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Capitalism in Medicine

June 11, 2014

I recently wrote a post about health care costs (It Doesn’t Cost What it Cost) in which I blithely blamed capitalism for the high prices and inconsistency of US medicine.  I’m just a poor music major with a minor in medicine, so I did a little research.

According to Merriam-Webster, Capitalism is an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market.  Wikipedia says that capitalism “is an economic system in which trade, industry, and the means of production are controlled by private owners with the goal of making profits.  OK.  Fair enough.  Wikipedia goes on to say “In a capitalist economy, the parties to a transaction typically determine the prices at which assets, goods, and services are exchanged”.

Generally we in the US understand that competition within the free market is supposed to control prices, as companies compete for customers.  However, the term “free market” is also used in various models of socialism, so it cannot be said that capitalism is synonymous with free markets.

So we can now say that we have a capitalist system in which trade, production, and distribution of goods is controlled by private owners, who compete against each other without government oversight for who can get the most customers, and thus make the most money.  Of course, the degree to which competition is free and open, and the amount of regulation imposed upon private owners, is variable and subject to the vagaries of politics.  Thus you have Laissez-faire capitalism, welfare capitalism, state capitalism, or some mix of planned and open market elements.

Clear so far.  Let’s look at health care now, specifically health insurance.  From one perspective, health insurance is the “good”, the product being sold by the private companies that want to make money.  If health insurance is the good, then patients are the customers, and they can choose what company or plan they want.  Capitalist all the way.  But patients are not paying for health care in this case.  That is, they are not purchasing the care itself.  If the care is the good being sold, the customer then is not the patient, but the payor, i.e the entity providing the money.  So if the good is care, the customer is the insurance company.  If the good, or the product, is actual health services, in a capitalist system the health services should be provided by private entities that set prices by competition.  But no one knows the actual cost of the health service being sold.  So the payor pays whatever it wants, and since insurance companies are in business of making money, they pay as little as possible.  So why doesn’t this system hold down prices?

Because the healthcare industry is not a free market.  A free market is an economy in which the forces of supply and demand are free of intervention by a government, price-setting monopolies, or other authority.  In medicine supply is limited and demand is infinite.  Insurance is a price-setting monopoly, no matter who does the setting.

Socialists, if I may use such a dirty word, “maintain that capitalism is superior to all previously existing economic systems (such as feudalism or slavery) but that the contradiction between class interests will only be resolved by advancing into a completely social system of production and distribution in which all persons have an equal relationship to the means of production” (Wikipedia again).  If you want a more official definition heres one: “a political and economic theory of social organization that advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.”  If the product is health insurance, the owner is the government and the customer is the patient.  If the product is health care, the doctor is essentially a contractor and the government is both owner and payor.  This is true socialized medicine, and it definitely has plenty of flaws, as the Russians can tell you.

Socialized insurance is a different matter.  Here’s Uwe Reinhardt, economics professor at Princeton: “Social health insurance, on the other hand, refers to systems in which individuals transfer their financial risk of medical bills to a risk pool to which, as individuals, they contribute taxes or premiums based primarily on ability to pay, rather than on how healthy or sick they are.”  Yes, boys and girls, Medicare is social health insurance.

So what if we had a system where everyone was in Medicaid;  the whole country was insured by the government.  That would make the government the payor.  But that doesn’t mean that the government has to be the owner as well.  If the government is not the owner, private entities must be and they, in true free market, apple pie, capitalistic style, would compete for who could give the government the best price.  Then you would have only one customer, and that customer would not also be a producer, and thus not in the business of making money.  The cost is the same for everyone, access is the same for everyone, and our precious capitalism lives on unsullied.

Note to potential haters: Access to care is a whole separate issue.


  1. Everett Wells permalink

    You get it.

    And you said it without being as snarky as I did.

    I actually run a health plan, by the way. Nothing as big as Blue Cross or United Health Care or Aetna or CIGNA but it’s a health plan all the same and performs all of the same functions that they do.

    We determine eligibility, enroll members, charge premiums, draft a plan document that says what’s covered, what’s excluded and under what circumstances, we receive bills (claims) from hospitals, physicians and other providers and we process the bills and issue checks. And all of the other myriad details associated with any health plan.

    However, running a health plan doesn’t mean I agree with most of the positions of the health plan industry. In fact, I disagree with most of them

  2. Phillip Gale permalink

    However in true capitalism the customer can choose to buy or not. If the government is the only customer (government is an organization not a person), individuals loose their right to buy or not to buy and are threatened by fine or imprisonment if they do not buy. It is still people who pay, either to a care provider, through an insurance company, or by taxes. I believe loosing the right to choose is what frost most people about Government intervention in a most personal part of their lives, the care of their own bodies. Access to care is as you say a whole separate issue.

  3. No matter one’s political views on economics, there is an oil-and-water interface between free-market / capitalist systems, and controlled/socialist systems. It goes right through the clinic, very often.

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