How The American Healthcare Crisis Began

Staff of Asclepius, symbol of healing

What is now termed modern medicine actually began in the early 1920s when science — in particular, germ theory — culminated to a point that sickness and disease were at last being treated reliably.

It was then that doctors and hospitals got much better at the business of saving lives. This more highly developed service and expertise raised the value of their work, and they charged accordingly for their increased skill and labor.

And that, really, is when the situation started: when lives can be saved and health can be gained because of developments in technology, everyone suddenly believes that it’s his or her right to have that thing.

We see the same principle at work in, for example, the platitude “No one should go hungry when Americans are throwing away food.”

The error in both cases is the fraudulent notion that survival should be assured. This notion neglects the singular fact that abundance and technology are produced — and produced, moreover, by individuals.

No one has the right to the life and labor (i.e. production) of any individual, including the life and labor of doctors.

An easy way to demonstrate this truth is by asking the following: where was that right before these goods and services were produced or invented?

It is a fact that American medicine is already 50 percent socialized.

It is also a fact that there’s a clear correlation between rising healthcare costs and the socialization of medicine in this country. More government intervention will only compound the problem.

In the 1920s, when advancing healthcare became more expensive (though still very reasonable), the administrator of Baylor Hospital in Dallas, one Dr. Justin Ford Kimball, created a system called Blue Cross. The Blues (so-called) were nonprofit health insurers. They served local organizations like the Rebeccas and the Elks Club, and — please pay attention — they kept their premiums low in exchange for tax breaks.

Tax breaks are one of the main components to our current healthcare crisis. They’re what initially created the problem.

Blue Cross, you see, was successful only because of these tax breaks. Up until then, commercial insurers had always regarded medicine as a mediocre market, and therefore commercial insurers didn’t deal too much in medicine. But when commercial insurers saw that the Blues were making money, it convinced them to enter the medical field. This was not a problem, at first — until the 1940s, when private insurers increased their efforts to get around wartime wage controls, thus:

During World War II, Franklin Delano Roosevelt’s price-and-wage people, who didn’t generally permit wage increases or price increases (regardless of market forces) sanctioned a form of tax discrimination: specifically, they allowed employers to pay for employee medical insurance with pretax dollars.

This quickly became one of the few ways employers could attract new and better employees, since FDR had actually mandated that employers were no longer permitted to pay out higher wages. (How this ridiculous idea came about is another story, for another time.)

To this day, those who get employer-financed healthcare are purchasing their healthcare coverage with pretax dollars. On the other hand, those who buy their own healthcare are purchasing it with after-tax dollars.

This is a much bigger issue than you might at first realize.

As far as the employer was (initially) concerned, this wasn’t any different from additional labor costs — which is to say, medical insurance was not, from the employers perspective, any different from a rise in wages, and yet FDR’s price-and-wage control people did not at all see it as a wage increase. They therefore allowed it, which may seem surprising in light of FDR’s desire to control the entire economy.

Likewise, the IRS bureaucrats under FDR did not regard this maneuver as a wage increase, and for this reason they didn’t slap a tax on it. Neither did the employees see it as a real raise in wages — a fact that is singular to how this whole horrible precedent was set — because these costs are what economists call hidden costs.

The upshot: people didn’t and very often still don’t know that it is, after all, their own money paying for this prepaid medical coverage, and that medical coverage isn’t free.

In fact, health insurance today isn’t even really health insurance. It’s more properly called prepaid healthcare. But — and this is an another crux — it gives the appearance of being free or substantially free to the user, and it therefore substantially increases the demand for it and therefore its cost.

Of course, the root of this whole problem is the misbegotten notion that healthcare is not a good and service to be traded on the open market, but a right.

Let us remember what insurance actually is:

Insurance, properly defined, is what you purchase in order to avoid financial ruin in the case of a rare emergency.

Under the dangerous system FDR created, employees came to regard their healthcare coverage as a kind of blessed phenomena which came without cause or consequence. Quickly, this phenomena was absorbed into the working culture and as quickly was taken for granted: employees got used to receiving free goods, which goods, however, were not actually free. Employees just could not see that they were paying for them, and paying for them, furthermore, with pretax dollars.

A family in the bottom fifth of the income distribution pays about $450 more in taxes than insured families at the same income level. For families in the top fifth of the income distribution, the tax penalty is $1,780. On average, uninsured families pay about $1,018 more in federal taxes each year because they do not have employer-provided insurance. Collectively, the uninsured pay about $17.1 billion in extra taxes each year because they do not receive the same tax break as insured people with similar income. If state and local taxes are included, the extra taxes paid by the uninsured exceed $19 billion per year (“Are the uninsured freeloaders?” National Center for Policy Analysis, Brief Analysis No. 120).

Among other things, this illustrates again why entitlements are such a deadly precedent: once they’re entrenched, it’s virtually impossible to retrogress. Why? Because people acclimate to entitlements and in no time cannot imagine life without them.


  • Henery Schaffer

    February 16, 2010

    Hi there,

    I looked over your blog and it looks really good. Do you ever do link exchanges on your blog roll? If you do, I’d like to exchange links with you.

    Let me know if you’re interested.


  • Dale

    February 16, 2010

    Now now, there you go looking at history and analyzing the facts. This is the act of someone who wants to understand the problem and actually try to solve it. Clearly this has no place in Ameri-Marxist politics.

    First of all, the only apparent demon is the government, and we all know our government is benevolent, well-intentioned, and incapable of error (unless it was Bush, of course). So, your position is fundamentally flawed, which discounts all those silly facts you were throwing around. Lacking a capitalist demon, you fail the first rule of Marxism.

    Secondly, you fail to understand the basic tenet that we can only accomplish good-sounding ideological goals by force of government. You seem to think that if we removed the causal social engineering (i.e. discriminatory and controlling pre-tax here, post-tax there) that capitalism would self-correct its market problems. Again, you implicitly dispute the premise “only government” can solve our problems, so you fail the second rule of Marxism, which requires socialist totalitarianism.

    What, you some kind of laissez-nous faire nut?
    Twice the displacement – hey, that’s my story!

  • Ray

    February 17, 2010

    Dale wrote: > What, you some kind of laissez-nous faire nut?

    Guilty as charged.

    Dale wrote: > Twice the displacement – hey, that’s my story!

    And a very fine story it is. So fine, in fact, that I called it back.

    Thank you for dropping by.

  • Vet

    February 17, 2010

    As a Paralyzed Veteran, I totally understand the current health care system. I also understand that if I were to loose my Veterans Fee Basis coverage that allows me to use private physicians closer to home, I would then have to use my Medicare Coverage. My current doctor would have to release me as her patient after 14 years, because she isn’t allowed to accept any more Medicare patients per group limits. My neurologist looses money with every Medicaid patient just paying the staff to set up the files and paperwork for the appointment.

    The low paying government is the cause of the high charges to the private insurance sector.

    Government pays for non productivity when it is a Federal Employee. Making positions and purchases to spend their budget maximum. It is possible to find productive qualified workers, but there is no such thing as firing a federal employee. They are only transferred to another department. I watched it happen with a Director of a VA Hospital, till they caught him embezzling. The government isn’t able to close it’s loop holes and watch over the systems that is currently in place. Fraud isn’t even trackable with authentic doctors identification. How could the new system keep track?

    I feel that the idea should be dumped till they get their current house in order. I’m not fighting for myself but for those that have no idea what they are fixing to get into, I’m already stuck. The one percent can not continue to cover the never ending costs that our government taxes on them. Tax deductions would be great, but the majority that are pressing for this new health care plan do not pay taxes or only use the simple tax forms. They live in apartments and many are single parents that are just above the Medicaid limit. They will suck the system dry and then the mass will be taxed to pay for the costs.

    Local south border Hospitals and states are broke because of the laws that allow a pregnant women to come to the border and an ambulance must be called so she can deliver her child in the USA. Then her child will be sent to the border crossing everyday to attend school. The local school district must accept these children and bus them. There is not one cent provided by that family to cover the costs of education or feeding that child for the next 15 years. Yes, 2 years of Head Start, Kindergarten and 12 more years.

    If the government is the cause of the problem, how the heck can anyone believe they have the ability to fix it?

  • Hamish

    February 17, 2010

    Something else that could be done to help the crisis:

    Add incentives for students to join the medical profession. This would increase the number of doctors and nurses needed for the increase in patients. This could be as simple as a tax deduction for tuition. If we can give a tax deduction for charitable work, then a tax deduction to get students into the profession could work as well.

  • Ray

    February 17, 2010

    What you’re describing, Hamish, is what economists sometimes call the Licensing Law Monopoly, and it’s one of the three main components (along with unsound insurance practices and tax discrimination laws which have been in place since the 1930’s) that’s at the root of the problem.

    Here’s the solution:

    Do away with all licensing requirements for hospitals and medical doctors. This will rapidly increase supply, and prices will rapidly fall. Also, a vastly greater variety of healthcare services will open up before our very eyes.

    Competing voluntary accreditation agencies would take the place of compulsory government licensing — if health care providers believe that such accreditation would enhance their own reputation, and that their consumers care about reputation, and are willing to pay for it. Because consumers would no longer be duped into believing that there is such a thing as a “national standard” of health care, they will increase their search costs and make more discriminating health care choices (Hans-Hermann Hoppe, Professor of economics, UNLV).

    As it now stands and as you point out, the AMA, in collaboration with the government, artificially restricts the number of openings in medical schools. This reduces the doctor supply, which in turn increases the cost of healthcare. Understand, though, this is all artificially created in the first place, through government manipulation and coercion, and specifically, the Licensing Law Monopoly.

    You’re right: the expensive healthcare we now have is in large measure the result of an artificially created shortage of doctors, nurses, hospitals, pharmacists, et cetera, which the AMA licensing cartel and other government institutions have brought about.

    Vet: Thank you for your service and your sacrifice.

  • Fredrick Douglas

    February 18, 2010

    Won’t be no taxes, Hamish! Just ask Dale. Won’t be no government at all, in Ray’s world. He’s turning back time and undoing everything down to and including the pesky Civil War. After all, we have to have the God-given freedom to own slaves — it says it in the beloved Constitution. Or it did until the socialists amended it out.

  • Redmond

    February 18, 2010

    To Frederick

    Have you read any of the posts on this site?

    Or are you simply “reading” between the lines?

    My guess is the latter.

    “Won’t be no taxes, Hamish! Just ask Dale.”

    Taxes are a way of the government saying to you – I know better than you how to spend your money – for your own good. Therefore taxes are a form of redistribution which is socialist. And since I have traded my life away for that money, the government had damn well spend it in my interests. 
    Frederick, I am guessing that you are American. Let’s see what your government is spending your money on, your life on – now I am making the assumption that you currently have a job, unlike 20% of Americans. Though maybe you are a student? Live with your parents?

    The illegal war in Iraq and Afghanistan – $1.05 trillion.
    Banker bailout – $23.7 trillion
    Cash for “clunkers” – $24 000 per car
    Nationalizing (sorry socializing) the car companies – $130 billion
    Paying for secret CIA torture bases around the world – unknown, but they probably subsidize it with some drug running – oh whoops into America so it is another tax.
    Prison-Industrial complex – sorry I couldn’t find those numbers, but it is in the trillions I am sure.
    Mercenaries- Blackwater has made $1 trillion in Iraq since 2004.
    War on drugs- $19 billion in 2003
    Shall I go on?
    So is the US Government spending your money in your best interest? For your own good?
    If I were you I would ask for some of your money back.
    But don’t worry, since the American people couldn’t hope to ever pay that off, China has been nice enough to lend you the money. $772 billion in fact. Oh what’s that? The PLA wants to dump US bonds and call the Americans bluff?
    You see Frederick, the problem with debt is that you owe your life to that person who holds that debt, so you are a type of slave. Therefore the American government has made you a slave to China. Like being a Chinese slave? Maybe you could move there and get a job, I hear their economy is great! 10% growth!
    With numbers like that, I would tend to agree with Grover Norquist when he said:
    “My goal is to cut government in half in twenty-five years, to get it down to the size where we can drown it in the bathtub.”
    Unfortunately he is a useful idiot.
    You continue:
    “Won’t be no government at all, in Ray’s world. He’s turning back time and undoing everything down to and including the pesky Civil War. After all, we have to have the God-given freedom to own slaves — it says it in the beloved Constitution.”
    As for there being government, as you can see from my list above, it would seem that the American people would be better without one, at least a federal one. Some of the states have enough sense to decriminalize marijuana. And they have their own national guard, so they could probably defend themselves from Mexico.
    The constitution is goddless, as were the founding fathers, I suggest you read Ray’s post on the “goddless constitution” or just read some history books. Of course it serves the interests of the “left” and “right” to continue to pretend that it is “God” given. It makes a nice talking point to the base.
    Are you the base? Spouting talking points? Or do you think for yourself?
    As for turning back the clock, I don’t think Ray is suggesting that we re-institute slavery, merely that we should respect the constitution and enforce the rights enshrined in it.
    Unlike what your criminal federal government is doing every day.
    “Or it did until the socialists amended it out.”
    Lincoln wasn’t a socialist, he was a statist, and he was a racist. And as for socialists, I highly doubt you could call the American goverment of 1860 a socialist one. Did they even have income taxes back then? Actually income taxes didn’t exist in America until 1913. You should look it up.
    And it was because of the rights guaranteed in that constitution that the end of slavery was inevitable.
    Why don’t you ask all the slaves in Africa and around the world today how not having a written constitution with guaranteed rights for all is working out for them?
    It looks like you have some things to think about.
    oh yeah I am going to put in a piece about the health care system in Canada – maybe on the weekend

  • Dale

    February 18, 2010

    Redmond, you shouldn’t engage in a battle of wits with an unarmed socialist. Just let their idiotic comments speak for themselves.

  • Redmond

    February 18, 2010

    Hi Dale

    I hear you, I just couldn’t resist – plus it gives me material for my blog.

    In any case, maybe it will pre-empt the next set of comments from the next socialst… and give them food for thought, try to get them to direct their put their energies towards something productive, such as campaigning for Debra Medina in Texas.
    As opposed to liberating the proletariat.

  • Dale

    February 18, 2010

    Redmond, I wish you the best of luck, but I’ve found that anyone who thinks Marxism-socialism-fascism-communism, when described as “liberalism” or “moderate” is somehow something other than its reality. In other words, “true believers” in the tenets of liberalism will never be swayed by facts or cogent thinking.

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