Milton Friedman: "the theory of bureaucratic displacement" ( healthcare )

In addition to the video, I also dug up some links. For those who prefer to read than watch the video.

Gammon's Law Points to Health-Care Solution

HEALTH CARE: How to Cure Health Care By M Friedman

ping

Ah, my main man Milt. His dear wife Rose died not more than a month ago. May our Lord keep them in eternal happiness.

Thanks for the link, 1/2’n 1/2

You’re welcome. As soon as I saw the video and Friedman talking about the displacement, I knew it was something I should bring up with others.

It makes pretty good sense that the bureaucrats will pack themselves in.

From the first link:

========Gammon’s law, not medical miracles, was clearly at work. The federal government’s assumption of responsibility for hospital and medical care for the elderly and the poor provided a fresh pool of money, and there was no shortage of takers. Personnel per occupied bed, which had already doubled from 1946 to 1965, more than tripled from that level after 1965. Cost per patient day, which had already more than tripled from 1946 to 1965, multiplied a further eight-fold after 1965.=============

That’s your government at work.

And the media has the gall to blame the markets. Hah!

From link 2

The data document a drastic decline in output over the past half century. From 1946 to 1996, the number of beds per 1,000 population fell by more than 60 percent; the fraction of beds occupied, by more than 20 percent. In sharp contrast, input skyrocketed. Hospital personnel per occupied bed multiplied ninefold, and cost per patient day, adjusted for inflation, an astounding fortyfold, from $30 in 1946 to $1,200 in 1996. A major engine of these changes was the enactment of Medicare and Medicaid in 1965. A mild rise in input was turned into a meteoric rise; a mild fall in output, into a rapid decline. Hospital days per person per year were cut by two-thirds, from three days in 1946 to an average of less than a day by 1996.

Some nuggets from the Hoover Institute link:

...Why, by contrast, are most medical payments made by third parties? The answer for the United States begins with the fact that medical care expenditures are exempt from the income tax if, and only if, medical care is provided by the employer. If an employee pays directly for medical care, the expenditure comes out of the employee’s after-tax income. If the employer pays for the employee’s medical care, the expenditure is treated as a tax-deductible expense for the employer and is not included as part of the employee’s income subject to income tax. That strong incentive explains why most consumers get their medical care through their employers or their spouses’ or their parents’ employer. In the next place, the enactment of Medicare and Medicaid in 1965 made the government a third-party payer for persons and medical care covered by those measures.

...If the tax exemption were removed, employees could bargain with their employers for higher take-home pay in lieu of medical care and provide for their own medical care either by dealing directly with medical care providers or by purchasing medical insurance. Removal of the tax exemption would enable governments to reduce the tax rate on income while raising the same total revenue.

...The high cost and inequitable character of our medical care system are the direct result of our steady movement toward reliance on third-party payment. A cure requires reversing course, reprivatizing medical care by eliminating most third-party payment, and restoring the role of insurance to providing protection against major medical catastrophes.

...The ideal way to do that would be to reverse past actions: repeal the tax exemption of employer-provided medical care; terminate Medicare and Medicaid; deregulate most insurance; and restrict the role of the government, preferably state and local rather than federal, to financing care for the hard cases.

...Medical savings accounts offer one way to resolve the growing financial and administrative problems of Medicare and Medicaid. It seems clear from private experience that a program along these lines would be less expensive and bureaucratic than the current system and more satisfactory to the participants. In effect, it would be a way to voucherize Medicare and Medicaid. It would enable participants to spend their own money on themselves for routine medical care and medical problems, rather than having to go through HMOs and insurance companies, while at the same time providing protection against medical catastrophes.

A more radical reform would, first, end both Medicare and Medicaid, at least for new entrants, and replace them by providing every family in the United States with catastrophic insurance (i.e., a major medical policy with a high deductible). Second, it would end tax exemption of employer-provided medical care. And, third, it would remove the restrictive regulations that are now imposed on medical insurance—hard to justify with universal catastrophic insurance.

This reform would solve the problem of the currently medically uninsured, eliminate most of the bureaucratic structure, free medical practitioners from an increasingly heavy burden of paperwork and regulation, and lead many employers and employees to convert employer-provided medical care into a higher cash wage. The taxpayer would save money because total government costs would plummet. The family would be relieved of one of its major concerns—the possibility of being impoverished by a major medical catastrophe—and most could readily finance the remaining medical costs. Families would once again have an incentive to monitor the providers of medical care and to establish the kind of personal relations with them that were once customary. The demonstrated efficiency of private enterprise would have a chance to improve the quality and lower the cost of medical care. The first question asked of a patient entering a hospital might once again become "What’s wrong?" not "What’s your insurance?"

I think of Milton Friedman often, especially the time he was a guest on Lou Dobb’s CNN program. They agreed, “Get out of the International Monetary Fund (IMF).”

As much as I admire Friedman, this is not a good economic analysis because he somehow does not incorporate the time domain into his supply and demand metrics. As a person ages they will use more medical care if and only if the treatment for each successive malady is successful. There is no "cure" for that dilemma in privatization. This explains why, as technology advances, we have increasingly expensive treatments for a necessarily declining marginal return, despite the fact that existing treatments are declining in cost while they improve in quality.

Thus medical treatment does not fit the usual "supply and demand model" that Friedman is applying. It's a very different kettle of fish.

Technology has increased the amount that can be spent on any one case while pooling has increased the total amount available to be spent. Hence the increase in total expenditure.

I’m not sure I see the issue.

As I’m reading this, bureaucratic displacement is about how the hospitals get infested with bureaucrats and the costs of administration rise. Everybody wants their kickback.

They become just like any other government entity, essentially.

As for what you’re saying, yes, it makes total sense that it’s more expensive to treat the elderly.

-—————Thus medical treatment does not fit the usual “supply and demand model” that Friedman is applying. It’s a very different kettle of fish.———————

It’s demanded by the elderly primarily, but the supply issue can most easily remain untainted by government(and it’s regulations) and therefore at it’s peak availability. That’s the point of the talk about bureaucratic displacement.

Bureaucrats come in and displace the useful individuals. From link 1:

==========”a bureaucratic system . . . increase in expenditure will be matched by fall in production. . . . Such systems will act rather like `black holes,’============

Everything needs some amount of bureaucracy, unfortunately. But government intervention causes it to grow unnecessarily.

we have increasingly expensive treatments for a necessarily declining marginal return, despite the fact that existing treatments are declining in cost while they improve in quality.

I think there is still economics at work. The assumption that people will pay any price for 1 (day, month, year) of life is false. There is an economic quotient - one that the individual and the family should make together.

Treatments also involve more than just money. A very close relative after two cancer treatments decided she wished to die at home, wished never to enter a hospital again, and refused more treatment - even though it would have prolonged her life.

In any case, if the cost is "free" then all economics are distorted to the maximum.

I think there is still economics at work.

I never said they weren't, just that there are additional factors at work that confound standard models of supply and demand within the range of usual decision-making. As a consequence, I wasn't impressed with Friedman's treatment.