Distributism and the Health Care System, Part 2: Ending Oligarchies and Monopolies

It should be clear that the vast majority of current thinking about the problem does little to address the underlying causes of our dilemma [see Part 1].  And this is odd because the mechanics of prices are well known and have been since the time of Aristotle. No competent economist of whatever school disputes these mechanics. There are two bedrock facts about any market system that we must confront :

      1. You cannot lower prices without raising supply relative to demand
      2. You cannot raise the supply in the face of oligarchies and monopolies.

Therefore, the key to the whole problem is first to control or eliminate the monopolies. Without addressing this problem, the system will be as it is, and any “reform” will only make it worse. However, there can be no question that a continuing stream of innovations have been provided under the patent regime, and medical licenses have guaranteed at least a minimum level of training for medical personnel. Is there any way to reform these systems and yet maintain their advantages?

The Problem of Patents. Contrary to received wisdom, patents are not necessary for research in any field. Even today in the medical field, 40% of research funds come from the government or from non-profit organizations. Hence, even a sudden end to the patent system would not end medical research. What research does require is a reliable funding source, which can come more efficiently from manufacturing licenses than from patents. That is, when a firm develops a new medicine they get the right to license that product to any number of production firms. The licenses should be for a longer term than the current patents, which will provide R&D firms with a much more secure revenue stream from which to fund further research. The license fee would be small relative to the current monopoly profits, but they would continue for a longer period of time, after which the product would enter the public domain and be appropriated by everybody.

Manufacturers, on the other hand, will have to compete on price and service, and will therefore have to find the most efficient ways to manufacture and distribute the medicines. The effect of such a license system would be to divide R&D and manufacturing firms. R&D firms would want as many companies as possible to distribute their product, and would have an incentive to keep the fees low. There may be a role for the government in setting the license fees.

If, however, the pharmaceutical firms insist on maintaining their current monopolies, then the only way to control costs is to have government set the prices. This is anathema to a free-market system. However, monopolies are the antithesis of the free market. And the monopoly cannot have it both ways: they cannot insist that the government enforce their monopoly rights while demanding that the government take no role in pricing. If they wish the government to withdraw from pricing, then the government should cheerfully agree, but it should also withdraw from enforcing their patents. This system of price controls already obtains in countries with a “single-payer” system. The government negotiates the price of the drugs with the manufacturers. This is why American drugs are usually cheaper in other countries than they are in America. The American taxpayer bears all the burdens of research, but gets none of the price benefits.

The Problem of Medical Licenses. Milton Friedman is undoubtedly right that medical licenses restrict the supply of medical services, and under the current system, this will not change. However, the current system may be an over-reaction to the lax standards of the 19th century. And any group that sets its own standards is likely to set them too high in order to limit supply and keep their income high.

I believe that we can drastically increase the supply of medical services—and therefore decrease the price—by providing a range of licenses: midwives, nurse practitioners, medical practitioners, medical doctors, and more advanced doctors of medicine. First-line care could easily be provided by NP’s and midwives working in their own neighborhood clinics, perhaps under the general supervision of a medical practitioner or medical doctor. Another area where this applies is in orthodontics. There is no reason why anybody needs a degree in dentistry to install orthodontics; the work could be as safely performed by techs, and at a far lower cost. It is only the legal monopoly that dentists have on the business which keeps the prices so high, thereby denying this useful and normally affordable service to many poor people, while charging the rest of us unreasonable prices.

A series of licenses would provide another benefit. As things stand now, a student will spend most of his youth and all of his fortune in getting an MD, and will still be left with staggering debts. Yet, he will have a degree in a profession he has not actually practiced. A series of licenses will provide the student with a career path by which he may alternate education with practice. He will have an income stream with which to finance his education, but he will also have practical experience to take to each successive layer of education. This will produce doctors who are more practiced.

Medical Guilds

It is not enough, however, to address supply and demand problems. All social goods, medical services included, are delivered by institutions, and the structure and control of these institutions will dictate the outcomes. If our social institutions are organized solely around the profit motive, as they are now, they will find clever ways of defeating any attempts to restrain their power to set prices. People who are only concerned with supply and demand are usually baffled by how easily the mechanism breaks down and monopoly and oligopoly take control. But the answer is not surprising: if profit is the only measure, then the entire institutional effort will be towards breaking down the limits on profit, the major limit being a truly free market.

This is not to say that there is anything wrong with the profit motive per se. Indeed, without making a profit, no firm or institution can be sure that it is delivering a useful product and correctly allocating its resources. But it is to say that a single measure—any single measure—is always self-defeating. As an analogy, suppose we designed cars solely on the basis of safety. We would indeed produce cars that were absolutely safe in nearly any circumstances. However, such cars would be so heavy and expensive that few people would want them. In the same way, a system where profit is the only measure will eventually fail even to make a profit. Other measures must come into play. But an institution solely devoted to profit cannot allow such measures. So what institutional framework should medicine have?

I believe that the answer lies in a well-tested institution from out past, and that institution is the guild. The guilds were associations of professionals in a given field who took responsibility for the training of their members and the quality and price of their products and services. They were the sole judge of the qualifications of their members, and had the power to set both standards and prices. What I propose is that we allow medical professionals to form guilds with the power to grant various licenses. They would be the sole judge of the qualifications required, and they would set the practice standards and prices. But most importantly, the guild would stand surety for its members. That is to say, when a patient had a complaint, he would sue not the doctor, but the guild. The guild would be responsible for the competence and good conduct of its members.

You might ask, “Why would one doctor stand surety for another?” But in fact, this is what already happens in malpractice insurance. Insurance is merely cost averaging. If the losses go up for one doctor, the rates for every other doctor in that insurance pool go up. But doctors have no control over who is in their insurance pool; the quack and the competent get thrown in the same insurance system, with the latter required to pay for the former. In a guild system, the guild would have a strong incentive to ensure the competence of their members and monitor their practice standards; they would want to weed out the incompetent or downgrade their licenses. The guild would purchase insurance for all its members, or even provide the insurance itself, thereby removing the profit motive and lowering the cost.

Since the guild would be the sole judge of the qualifications and practices of its members, there would be a greater diversity of practical approaches. The Guild of St. Luke, for example, might favor one approach to medicine, The Galen Guild might favor another, and natural competition and practical experience would be sufficient to discover the superior approach. And while it might be difficult for the public to judge one doctor against another, it would be easier to judge the performance of one guild versus another. Further, this also provides space for “alternative medicine.” I have no way to judge whether such things as acupuncture or Chinese herbalism are medically valid. But when joined in a guild and required to stand surety for each of their members, practices which do have some value would likely thrive, even if conventional medicine does not, as yet, recognize their value. And if they have no value, it is likely that such practices would simply disappear because the insurance claims would bankrupt them. Likely the government would still have some minimal role to prevent outright quackery; they would not likely allow a Guild of Peach Pit Cure-alls.

In addition to insuring their doctors, the guild would offer insurance to the public. That is, they could offer to treat people for a fixed annual fee. This would give the guilds an income stream, but also a great incentive to insure that small problems do not go untreated to become big problems. In other words, such health insurance would actually be concerned with insuring health rather than denying claims. Further, the guilds could be required to devote a certain amount of their resources to free or low-cost care for the impoverished or indigent. The government might play a role here in qualifying people as eligible for such reduced-cost treatment, and could even pay a part of the cost.

The guild would be empowered to establish its own clinics, its own training and education programs, its own pharmacies, labs, administrative structures, and whatever else is necessary to medical practice. This would also make it easier for medical professionals to enter practice without worrying about setting up the business and administration that consumes so much of doctor’s time today. The doctor, and every other member of the guild, would be the “owners” of the guild, and while they would certainly be interested in their own incomes, it would be impossible for that to be their sole interest, not so long as they are providing insurance to each other and to the public.

The Future of Reform

The current system, consuming 16% of GDP—and rising—is simply unsustainable. Moreover, the great burden it places on our businesses makes us uncompetitive in world markets, as we have discovered in the auto industry. The status quo is no longer an option. But here we come to a great conundrum: either we return to the chaos and quackery of the 19th century, or we move to a European-style socialist system, in which medical services are allocated by the state. European socialism has resulted in better over-all health statistics and at least a perception of fairness in allocating services. However, socialism converts everybody from being a citizen to being a ward of the state. Nevertheless, if one has a life-threatening illness or injury, one might prefer to be a live ward rather than a dead citizen.

But there is a great problem in establishing universal health care, whether by socialism or any other method. Namely, there will be an additional 50 million persons in the system who are currently uninsured, plus the untold millions who are under-insured. This is a tremendous increase in demand with no corresponding increase in supply. Either there will be huge price increases, or the government will be forced to severely ration health care. Both courses of action are untenable, and the system will collapse before it gets started. Without increasing the supply, you cannot control the costs, and this is impossible without curtailing or eliminating the monopolies and oligarchies that currently restrict supply.

But if costs are brought under control by market forces, and the institutional problem is solved by the guild, then the problem of universal care will turn out to be a relatively easy one; providing medical insurance to all will be no more difficult than providing car or home insurance. No system of reform currently on the table addresses either the supply or the institutional problems. Instead, they all exacerbate both problems. It will become painfully clear that as we move towards universal care, we will increase the demand but leave the supply unchanged. This will result in a disaster. I firmly believe that only a distributist analysis can give us the tools to look the problem squarely in the eye and provide rational solutions.

John Médaille is an adjunct instructor of Theology at the University of Dallas, and a businessman in Irving, Texas. He has authored the book The Vocation of Business, edited Economic Liberty: A Profound Romanian Renaissance and just completed Toward a Truly Free Market: A Distributist Perspective on the Role of Government, Taxes, Health Care, Deficits, and More.

This article courtesy of The Distributist Review.

  • goral

    The only group for whom the current system works are the gainfully employed who contribute about 3K per year and the 200K income small business whose insurance costs are about ten percent of income.
    For everybody else, the system doesn’t work.

    The opposing political arguments of more socialized healthcare or “leave it alone” because we have the best healthcare in the world simply fail to address the problem that is coming at us as this article states.

  • It does not help to have the best health care system healthcare in the world if tort law, insurance industry’s greed, and out of control drug production costs prevent you from using it, isn’t it so?

    I worked for the insurance industry in the NE United States for quite a few years. It is amazing how they cheat the state, their clients, and their shareholders.

    There at least one procedure routinely priced around $10,000 in the US that one can have in the best clinics of the rest of the world for about $100 to $250.

    Countries like South Africa, Argentina, Paraguay have health care systems that serve their population well without socialization and without insurance companies being the only middleman. How could this be?

    Oh! I forget they are Third World countries run by corrupt politicians who don’t care about the well being of the citizenry…

    … hey! wait a minute!