The Ideology of Privilege

Sorry for the long post, some ideas are just complicated.

Economists have provided capitalists with a comforting concept called the "free market." This is essentially a religious idea. It does not describe any part of reality, at any place or time. It's a mantra conveniently invoked when it is proposed that government do something the faithful don't like, and just as conveniently ignored whenever they want government to do something for them.
The "free" market is supposed to insure that society's resources are allocated "efficiently". We are all taught to pursue efficiency, but it is definable only in terms of desired outcomes, that is to say value judgments.
Markets are not a force of nature. They are human social constructions, and cannot exist independent of social conventions. In complex societies, such as nation-states, they cannot exist apart from systems of law and politics. No market is "free," all markets are regulated. The question is how they will be regulated, for whose benefit, not whether they are "free". Furthermore, the characteristics of the "free" market which are supposed to maximize allocative efficiency, while they can never be attained in practice, can only be approached through sustained and elaborate political and legal intervention.
The economists' method is to make a number of fundamental assumptions which are contrary to fact, not sometimes, but all the time. They then spin out an elaborate theory of efficient "free" markets based on these counterfactual assumptions. Thereafter, their project is to somehow reconcile the real world with their fantasy. This is not science, but theology. Just as theologians must depend on mysticism to reconcile the existence of evil with a benevolent, omnipotent creator, so free market ideologues are practitioners of faith-based sophistry.
Although all markets violate the requirements of the so-called free market, the market for medical services is one in which this is particularly easy to see. For example, ideal market transactions are supposed to be based on "perfect information." Consumers are supposed to know everything of importance to them about products offered for sale, and alternative products. That condition is impossible to satisfy in principle, but sometimes we can come reasonably close. We can try several brands of cheese until we find one we like. Of course, if we don't know what's in it, in particular its nutritional content, we lack critical information. That's why the ideologues could not resist food labeling requirements.
Medical services are not like cheese. We might know that we have a good personal rapport with our family doctor, but few consumers have any basis for comparing the quality of available services on most dimensions of importance. How good are your surgeon's hand skills? You won't know until it's too late. That is the rationale for requiring physicians to go through prescribed training regimens, to pass licensing examinations, and to retain their licenses at the will of a government authority – in other words, government intervention in the market. (The particular way this happens in the real world is a more complex story. Licensing gives a monopoly of prestige, eligibility for reimbursement and the most lucrative employment, to a politically influential priest-like caste of healers who adhere to an exclusive ideology. )
Another way in which all markets depart from the theoretical ideal is called "externalities." The theology of the market assumes that all of the costs and benefits of a transaction are felt by the parties to the transaction – that no-one else is affected. This is never true. The most commonly recognized example is pollution. Buyers and sellers make markets for cars and gasoline, but bicycle riders and pedestrians have to breathe the fumes. So we regulate the design of motor vehicles to reduce pollution, though not enough.
An obvious example of an externality in medicine is communicable disease. If we count on people to seek out and pay for treatment on their own, we leave others at risk when they don't. A slightly more subtle example is that people whose economic productivity is constrained because they are ill or disabled can't contribute to the support of their families or the total wealth of society. Because society chooses not to provide adequate services to people with mental illness or substance abuse problems, many of them end up living on the street, as a visible social problem which interferes with other people's use of public spaces.
As another example, ideal market transactions are supposed to take place between "willing sellers and willing buyers." Sellers of medical services are no doubt willing, but buyers? You might well go into the emergency room unconscious, in such pain or distress, or so demented, that you can't make any choices.
I was admitted to a hospital a few years ago with a diagnosis of acute appendicitis. They told me they were going to remove my appendix, and anaesthetized me. When I woke up seven hours later, I found they had removed half my colon, in the mistaken belief they had discovered cancer. Thanks to the surgery and ensuing complications, I spent 11 days in the hospital. They sent me a bill for $25,000. Was I a willing buyer?
Even when consumers are lucid, the notion of "willingness" on the part of buyers is often elusive. If we believe the alternative to buying a service is death or disability, are we willing? Economists will say yes, we are extremely willing, in fact. But philosophically, the idea of need enters the market for medical services, although economists would prefer to speak of "preferences" or "tastes". Well, most of us prefer life to death.
Notice I've left out the ethical implications. The dirty little secret of the free-market ideologues is that, no matter how they stretch and torture their theory, nobody has been able to make an intellectually respectable case that the free market in any way insures distributive justice. This is true generally, but in the case of health care, it's immediately obvious. Notwithstanding that there is much we can do as individuals, families and communities to protect and improve our health, sickness and injury are often the product of just plain bad luck. If a child develops leukemia, we don't consider that a just product of the invisible hand.
Yet people may be impoverished by large medical bills, or completely unable to pay for needed medical services. Hence we feel it is right and proper that medical services be paid for by insurance. That's a major reason why those 40 million-plus uninsured, and 60 million underinsured people, are a serious social problem.
That's also why most people are in fact covered by insurance. However, that wholly or partially insulates the individual consumer from considerations of cost. Our physicians know this also, so under the old indemnity insurance system, they would have no compunctions about ordering up all the tests, procedures, consultations, nursing services and other interventions they could think of.
Medical services are expert services: we depend on our physicians to tell us what we need. This basic fact, which is related to the above issues of imperfect information and unwilling buyers, constitutes provider induced demand. In the (non-existent and fantastic) free market, consumers create demand. Suppose that every time Bill Gates said you needed a new word processor, you went out and bought one. What would happen to the price of software? To the volume of software sold? (To some extent, of course, this does happen – but that's another discussion.)
Medical services, historically, have been exactly like that. Some argue that physicians have a "target income" – that they will do enough procedures to make their boat payments and send their daughters to Bennington. It is a fact, for example, that the number of coronary bypass operations per capita varies enormously by geographic region, not related to the incidence of heart disease, but only to the concentration of cardiac surgeons.
Now we can begin to see why we pay so much more in the U.S. for medical services than in other countries, and why costs have increased so much in past decades. The first reason for the trend of dramatically increasing costs has to do with the development of expensive new technologies. New technologies don't have to increase costs. For example, arthroscopic surgery saves money compared with old-fashioned knife surgery. But our system has had no good way of selecting for technologies that are more efficient. If it's possible to do a PET scan, everybody has to have one.
This is a difficult issue for many Americans to confront, but it's profoundly important. At what point does it make sense to forego vastly expensive measures that have little prospect of prolonging or restoring a decent quality of life? People seem to have an instinctive aversion to the idea of "rationing" health care. It seems morally compelling, when confronted by a specific, desperately sick individual, to do whatever is possible that may offer a chance of saving that person. Yet these costs are ultimately born by society, paid through taxes or other people's insurance premiums – a society which is unwilling to spend enough to properly educate, feed and house all its children. And all too often, high technology intervention with desperately ill people merely inflicts needless suffering. Other wealthy societies have in fact made different choices about these issues; their medical systems do not have the same presumption of unrestrained interventionism.
The second reason for the upward trend in medical costs is simple: the price of goods and services used in medicine has tended to increase faster than general inflation. Drug companies' profits are greater than the average rate of profit, physicians' salaries increased steadily after World War II, as did the salaries of hospital executives and administrators. These prices are much higher than in other countries, as anyone knows who has purchased pharmaceuticals abroad.
Two other reasons why costs are so much higher in the U.S. than elsewhere are unnecessary "care" and administrative costs. When someone is subjected to a medical procedure which does not benefit them, and probably harms them, I'm not sure how you can call it "care", but that's what they call it. This is related, obviously, to provider induced demand. Administrative costs in the U.S. are high principally because of the system of private insurance. Insurance companies have marketing and claim processing costs, and make large profits; providers have costs associated with the complexities of billing many different payers. The systems in other countries avoid many of these costs.
Finally, many people assume that the aging of the population is an important reason for rising medical costs. Elderly people do consume more medical services, but the "graying of America" is a gradual process which explains little of the cost trend so far.