Health Care: 100 Years of Creeping Government Control

(Source: Red Cross)

Editor’s note:  A police state is a “state in which the government exercises rigid and repressive controls over the social, economic, and political life of the population.”  The micromanagement and control over entire industries — such as health care — is categorically part of the development of a police state.  The ongoing market manipulations and monopolistic regulations have had a variety of consequences on economic and social freedoms.  Some of the economic consequences will be examined here.


(Source: Red Cross)
(Source: Red Cross)

Health care is a hotly debated topic.  Much of the debate revolves around a single problem:  Health care costs have soared and continue to rise.  We, as a society, have accepted these costs as the nature of medical care.  Should we?  There are many skilled professions in our nation and each one of them varies in difficulty and in price.  Health care seems to be the exception; the price is always exorbitant.  There are no affordable options when it comes to health care.

Why?  How did we get to a point where one human being can not afford to offer another human being a fair wage for an hour of their time?  A truly free market should keep prices under control.  If prices get too high, supply increases accordingly and new providers will compete for your business.  Has the free market failed us in the health care sector?

These questions led me to yet another question:  Is the health care industry even operating in a free market?

In the research that followed, I discovered that the industry is completely unaffected by free market competition.  It is shielded by extensive levels of regulation that date back more than a century.  These regulations have brought us the system that we have today.

A look back through the history of health care regulations reveals some common themes, all of which have caused prices to skyrocket.

  1. Artificial restrictions on the supply, causing an inevitable increase in prices.  Entering the health care field now requires an enormous investment of time and capital from the aspiring entrepreneur.  These exorbitant costs also stem from a heavily regulated education market, but that is beyond the scope of this article.
  2. Artificial creation of demand, causing an equally inevitable increase in prices.  Luxurious amounts of health care are utilized by people who would otherwise only be able to afford the minimum.
  3. Restrictions on the consumer’s ability to price shop.  Insurance plans have been specifically designed to shield consumers from the actual costs of the services that they purchase.  The customer has no incentive — or practical ability — to shop for the best price, leaving no motivation for the suppliers to lower their costs.

Let’s take a look at the heritage of the system that has spawned from this controlled market, starting with:


1910 – The Flexner Report.

Abraham Flexner wrote this report at the behest of the American Medical Association.  Despite his lack of any kind of qualification in the area, its recommendations were adopted by every state.

A state licensing system was created that effectively eliminated any alternatives to state-run education.  The AMA used (and still uses) these regulations to control the supply of the very service that their organization sells.

 Abraham Flexner, an unemployed former owner of a prep school in Kentucky, and sporting neither a medical degree nor any other advanced degree, was commissioned by the Carnegie Foundation to write a study of American medical education. Flexner’s only qualification for this job was to be the brother of the powerful Dr. Simon Flexner, indeed a physician and head of the Rockefeller Institute for Medical Research. Flexner’s report was virtually written in advance by high officials of the American Medical Association, and its advice was quickly taken by every state in the Union.

The result: every medical school and hospital was subjected to licensing by the state, which would turn the power to appoint licensing boards over to the state AMA. The state was supposed to, and did, put out of business all medical schools that were proprietary and profit-making, that admitted blacks and women, and that did not specialize in orthodox, “allopathic” medicine: particularly homeopaths, who were then a substantial part of the medical profession, and a respectable alternative to orthodox allopathy.

Murray N. Rothbard, Making Economic Sense

This market situation is commonly referred to as a ‘monopoly’.


noun \mə-ˈnä-p(ə-)lē\

: complete control of the entire supply of goods or of a service in a certain area or market

Free market competitors are restricted from offering any kind of medical care without first paying homage, to the tune of over $207,868 (on average), to AMA approved schools and then seeking their approval to receive a license (which can be taken away at any time).

Even then, alternative practices of medicine are highly regulated and often targeted for harassment.  A cancer clinic in Tulsa Oklahoma was recently raided by federal agents, and its patients were sent home without their medications.

These levels of regulation have impeded entry into the health care market, leaving us with a severe shortage of doctors (and the high prices associated with such a shortage).

The AMA and AHA have fully used this monopoly to their advantage, leading us to:


1929 – Blue Cross comes on the scene.

The predecessor to Blue Cross is created by the hospital association in 1929, allowing people to pre-pay for their health care coverage.  This was designed to ensure steady income to the hospitals.

Hospitals, hit hard by the Great Depression, rushed to embrace plans for prepaid health care as a way to survive. In 1939 the American Hospital Association began allowing plans that met its standards to use the Blue Cross name and logo. State legislatures agreed not to treat Blue Cross plans as insurance, based on the rationale that they were owned by hospitals. This permitted Blue Cross plans to operate as non-profit corporations, escaping the 2% to 3% premiums generally charged private insurance companies, and exempted them from insurance company reserve requirements.

Worried that the hospitals would expand the Blue Cross concept into physician services, physicians began thinking about their own organization. By 1946 all of the prepaid physician services plans had affiliated and became known as Blue Shield.

Since the primary concern of the early Blue Cross and Blue Shield plans was to ensure that hospitals and physicians were paid, the plans covered all costs, and everyone in the same geographic area paid the same price. This encouraged patients and their doctors to use medical care without worrying about costs.

The History of Health Care Costs and Health Insurance

The plans designed by the AHA were specifically designed to stifle competition.  They only survived in the market by lobbying for government-based incentives: fewer regulations and a special tax-exempt status.

The AHA designed the Blue Cross guidelines so as to reduce price competition among hospitals. Prepayment plans seeking the Blue Cross designation had to provide subscribers with free choice of physician and hospital, a requirement that eliminated single-hospital plans from consideration. Blue Cross plans also benefited from special state-level enabling legislation allowing them to act as non-profit corporations, to enjoy tax-exempt status, and to be free from the usual insurance regulations.

Originally, the reason for this exemption was that Blue Cross plans were considered to be in society’s best interest since they often provided benefits to low-income individuals (Eilers 1963, p. 82). Without the enabling legislation, Blue Cross plans would have had to organize under the laws for insurance companies. If they organized as stock companies, the plans would have had to meet reserve requirements to ensure their solvency. Organizing as mutual companies meant that they would either have to meet reserve requirements or be subject to assessment liability.3 Given that most plans had little financial resources available to them, they would not have been able to meet the requirements.

Health Insurance In The United States

These pre-paid policies soon became the preferred choice in the market. Free market programs like “Injury Insurance” and “Sickness Insurance” could not compete while dealing with the taxes and regulations that Blue Cross was immune to, and were soon overtaken by the pre-paid plans.


1942 – Legislation surrounding WWII permanently solidifies employer-based health insurance.

The entire practice of offering health insurance as an employment benefit was spawned by government-imposed wage restrictions during WWII.  Pre-paid insurance policies were no longer an optional luxurious item purchased by the few — they became a permanent part of an employment package, replacing actual monetary income.

Responding to the inflationary pressures of a wartime economy, the federal government imposed wage and price controls to prevent employers from raising wages in order to compete for scarce labor. While stripping them of their power to increase wages, the 1942 Stabilization Act allowed employers to expand their benefit offerings. By permitting employers to offer health insurance to their employees, the government provided private insurers with a new market for their product. In the years that followed, the government passed several additional rulings that reinforced the efforts of insurance companies to link health insurance with employment and institutionalized the employment-based system of health insurance that exists today.

An Introduction to the Health Care Crisis in America


1945-1954 – More legislation is passed to further entangle employment and health insurance.

With the monopoly firmly in place, the industry needed new protections from the free market once the depression and the wage restrictions had passed.  This came in the form of tax benefits to employees that accepted health insurance as part of their benefits package.

The first piece of legislation, passed by the War Labor Board in 1945, ruled that employers could not change or cancel an employee’s insurance plan during the contract period. The second ruling, which became law in 1949, mandated that benefits should be considered part of the compensation package so that unions could haggle over both wages and health insurance in their contract negotiations. Finally, in 1954, the IRS decided that workers would not be taxed on the contributions that their employers made to their health insurance plans. This preferential tax treatment for “fringe” benefits gave businesses an incentive to offer health insurance to their employees.

An Introduction to the Health Care Crisis in America


1965 – Medicare is passed.

Medicare was at first sharply criticized by the AMA and the AHA.  These organizations feared that it would be detrimental to their profits.  However, they eventually saw it as an opportunity to further solidify their artificial price controls and the government met their requirements.

Fearing that physicians would refuse to treat Medicare patients, legislators agreed to reimburse physicians according to their “usual, customary, and reasonable rate.” In addition, doctors could bill patients directly, so that patients had to be reimbursed by Medicare. Thus, doctors were still permitted to price discriminate by charging patients more than what the program would pay, and forcing patients to pay the difference.

Health Insurance In The United States


1973 – Health Management Act is passed.

Marketed as an attempt to control costs, it accomplished the opposite.  This legislation effectively created new demand for services that were otherwise unwanted (increasing costs, as a result).

In addition, it created a situation where the consumer was left out of the health care loop altogether.  The physicians and insurance companies worked together for the sake of their own profit.

Along with certificate of need laws, the federal government embraced managed care as a cost control measure, tilting federal health policy towards Health Maintenance Organizations (HMOs) with the passage of Senator Edward Kennedy’s (D-Mass) 1973 HMO Act. Federal agencies were formed to aid in the development of HMOs. To artificially create a market for services that few people at the time wanted, businesses with more than 25 employees were required to offer an HMO option under their health insurance plans. According to John C. Goodman and Gerald L. Musgrave, HMO premiums accounted for just 2% of all health insurance premiums in 1962. Federal insistence on adopting the HMO model of care delivery resulted in rapid growth in HMO membership rising from 5% in 1980 to 46% by 1996, of the total insured population under age 65.

Health Maintenance Organizations differ from standard indemnity insurance and from preferred provider organizations (PPOs) because they combine the physician and the insurer in a single organization. Patients pay a flat fee for their health care, a capitated payment, and the HMO promises to provide all of the health care an individual needs. A conflict of interest is built into HMO structure: HMO physicians work for the insurer, not for the patient.

An Introduction to the Health Care Crisis in America


1983 – Medicare introduces price controls.

In yet another attempt to control costs, Medicare introduces a fixed price system that is ultimately adopted by the entire industry.

These fixed prices encouraged health care providers to game the system. Helping the individual was no longer profitable, considering the fixed prices for any given diagnosis. Despite the fixed prices, more health care was ultimately consumed and overall costs increased.

With its fixed price for any case with a given diagnosis, the prospective payment system instantly turned patients who cost more, generally those who were older, sicker, and frailer, into financial liabilities. Hospitals discharged patients “quicker but sicker,” shifting much of the burden of care and rehabilitation to nursing homes unconstrained by the new payments system. As providers learned to game the system, diagnoses with higher reimbursements increased, corrupting medical records. Intense lobbying efforts occurred to create DRGs that reflected costs in various specialties and treatments for various diseases. As of 2004, the number of DRGs had expanded to 526.

As a result of prospective payments, Fitzgerald, Moore, and Dittus found that between 1981 and 1986 the mean length of hospitalization for elderly patients with hip fracture decreased from 21.9 to 12.6 days and the maximal distance walked before discharge fell from 93 to 38 feet. The proportion of patients discharged to nursing homes rose from 38% to 60%, and the proportion of patients who were still in a nursing home one year after their hip fracture also rose, from 9% to 33%.

Sicker but quicker discharges appear to have been the norm for patients with other conditions as well. In 1990, Kosecoff et al. developed measures of discharge impairment for five conditions before and after the imposition of prospective payments. They found that before prospective payments, 10% of patients discharged to their homes were unstable. After prospective payments, 15% of patients discharged to their homes were unstable. In general, unstable discharge was associated with a higher mortality rate; death in 16% of cases versus death in 10% of cases.

Although prospective payment undoubtedly reduced hospital use, it may well have done so at the expense of increasing overall costs. Unstable patients often have to be readmitted to hospitals, increasing the cost per case even as the number of days of hospitalization per admission falls. Writing in 1990, Keeler et al. looked at the U.S. system before and after prospective payments, finding that patients admitted to the hospital were much sicker after prospective payments than before. Captivated by what planners said should be happening, the authors figuratively scratched their heads, saying that the reasons for this were “not clear,” because under the new system hospitals should be encouraged to take healthier people.

They did not consider the possibility that the sicker patient population was an artifact of multiple readmissions.

An Introduction to the Health Care Crisis in America


2010 – The Affordable Care Act is signed into law.

The Affordable Care Act — known as Obamacare —  is a multi-faceted approach, marketed as a solution to costs so high that the average American cannot afford health care.  It’s main mechanisms are:

  1. Force insurance companies to provide even more pre-paid care with their plans.
  2. Force insurance companies to cover more people for longer periods of time.
  3. Create an ‘exchange’, intended to appear as a free market for people to purchase health insurance.  Included in this exchange are government subsidies to help cover portions of the premiums (depending on your income).
  4. Funding will come partially from raising taxes on health insurers, medical device manufacturers, and others.

Much of the public sentiment that spawned this bill was a disdain for insurance companies.  Curiously enough, the ACA actually provides insurance companies with an even larger captive market share than they had before.

As this law is implemented and more people are encouraged to accept these insurance policies, we should expect prices to continue to rise, both in insurance premiums and in actual costs.  The simple economics are unavoidable.  The demand for health care services will necessarily increase, as more people are forced to pre-pay for them.  The supply will remain controlled, and possibly diminish due to the medicare price controls.  Price competition will become nearly extinct as the consumer is increasingly isolated from the true price of his care.  And manufacturers of medical equipment will raise their prices to offset the additional tax burden placed upon them.

As with previous market interventions, the so-called Affordable Care Act will not change economic reality.

(increased demand) + (decreased supply) + (decreased competition) = higher costs.


Beyond Affordable Health Care

This has been a brief look at more than a century of market manipulations.  The recurring theme is the sponsorship of pre-paid insurance policies by the federal government.  As this trend has advanced over the years, costs have risen accordingly.

As prices skyrocket, there will be even more demand for legislative action — Could this have been the intention all along?  The primary demand that we can expect to hear is a demand for a ‘single payer’ system, where the government absorbs the responsibility of offering pre-paid health insurance.  The goal of this will be to re-introduce accountability into the system, forcing providers to accept lower prices for their goods and services.

As we have seen with the price control attempts in the past, this will not work.  Providers will learn to game the system.  More health care will be consumed while less actual health will be achieved.

As usual, government control is the problem.  Not the solution.  We need to stop allowing the health care industry and insurance companies to use the police state as their own personal monopoly protection.


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