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<font face="Verdana" size="1" color="#002864">http://www.mises.org/fullstory.asp?control=917</font>
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<font size="2"><font face="Verdana" color="#002864" size="5"><strong>'Bad Medicine' or Bad Economics?</strong></font>
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<font size="4">by William L. Anderson</font>
[Posted March 25, 2002]
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<font size="3"><img alt="Paul Krugman" src="http://www.mises.org/images/krugman.gif" align="right" border="0" width="167" height="214">While
most of the writings of Paul Krugman are, to me, analogous to one?s scraping
his fingernails on a chalkboard, I must admit to reading his stuff. His latest
gripe about a story on how many doctors are refusing to see more Medicare
patients provides ample proof that one can be called an"economist,"
yet not know much about economics.<a title href="http://www.mises.org/fullstory.asp?control=917&FS=%22Bad+Medicine%22+or+Bad+Economics%3F#_edn1" name="_ednref1">[1]</a></font>
<font size="3">Krugman was referring to a recent New York Times piece
that told of numerous doctors opting out of caring for Medicare patients because
of regulations and low payments for services. Doctors who treat elderly patients
have their share of horror stories, in which Medicare, the U.S. government?s
HMO for people above age 65, continuously has slashed what it is willing to pay
for medical treatment, not to mention the oversight in which the commission of a
"technical error" can ultimately mean financial ruin or, in some rare
cases, imprisonment for those who run afoul of the Medicare bureaucracy.</font>
<font size="3">Before going further, it should give all of us pause to think
that many in the political classes, as well as some of the medical"elites"
like the editors of the New England Journal of Medicine, along with many
so-called economists, have been urging that the United States adopt a health
care system akin to what exists in Canada.</font>
<font size="3">They forget that we have such an arrangement already in place;
it is called Medicare. If Krugman, a supporter of government medicine, does not
like Medicare, I cannot see how he would like to live under such an arrangement
himself.</font>
<font size="3">For many years, we have been besieged by stories on the"costs"
of health care, and Krugman continues the myth that improvements in medical
knowledge and technology are behind the rise in costs. He writes:</font>
<font size="3">"Why do health care costs keep on rising? It?s not
because doctors and hospitals are greedy; it?s because of medical progress.
More and more conditions that once lay beyond doctors? reach can now be
treated, adding years to the lives of patients and greatly increasing the
quality of those years--but at ever greater expense. A triple coronary bypass
does a lot more for you than a nice bedside manner, but it costs a lot more,
too."</font>
<font size="3">I must admit that such a statement astounds me, although it
doesn't surprise me. For years, I have read the claims of some pundits that
"medicine is not subject to the laws of economics," yet until Krugman
I had not read it from someone who is supposedly a"respected"
economist.</font>
<font size="3">What Krugman expects us to believe is that health care is the
only industry in which improvements in knowledge and the development and
acquisition of capital drive up costs, not reduce them. If that were true,
then health care certainly would be the great exception to the economic rule.
But if that were true, then we would need to throw out our economics textbooks,
since we would be declaring that the law of scarcity, not to mention the laws of
supply and demand, is not universal to human action.</font>
<font size="3">As one with even a rudimentary understanding of economics
knows, capital has the effect of reducing unit costs. It would make no sense to
acquire it, otherwise. While many pundits are fond of declaring that capital
drives up medical costs, they simply are not being truthful.</font>
<font size="3">For example, before the advent of the Magnetic Resonance
Imaging device, known as the MRI, doctors had to perform invasive exploratory
surgery just to find what was wrong. Today, the MRI does that quickly and more
efficiently than the surgeon?s scalpel.</font>
<font size="3">In 1966, my father had surgery to remove damaged cartilage
from a knee. He first had to experience exploratory surgery, and then the
cartilage was removed--all during an inpatient hospital stay. The entire
episode--and recovery--was long and painful.</font>
<font size="3">In today's world, all of this would have been done
quickly. After a doctor had determined my father's knee was injured, my father
would have gone for an MRI, and then he would have had outpatient surgery once
doctors had pinpointed the damage. He would also have experienced a faster
recovery, since the surgery done today would not have been as traumatic as that
done thirty-six years ago. (He still carries the six-inch scar common with knee
surgeries at that time.)</font>
<font size="3">If one takes into consideration the time needed to complete
the work, the lack of trauma that accompanies the surgery, and the lost time
from work and family, it is easy to see that, when all costs are taken into
consideration, the modern surgery techniques are less costly than what came
before.</font>
<font size="3">Unfortunately, the Krugmans of the world don?t take into
account opportunity costs. Instead, they perform the following flawed analysis:
In the old days, the only tools needed were a surgeon?s scalpel and a
flashlight, and those tools are cheaper than the MRI machine. Therefore, the MRI
machine"drives up" health care costs.</font>
<font size="3">Although he does admit that many modern medical practices,
such as bypass surgery, save lives, he fails to understand that death is not
cheap in most circumstances. Moreover, the semi-primitive health care that is
performed in Canada and elsewhere where socialist medicine reigns (this is
because many modern, labor-saving devices like MRIs and Cat Scan machines are
not made available in those places) imposes huge costs on patients, who must
wait in line for numerous medical procedures.</font>
<font size="3">While Krugman?s explanation of why health care costs are
rising is horribly flawed, at least he asks the question. The answer is not
difficult. On the demand side, for the last five decades, Americans have
depended mostly upon private health insurance, as well as payments from state
and federal agencies (read that, taxpayers) to make payments that once would
have been handled by individuals.</font>
<font size="3">These third-party payments, and especially Medicare, have
driven up demand for medical care, which has also forced up prices. We should
also keep in mind, however, that the development of medical technology and
improved information has kept health care costs lower than what they would have
been otherwise.</font>
<font size="3">It is also true that in its earlier years, Medicare generally
did not hold back on payments to doctors, who after initial reticence to accept
the government program begun in 1965, found it to be a"cash cow." In
recent times, however, Medicare has cut back severely on what it will pay
doctors and hospitals, thus the Krugman commentary.</font>
<font size="3">While it is true that Medicare payments are shrinking, Krugman
is wrong when he claims that these cutbacks are the result of"small-government
ideology" coming from President George W. Bush and his Republican Party.</font>
<font size="3">First, it has been obvious in the wake of the September 11
attacks that Bush is anything but"small government." Second, such
cutbacks began during a"big-government" Democratic administration,
one that employed Krugman himself.</font>
<font size="3">No, one reason the cutbacks are occurring, I believe, is
somewhat more sinister. By holding the purse strings and by constantly
threatening doctors and other medical professionals with investigations for
"fraud, waste, and abuse," the state is able to corral the medical
profession and force it to do its own bidding.</font>
<font size="3">There is also a supply-side component to high health care
costs. Governments at all levels have restricted entry into this field,
ostensibly in the name of consumer protection, but actually to keep down
competition, which would ultimately lower the incomes of many people in the
medical fields. Furthermore, many governmental"cost containment"
measures like Certificates of Need actually drive up costs, since they restrict
the number of allowable medical facilities, along with some medical equipment.</font>
<font size="3">Unfortunately, Krugman?s sophistry does not end with his
wrongheaded assessment of medical costs. He also declares that the massive
third-party payment system we have is necessary to prevent
"inequality." He declares:</font>
<font size="3">"Why don?t we just leave medical care up to individuals?
Basically, [i]even in the United States (italics mine) there are limits to
how much inequality the public is prepared to tolerate. It?s one thing if
the rich can afford bigger houses or fancier vacations than ordinary families;
Americans accept such differences cheerfully. But a society in which rich
people get their medical problems solved, while ordinary people die from them,
is too harsh even for us" (italics mine).</font>
[/i]
<font size="3">While such a statement is a gold mine of ignorance, I will
concentrate on the"inequality" portion. Krugman would rewrite
history, having us believe that before the advent of programs like Medicare,
only rich people received health care. Somehow, incensed by the prospect of most
ordinary Americans dropping dead while the rich lived happily ever after,
Congress in 1965 moved to"correct" such horrible inequities. Although
Krugman?s gratuitous"even for us" comment about Americans might
make for good moral theater, it simply does not come close to describing the
American experience in health care.</font>
<font size="3">People of all classes and incomes have long had access to the
medical facilities of this nation, and to declare otherwise is to rewrite
history. In fact, basic health insurance did not arise because Americans were
lacking care, but rather it came about as a way for employers to offer
nontaxable perks to employees during World War II.</font>
<font size="3">In reality, because government actions have been a major
factor in forcing up the price of health care in America, we now have the
perverse situation in which someone who either does not have access to private
insurance or qualifies for government payments must face the system out of
pocket. While politicians and their allies are fond of decrying the fact that at
any given time, millions of Americans lack health insurance, they forget that
they themselves have played a major role in creating the conditions that have
made going without health insurance a recipe for individual financial calamity.</font>
<font size="3">I suppose I should not be shocked when one of this nation?s
"foremost economists" cannot even understand basic economics. For many
years, the economics profession has been striving to make this relatively easily
understood discipline of the study of human action into a branch of physics. I
must say that if Krugman?s declarations on medical care are the results of
such"scholarship," the profession truly has managed to make itself
irrelevant.</font>
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William Anderson, an adjunct scholar of the Mises Institute, teaches economics
at Frostburg State University. Send him <font color="#000080" size="2">MAIL</font>.
See his Mises.org <font color="#000080" size="2">Articles
Archive</font>.
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<a title href="http://www.mises.org/fullstory.asp?control=917&FS=%22Bad+Medicine%22+or+Bad+Economics%3F#_ednref1" name="_edn1">[1]</a>
Paul
Krugman,"Bad Medicine," The New York Times, March 19,
2002.
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