on Medicare—which itself teeters on the edge of insolvency. Sanders proposes to fund his new plan with a variety of heavy taxes on productive labor and capital, without noting that his program will cut into the very tax revenues needed to support such a system. Incentives matter, even in la-la land.
None of this matters to Sanders, for whom noble aspirations cure all technical defects. He believes that the United States, like all other modern states, should “guarantee comprehensive healthcare to every person as a human right.” In his view, the simplification of administrative costs should remove frustration from a beleaguered citizenry constantly at war with its insurance carriers, while simultaneously slashing the expense of running a healthcare system. It is fortunate that the odds of getting this plan enacted soon are low, notwithstanding that his position is swiftly becoming mainstream in the Democratic Party. Of greater import is the catastrophic consequences that would follow its enactment.
Most fundamentally, Sanders and his many acolytes never ask hard questions about what the term “comprehensive” means. Many public healthcare plans, like that of Great Britain, wrestle with this challenge, knowing that aggregate demand for expensive medical services explodes whenever these are offered for free. The extra services demanded cannot be supplied from existing personnel and facilities, so finding additional resources is expensive, given the inevitable diseconomies of scale. It is only possible to survive the onslaught by defining protected benefits relatively narrowly.
These systematic shortages are aggravated as the existing supply of medical goods and services shrinks, with the government imposing caps on salaries, drugs, and procedures. These shortages impose high costs as services are rationed by queuing, not money. These queues spawn intrigue: the rich (who under the Sanders plan would be barred from paying private providers of goods and services) go either overseas or into the black market in order to obtain vital goods and services that less fortunate individuals cannot afford.
This grim picture is no idle abstraction. These incentive effects are so powerful that they will swamp any effort to improve national healthcare by government fiat. It is conceptually indefensible and politically naïve to assume that healthcare is somehow “special” and therefore follows economic rules that don’t apply to other markets. In housing, it has been known for decades that rent control only aggravates shortages by creating massive distortions in housing markets. In agriculture, ethanol subsidies for gasoline have wrecked the operation of both food and energy markets. In transportation, endless queues formed when price controls at the pump created systematic gasoline shortages. The lesson is that basic economic principles apply to all goods and services, no matter their elevated position in the social discourse.
We already have good evidence of the destructive effect of regulation on healthcare markets. The individual mandate of the Affordable Care Act (ACA) does in miniature exactly what the Sanders plan will do in the aggregate. By mandating benefits and coverage formulas, it requires huge public subsidies to keep the program alive, and then makes matters worse with its system of community rating. The combined effect of these initiatives is to contract severely the insurance market for individual healthcare policies. The failure of central planning to work should lead people to shy away from universal healthcare, which will only magnify the same set of dangers. But instead, the constant refrain one hears today is that the public wants single-payer to ease the frustration and complications of the current healthcare system.
This common position makes the disease the cure. But there is another way: deregulation. Removing regulation can do two things that a national healthcare system cannot. First, it reduces administrative costs by removing the role of government in decisions insurers should make about what goods to supply and what prices to charge. Second, it increases the level of choice in the selection of healthcare coverage. There is no reason to think that every American needs exactly the same set of benefits regardless of age, health, sex, and income. Choice is generally regarded as a virtue in markets that deal with food, transportation, housing, and other goods. It is a fatal conceit to think that healthcare is so unique that a central planner can decide at a low cost which of the thousands of permutations of goods and services belong in the one comprehensive nationwide healthcare plan, especially after dismantling the private sector—which would take away the essential information needed to best allocate scarce resources.
In contrast to central planning, markets tend to bring supply and demand into balance, as higher prices draw in more suppliers in case of shortages, while lower prices draw in more consumers in case of surpluses. Price controls for healthcare services operate just like price controls everywhere else: the shortages they create ripple quickly through the entire economy. Delays in the provision of healthcare allow serious medical conditions to fester until emergency care becomes necessary, but prompt access to such treatment is far from certain.
Sanders misses the point because he lives in a Pollyannaish universe in which these fundamental structural principles somehow do not apply. Accordingly, he finds it all too easy to pin the breakdown in the current healthcare system on the villains of “the medical industrial complex.” In so doing, he foolishly assumes that the high salaries paid to executives are unearned and should be plowed back into better services for the population at large. Wholly foreign to his way of thinking is that people who command these salaries function in a competitive market in which few players long prosper if they do not deliver to their customers benefits in excess of what they receive in exchange.
Unfortunately, Sanders starts from the Marxist premise that all contracts are forms of exploitation. He thus finds it hard to fathom the essential truth that markets work precisely because of the gains from trade that follow from voluntary exchange. In 2016, Pfizer, for example, offered its CEO a compensation package of over $17 million, which is small potatoes against its nearly $53 billion in sales that year. On a daily basis, the CEO and his team have to make high-stakes decisions that go straight to the bottom line. You pay top talent top dollar because complex businesses are exceptionally hard to run, especially in today’s regulatory environment. Perhaps Sanders thinks that every compensation committee in the land is afflicted with some deep confusion concerning the worth of its key officers. Perhaps he also believes that institutional shareholders, to whom this information is disclosed in a myriad of ways, are duped just as easily.
Indeed, when he writes that the United States should negotiate down the prices of key drugs, he ignores the well-established point that a cut in prices will necessarily lead to a decline in pharmaceutical innovation. The large payments to drug companies would be a proper source of concern if they resulted from some improper use of monopoly power. But under competitive conditions, these prices reflect both the high cost of getting drugs to market through the approval maze set up by the Food and Drug Administration, and, once some drugs run that gauntlet, the huge benefits they provide by stabilizing chronic conditions, responding to acute illnesses, and eliminating costly surgeries and other forms of intervention.
There is much that can be done to fix the American healthcare system. All sides of the debate agree that it costs too much to operate and supplies too few benefits. But there is no way that a system can control costs while catering to unlimited consumer demand. The law of unintended consequences applies to all social activities, healthcare included. It is this message that has to be hammered home in the upcoming debate over healthcare reform.