Correction, Please! M. Skousen

Greater productivity does not lower costs." But are medical services really that dif ferent from soap, cars, or baseball tickets? Let's go back to Economics 101 to ana lyze the health care debate. We shall see Mark Skousen is editor of Forecasts & Strate gies, one of the nation's largest financial news letters, and an economist at Rollins College in Winter Park, Florida 32789. For information on his newsletter and his book, Economics on Trial, contact Phillips Publishing, Inc. at (800)-777 5005. by Mark Skousen that, contrary to The Times's statement, supply and demand are working all too well in the health care industry. On the next page is a graph of supply and demand for product x. This simple graph teaches us three grand principles which, if followed, will easily explain (and resolve) the health care crisis. Market Principle #1: Supply and Demand First is the principle of supply and de mand. When supply is free to adjust for changes in demand, prices move quickly toward equilibrium without creating short ages or surpluses. As demand increases, prices rise; as supply increases, prices de cline.

Why is the cost of health care rising so rapidly? Two reasons: first, increasing de mand from Medicare and Medicaid, which today accounts for 65 percent of all medical expenses; second, restrictions by the Amer ican Medical Association on the number of students admitted to medical school and limitations on what services nurses and paramedics are permitted to perform. Market Principle #2: NonDiscrimination Second is the principle of nondiscrimi nation. Note in the graph that everyone tends to pay the same price for product x. No matter what your income, religious be525 526 THE FREEMAN • SEPTEMBER 1994 Supply Quantity tiefs, or color of skin, you pay the same price as everyone else. Republicans and Demo crats pay the same amount, Pe' for the same product. So do rich and poor, Christians and atheists, secretaries and engineers. In the free market, as customers compare prices and producers compete, price discrimina tion is minimized and products are univer sally available.

Maintaining the principle of nondiscrim ination in the marketplace is essential. If prices were based on income, there would be little incentive to work harder and earn more income, or for businesses to compete and shoppers to compare prices. However, this principle is being eroded. Private insurance premiums are still the same for each participant, but an increasing share of medical costs is being borne by taxpayers based on income level. The Medi care tax is now an unlimited tax on income (2.9 percent). The Clinton health plan would make matters worse by making monthly medical insurance premiums a percentage of income, not a fixed amount. Market Principle #3: Accountability Third is the principle of accountability. The graph above suggests that you, the customer, pay a specified price, Pe, for each product you buy, or for each unit of service you use. In other words, there is a direct link between beneficiaries and payers. Those who benefit from a service should pay for it.

That's a cardinal principle of sound econom ics. If you buy one loaf of bread, you pay $1. If you buy two loaves, you pay $2. When people don't pay for the services or products they are using, there is a tendency to overuse the benefits and less incentive to keep costs down. The connection is obvi ous: If you use a doctor's services, you should pay for them. If you use more, you pay more. And if you use less, you shouldn't have to pay the same amount as someone who uses more. The principle of accountability is also disintegrating. The link between payers and beneficiaries is breaking down. In more and more cases, Medicare users are not paying the bill, taxpayers are. Another major source of trouble is the pervasive use of employer-paid medical in surance to pay for even routine doctor visits. When employees know that someone else-the insurance companyis going to foot the bill, there is less incentive to shop around and to limit the number of visits to the doctor or the hospital's emergency room. Fortunately, the insur~nce compa nies do attempt to maintain some form of cost control on hospitals and doctor ser vices, but the current system is less than optimal.

Who's to Blame? The author of the Times's article blames the market for America's health care prob lems, but the real cause is the government's failure to let the market operate fully. Even employer-paid medical insurance is, in a way, a government creation. High corporate taxes encourage businesses to offer a wide variety of fringe benefits, which are tax deductible to corporations and tax-free in come to employees. Contrast the health care industry with the dental industry. The dental market does not suffer from the problems facing the medical industry (spiraling costs, bureaucracy, long waits at medical facilities) largely because (1) most dental services are paid for directly by the patient, and (2) the number of dental students is not restricted. These two factors, patient accountability and expanding sup ply, have worked to keep the price of dental care down. Despite The Times's dire pro nouncement, market principles do work.

THE FREE MARKET WORKS FINE, EXCEPT. . .. 527 How to Resolve the Health Care Problem What should be done to improve the situation? Imitating national health pro grams in Canada and Europe won't do because they violate market principles. (If you want to know the weaknesses in each country's health care system, analyze each according to the three market principles.) Analyzed according to these three market principles, Clinton's health care plan won't work either. The cost of medical services would vary according to income, beneficia ries wouldn't pay directly for medical ser vices, and a new federal agency would impose cost controls on drugs and other medically related services. The result would be shortages, bureaucracy, higher costs, reduced services, and less research and development. The solution to the so-called health care crisis is to get government out of the picture. Private insurance would be able to solve the problem on its own through flexible deduct ibles and co-payment arrangements. This would encourage competition and compar ison shopping to control costs, stimulate further medical advances, and encourage preventive care and exercise. The United States would then be reassured of her position as the nation with the world's best health care system. D Religion: Foundation of the Free Society by Edmund A. Opitz Introductionby the Right ReverendRobertC. Harvey T wenty essays eloquently explore the religious roots of American liberty and the free society, the role of the individual in society, and the relationship between religion and the free economy. The economic case for capitalism will not be heard and understood, the Reverend Mr. Opitz contends, until people "have given proper weight to the argument for the free society based on ethics, inherent rights, and free will."

Edmund Opitz, an ordained Congregational minister, founder of The Remnant ( a fellowship of conservative and libertarian ministers) and The Nockian Society,is an associate editor of The Freeman. He served as a member of the senior staff of FEE from 1955 until his retirement in 1992. Religion:Foundationof the Free Societyis vintage Opitz, graced with his elegant style, subtle wit, and gentle erudition. 272 pages, indexed, $14.95 paperback 528 BOOKS The Ghost of the Little House: A Life of Rose Wilder Lane by William Holtz University of Missouri Press, 1993 .425 pages • $29.95 Reviewed by Bettina Bien Greaves R ose Wilder Lane was born on Decem ber 5, 1886. She was a fascinating person. For most of her life she eked out a precarious livelihood as a freelance author, journalist, ghostwriter, and novelist. Yet her impact has been much greater than that of run-of-the-mill freelance authors, jour nalists, ghostwriters, and novelists. She became an important figure in the libertarian movement.