Dr. Sowell has granted IBD permission to run one of the chapters of Applied Economics: Thinking Beyond Stage One — The Economics of Medical Care — in its entirety. We are doing so because of its relevance to the debate over health care reform. The chapter will run in nine parts over the next week and a half.
The high cost of medical care has been a recurrent theme in countries around the world. In the United States, medical expenses absorb about one-sixth of the total annual output of the economy.
Medical care is one of many goods and services that can be provided in a wide variety of ways. At one time, it was common for sick people simply to pay doctors and buy medicine individually with their own money.
Today, both the medicines and the medical care are often paid for by third parties through either political or market institutions — that is, either by insurance companies or government agencies, or both, with or without some portion being paid by the individual patient.
Just as artificially low housing prices have led many people to seek their own separate housing units who would not ordinarily do so, if they had to pay the full costs in a free market, so artificially less expensive — in some countries, free — medical care has led many people with minor medical problems to absorb far more of doctors' time and expensive medicines and treatments than they would if they had to pay the costs themselves.
Third-party payments are at the heart of much confusion about the cost of medical treatment— and are a major factor in the increased cost of that treatment.
In government-run medical systems, the public pays in taxes for its medical care, either wholly or in part, with a share being paid directly by the individual patient.
Political slogans about "bringing down the cost of medical care" are almost invariably about programs or policies directed toward lowering the price paid directly by the patient. But the fact that only part of the costs are reimbursed by direct out-of-pocket payments from individual patients to doctors, hospitals or pharmacies in no way indicates that the total cost of the particular medical treatment is any lower than before.
A major source of the high cost of American medical care is malpractice insurance for doctors and hospitals.
The average cost of this insurance for individual doctors ranges from about $14,000 a year in California to nearly $40,000 a year in West Virginia. In particular specialties, such as obstetrics and neurosurgery, the cost of malpractice insurance can exceed $200,000 a year in some places.