How to Cure Health Care: What We Can Learn from Milton Friedman – Part Two

In my previous post I introduced you to Dr. Michael Ciampi, who is reforming his medical practice by refusing to accept insurance payments. According to the doctor, he is able to cut his prices in half—if not more—and he has much more freedom in how he runs his practice. Here are some examples:

Before, Ciampi charged $160 for an office visit with an existing patient facing one or more complicated health problems. Now, he charges $75. Patients with an earache or strep throat can spend $300 at their local hospital emergency room, or promptly get an appointment at his office and pay $50, he said. Ciampi collects payment at the end of the visit, freeing him of the time and costs associated with sending bills, he said. That time is crucial to Ciampi. When his patients come to his office, they see him, not a physician’s assistant or a nurse practitioner, he said. “If more doctors were able to do this, that would be real health care reform,” he said. “That’s when we’d see the cost of medicine truly go down.”

Ciampi, I take it, believes that insurance companies are partly responsible for the rising cost of medical care. I agree with him. And more is to be said on how not only insurance companies, but also third-parties—including employers and the government—are partly responsible for the rise in medical costs.

Milton Friedman wrote there are at least two reasons for the affect that third-party payers have on rising medical insurance costs:

First, it leads employees to rely on their employer, rather than themselves, to make arrangements for medical care. Yet employees are likely to do a better job of monitoring medical care providers—because it is in their own interest—than is the employer or the insurance company or companies designated by the employer. Second, it leads employees to take a larger fraction of their total remuneration in the form of medical care than they would if spending on medical care had the same tax status as other expenditures.

As I have noted, Friedman’s points make sense because other people won’t spend money on you as well as you could on yourself. And this includes the government.

So why is it that the government spending on medical care has increased from “an eighth of the total in 1919 to a quarter in 1965 to nearly half in 1997?” It’s simple: because it’s a handout, and so the demand grows. Friedman’s calculations show that the effect of tax exemption for businesses and the enactment of Medicare and Medicaid have accounted for a 60% increase in the cost of insurance.

Friedman suggested that the best way to lower health insurance costs is to get the government out of the marketplace: deregulate most insurance, dissolve Medicare and Medicaid and remove the tax-exemption for businesses. Furthermore, he wrote that we should create medical saving accounts, eliminating the third-party and allowing for tax-deductible donations to the account.

This hardly seems feasible given the status quo; however, I think if our system becomes so defunct (as it is becoming), an overhaul will be necessary. In the meantime, let’s take a page out of Dr. Ciampi’s playbook.

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