The Cause of Rising Health Care Costs

Posted on Monday, August 24, 2009

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A strong case has been made that the reason for high health care costs is rooted in the growing third party pay system. One simply needs to envision what would happen to food costs if employers started providing food insurance. When you reach the checkout counter the bill is simply charged to your food insurance company. Since you are using someone else’s money to pay for your food—price would not be a consideration—Super Markets would give way to Gourmet Markets— with food costs skyrocketing. We simply do not spend somebody else’s money as wisely or as frugally as we spend our own. Then as the government would attempt to remedy the rising food costs by expanding the third party pay system—with government provided food insurance—food costs and Gourmet Markets would simply expand further. This would continue us down the never ending spiral of growing food costs—in the exact same fashion that we have endured with never ending health care costs.

World War II wage ceilings spawned the proliferation of employer-provided medical insurance. In 1954 the Internal Revenue Code made employers’ contributions to health care plans tax exempt. In the early fifties, union membership became mandatory for over two thirds of the production work force.  This enabled the unions to establish compulsory health insurance for a large segment of the working population. In the next place, the enactment of Medicare and Medicaid in 1965 made the government a third-party payer for persons and medical care covered by those measures. The following chart clearly shows how the accelerated use of third party pay systems and the rapid increase in health care costs have gone hand in hand.

Spending on medical care went from 3 percent of the national income in 1919 to 4.5 percent in 1946 to 7 percent in 1965 to a mind-boggling 17 percent in 1997. The changing role of medical care in the U.S. economy is truly breathtaking. To illustrate, in 1946, seven times as much was spent on food, beverages, and tobacco as on medical care; in 1996, 50 years later, more was spent on medical care than on food, beverages, and tobacco.

This information helps provide the knowledge needed to accurately assess the cause of rising health care costs which would in turn lead to real solutions to the problem.

The Solution therefore would be in restoring personal responsibility to the health care consumer—by structuring the payment to go through the individual—which would in turn reintroduce competition to the health care industry thereby—reducing health care costs.

The health care crisis we now face is a result of the method of financing and of extensive intervention by government in the medical marketplace.  The gradual transformation of medicine into a wasteful and inefficient industry came about in direct proportion to our failure to follow the golden rule of market economics:  Let the person who benefits from a product or service pay for it as directly as possible.  If most consumers had a substantial financial stake in the cost of their care and had access to information on the quality of competing hospitals and physicians, the medical industry would, seemingly overnight, be transformed into a model of economic efficiency and prudence.

Millions of Americans have inadequate health insurance or none at all.  The solution to this problem is not to provide blanket insurance coverage at taxpayer expense, but rather to drive the cost of health care down to a level where the poor can afford to purchase basic health care.  This is not a pipe dream.  It is a matter of unleashing against the medical industry that most potent of market forces:  the economic self-interest of the individual.

The Non-Solution is using the same third party pay system that created the problem to solve the problem. We see all this unsound “Government Takeover of Healthcare Option” program being misrepresented, “sold” to the public, if you will—by the public's own representatives in government—as though it were a free service by a great and wealthy and indulgent government. And we see our government keep trying to give the impression to the vast majority of citizens that it can get the money from somebody else—while the costs of the so-called “free” benefits will be taken directly and indirectly out of the pockets of the whole public—from you and me—from everybody.

We have been led to believe some magic, some escape from the rules of arithmetic, is possible.

There seems never, never any honest explanation that all of us pay the bill, and pay it soon, if not immediately. We've got to learn that—in government programs as elsewhere—there isn't any such thing as “a free lunch.”

The plain fact is that most all politicians in all parties and all lands—no matter what their private convictions on economic matters—think that the majority of adults everywhere are so misinformed that they not only believe “something-for-nothing” is really possible, but demand it. They think the public just would not understand or support them if they spoke and acted soundly.

For years, from within our own government has come a persistent endorsement and following of such unsound and demagogic ideas—so much so as to be an actual attack from within on the very free economic and political system our officials are sworn to defend and protect.

Too many of us just do not understand how we got this standard of living that's the envy of the rest of the world.

The free market system offers the incentive to work, create, compete, save, invest, and profit.

But there must be either force to drive men to work. Or there must be incentive to make men want to work.

It's “the carrot or the stick”—now, as in all history of man or other animal.

The penalty for such economic ignorance can be—is already—very great in both the economic and political fields. Our free markets and our free persons are at stake.

Let's keep in mind that communism and socialism did not used to be known by the current erroneous concept as being two different things. Communism is just a slight variant of socialism, as were fascism and nazism, and as now the European type of socialism which is just communism a little less brutal, a little more gentlemanly yet, and in not so much of a hurry.

Our great problem in this country—and the world—is to learn the economic fallacies of the whole socialist theory—and then to act accordingly to keep people from being fooled and pauperized and silenced and enslaved, and to keep our great nation—as we know and love it—from going on the ash-heap of history.

It has become popular, and therefore politically expedient, to heap injustices upon the free market, and even to put limitations on our businesses carrying out what people want them to do for them.

How do people all over the world get this way? Why do they reject the free market, which has a 100% record of raising the standard of living through voluntary action inspired by the incentive to save and to compete? Why do so many choose, instead, the government planners—skimming off for state purposes everything above a bare subsistence standard of living—and with their inevitable necessity in the end, directly or indirectly, of having to shut off free choice and free speech in order that their planning failure will be masked?

If we want bad—or even good—leaders to do what is right economically and politically, we must see that a majority of us, as citizens at the grass roots know what is right economically, do what is accordingly right within the area of our own economic and political activities, and then get and stay forcefully articulate—in private and public—in getting our representatives in government, unions, and elsewhere to act with economic and political horse-sense.


Health care spending accounted for 10.9 percent of the GDP in Switzerland, 10.7 percent in Germany, 9.7 percent in Canada and 9.5 percent in France, according to the Organization for Economic Cooperation and Development.


The answer to our rising health costs is a system that is based on a genuine free market in which there is some connection between what patients pay for coverage and the services they receive. That is emphatically not what America or any Western country has today. Looking to these countries for solutions as Obama and other advocates of universal health coverage are doing will lead to false diagnoses and false cures.


Our health care system is like a free market in the same way that Madonna is like a virgin.


The point is that there is no health care model, whether privately or publicly financed, that can offer unlimited access to medical services while containing costs.


Separate the consumer from the product.


The way you contain costs is to put the individual in charge of what he or she spends.


When you go to the store and you find something too expensive, you do not buy it or you postpone it, or you wait for it to go on sale.


Our relatively free market has done a magnificent job in providing us with necessities such as food and shelter. It’s time we let it work for health care as well.


In the freest sectors of medicine such as LASIK eye surgery, we see the classic pattern of falling prices and rising quality that we take for granted with cell phones and computers. This could be the norm in all of medicine if we adopted free-market reforms. Some examples include allowing patients to purchase insurance across state lines and using Health Savings Accounts for routine expenses. Insurers should be allowed to sell inexpensive, catastrophe-only policies to cover rare but expensive events. States should repeal laws that force insurers to offer (and patients to purchase) unwanted “mandatory benefits” such as in vitro fertilization coverage. Such reforms could reduce insurance costs by over 50% and make insurance available to millions who cannot currently afford it, while respecting individual rights.