Charles Smith

The expansion of health insurance and government entitlements created “free money” and thus the explosion of healthcare costs. The solution is simple and “impossible”: we all pay cash.

Here’s why healthcare (a.k.a. sick-care) costs cannot be reduced; the entire system is based on vast pools of “free money.” The corporate-America or union/government employee who goes to the doctor pays a few dollars for a visit and drugs; the “real cost” is of no concern. Ditto the “real costs” charged to Medicare and Medicaid.

The link between the “consumer” of healthcare and the provider has been broken for decades. There is no “free market” in healthcare–there isn’t any market at all. We live in a Kafka-esque nightmare system in which “some are more equal than others” and hundreds of thousands of dollars are lavished on worthless tests, procedures and medications for two reasons:

1.    Because there’s “free money” to pay the bills

2.    So-called “defensive medicine” in which worthless tests are administered to stave off random (sometimes valid, sometimes nuisance) malpractice lawsuits.

There is a solution so simple and so radical that it is “impossible” (and of course you’re reading it here): shut down insurance and all government entitlements, and return to the “golden era” of the 1950s when everyone paid cash for healthcare. Here are the costs of childbirth as of 1952 at one of the finest hospitals on the West Coast, The Santa Monica Hospital:

And here are the obstetrical rates:

Having a baby cost $30, which is today’s dollars is $244. A private deluxe room cost $23 or $187 in today’s dollars. According to the Bureau of Labor Statistic’s inflation calculator, $1 in 1952 is $8.14 in 2009 dollars.

What does it cost to have a baby now? $10,000? Or is it $25,000? Who even knows?

I know all the reasons why “costs had to skyrocket”: we’re getting so much better care now, right? Actually, as measured by death rates and any other metric you want to select, there is simply no way to justify a 40-fold increase (or is it 100-fold?) in medical care costs. The returns on all the “miracles of modern medicine” are in fact exceedingly marginal– but nobody wants to talk about that.

In 1952, if something awful happened and a patient died, here was the response: “We’re very sorry.” Families weren’t outraged; they expected people to die and interventions were not expected to be miraculous every single time. Doctor Kildaire and all his imitators on TV had not brainwashed the public into reckoning that if someone died, a mistake had been made. They also hadn’t been brainwashed by the mental disorder known as “the American Legal System” into thinking that in every possible circumstance in life, there is liability, and the only question is where to pin it for the big bucks jackpot.

Stories about people suing doctors and hospitals for 5 times the value of a house ($1 million in today’s money would have been $120,000 in 1952, when you could buy a nice house for $20,000) simply did not exist in the 1950s. The cultural mindset that someone somewhere must be at fault and it’s a “right” to go after them did not exist. Since insurance was limited, there was no “free money jackpot” to go after, either.

I know you’re probably outraged at the suggestion that “modern safety nets” of insurance and entitlements are the cause of our ills, but follow this idea through:

With no insurance or government program to bill vast sums, then every clinic, doctor and hospital in the U.S. would instantly go broke. Someone would pick up the pieces for $1 or whatever the auction price happened to be and start charging people $50 for a visit to the doctor–not a “co-pay” which was accompanied by a bill for $500 or $1,500 or $15,000 to an insurance company or the government, but $50 cash–that would be the total cost. People might decide they did not need to see the doctor every time they got the sniffles. They might ask the doctor if an MRI was really going to help diagnose their problem or if it was gilding the lily.

As for malpractice, maybe the clinics/hospitals would be non-profits. Go ahead and sue the bejabbers out of them–they have no insurance and no cash. Go ahead and win a huge settlement: you’ll never collect because there’s simply no money. The non-profit folds and another one buys the clinic for $1. With no giant pot of “free money” to pillage, the pillaging goes away. Hospitals which sought stupendous profits would presumably charge more, and hence would have fewer customers. It would be up to the consumer.

The solution to malpractice is information, not lawsuits. Based on my conversations with the M.D.’s who frequent this site, here are some simple policy/regulatory steps which would have very low end costs:

1.    License all M.D.’s nationally so they don’t need to go through the absurd waste of time and money being licensed in multiple states.

2.     Make all information on clinics, hositals, surgeries, etc. public on the Web. Those doctors willing to take on the very ill will have more patients die than those who avoid the risky cases; it will be up to consumers to sort out the track record of the people who they choose to hire to attend to their health.

Something magical would happen to prices: they would drop to what people could afford to pay cash. Yes, those wonderful folks in the pharmaceutical industry could list their drugs for $10,000 a dose, but few would be buyers. Just as in other countries with no “free money” to tap, the price of that drug would quickly drop to $50. That, or the pharmaceutical companies can go bankrupt and let others fill the vacuum.

What would happen is simple: marginal care would vanish because few would be willing to pay for it. The cost of an MRI in China is a tiny percentage of the cost of an MRI in the U.S., and the machine and training of the technicians is the same; so why does it cost 25 times more for an MRI here? Because there’s a pot of “free money” available to tap.

If the entire system collapsed and everyone paid cash, the cost of an MRI would be $100 or so, regardless of any other conditions. Or, the owners of the MRI machines could declare bankruptcy, sell the machines at auction and let someone else provide the service to those who decided it was worth the expense.

But what about the “poor people” who can’t afford medical care now? Well right now they have to stand in line at emergency rooms–the most wasteful, inefficient system possible. Even “poor people” can afford a few dollars–there’s endless excuses provided yet how many “poor people” have cell phones, eat costly fast food, do costly illegal drugs, etc. etc. Everybody has choices; we’re not all deranged, and for those who are deranged, then clearly the government will have a role in their care when it exceeds the capacity of their family or if they have no family.

Everybody’s got an excuse in our current system, and perhaps that’s why it is morally and financially bankrupt. The U.S. (and certainly not Santa Monica) was not a Third World nation in 1952; people did not feel their healthcare was deficient or poor. There was simply no money to pursue marginal returns except perhaps for a few millionaires seeking exotic treatments. Fine, it’s their money; most died right along with the rest of us and at about the same lifespan.

As for “overall health” of the populace: what with the “diabesity” epidemic out of control due entirely to lifestyle changes, it’s hard to say we’ve gotten 50 times healthier as a result of our healthcare costs rising 50-fold.

When it comes right down to it, the current system is based on this premise: the average American is too dumb to figure out healthcare for themselves and so we need a gigantic structure of “experts” to figure out what should be done and what it should cost. It’s not even really “insurance” because everyone gets old, ill and then dies.

This has resulted in the most brutally inefficient and even cruel system possible, one in which the very elderly are milked for hundreds of thousands of dollars of “healthcare” in the last days or weeks of their lives while tens of millions get no care at all except at the emergency room. Since no one takes responsibility for their own health or healthcare costs, then people take poor care of themselves and thus many of our ills are self-inflicted. People save little to nothing for emergencies because they’ve learned to expect someone, somewhere, to pay for their healthcare. (It’s a “right.” Really? At whose expense? The Chinese who buy our debt?)

I know, I know–going to a market/cash system is “impossible.” But the irony is that’s where we’ll be in a few years, regardless of what anyone thinks or wants: “healthcare” in its present incarnation will bankrupt the nation just as surely as the sun rises.

Charles Hugh Smith

August 5, 2009

Charles Smith

Charles Hugh Smith is an American writer and blogger. He is the chief writer for the site "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites.

  • Darren

    With all due respect, Mr. Smith, you’re “solution” isn’t a solution at all.

    You want national level licensing of doctors, why? The govt shouldn’t be licensing them at all.

    You seem to advocate prohibiting medical insurance, again why? If insurance companies want to offer such insurance why stop them? The answer is to have the govt stop regulating & licensing them.

    At the risk of sounding like a broken record, well, guess what I advocate for the pharma industry?

    There’s no free market in your solution, only a different kind of regulation, & regulation is always bad news.

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  • rancherlady

    Dear Mr. Smith:

    Bravo! I did an analysis a few months ago using my private system of what my five dollar a week allowance would buy in 1956 when I was a Sophomore in High School. The amount was set very carefully by my parents so that I had to make CHOICES. Did I want to drive my car to school more than I wanted to eat lunch in the cafeteria? (Yes!) I learned to sew because Daddy would pay for fabric and patterns, but if I wanted more store-bought clothing than he thought necessary, I couldn’t have it…unless I got a summer job. Half of everything I earned had to go in an account I couldn’t touch. I paid half the cost of my first car, and you don’t forget how much money $112.50 is when you earn a dollar an hour. Daddy covered insurance, bless him, and licensing and so forth, but I was expected to change my own oil, grease my ’52 Plymouth Cranbrook, and replace the wheel cylinder kits myself. As I recall, a set of the wretched things cost $3.10. No sales tax, of course. That’s still a lot when it is over 60% of a week’s income.

    Smile…the month before school started Daddy gave me the princely sum of a hundred dollars AND told me to go clean out the savings account to buy my college wardrobe.

    Daddy taught me about how life really works and what we have to do to be self-sufficient.

    By my calculations, the office visit which cost $5 then (No, that did not come out of my allowance.) would cost $30 by my system, $40 using your more scientific method.

    The whole mess goes back to “that man,” who set wage and price controls. Since businesses were forbidden to offer higher wages they came up with the idea of helping out with medical expenses as a way to get around FDR’s ukases. For years the insurance company hasn’t cared whether I “shop around,” or not. There is no incentive to find a less expensive pharmacy. Litigation insures that doctors order enormously expensive tests “just in case.” Just in case they are sued! It is really annoying to have donated a fair amount of my blood and run up $1500 in charges only to be told that everything looks fine.

    I have Medicare only because I have no choice; if I refuse the SS people will smile happily and keep everything. Most years I have a checkup, get my only Rx medication renewed (Armour thyroid), and have my eyes checked, which is not covered. Neither is dental care. At that rate, my checkup costs me over $1200. This year I got “lucky” and got the Swine Flu, so my doctor’s visits will “only” cost me $400 each.

    Given a choice I would have only a catastrophic care policy and my family is under orders: NO “heroic” measures. I had my 69th birthday in May, and I think I’m good for another quarter of a century. My lifestyle, nutritional choices, and knowledge keep me healthier than most people. I said, 20 years ago, that Alzheimer’s was a nutritional deficiency disease and that the culprits were going to be aluminum (pots, water, deodorants) and lack of vitamin E. I threw out all my aluminum pots. The medical establishment picked up on the Al about a decade ago, but last night was the first time I have read that anyone else worked out the E connection!

    The solution IS private pay, and NO “free” care for anyone. Health care is not a “right.” It is a luxury and a personal responsibility. I’ll have compassion for those who make poor lifestyle choices and want handouts when someone has compassion for my clear right to the fruits of my labors.

    Thanks again for an article I appreciated.


  • J.D. Swampfox

    Thanks for you article. If patients had to pay (at current prices) a larger part of the bill, with a catastrophic cap, of course, they would insist on and negotiate for, more reasonable prices. This is simple, straightforward, but doesn’t offer the government the opportunity to ration health care, so it won’t be pursued. But the real bottom line is that prices of care (or insurance premiums) will not decline unless THE SUPPLY of health care available is increased. We need more doctors and nurses entering practice and more companies competing for our health care dollars. For example, the number of matriculants into medical school is about 28000 per year. What would happen if we doubled that? – and please don’t tell me there aren’t enough qualified applicants. Making it easier for the supply to grow is where the emphasis needs to be, not figuring out how to avoid rationing a limited supply with price by rationing by one government scheme or another….

  • Ernie

    I wasn’t going to comment on this article since it was so right on. But since the first couple of comments were actually critical: The federal government has no legitimate authority to license doctors, but it has the power to require that each state honor with full faith and credit the acts of each other state. So if Wyoming decides to offer medical licensing for $50 gold and no more than two complaints per year, Massachusetts has to allow that doctor to practice. Neat, huh? When I win the lottery, I’m going to demand that Illinois honor my Vermont concealed carry permit. Great article- points out the obvious- government interference has caused the current mess and all that government can do to fix it is to enforce contract law and prosecute fraud- with the burden of proof on the accuser, of course.

  • Greg Fasolt

    Very good article making some excellent points. However, I’m inclined to agree with Daren’s arguments. The solutions you offer often embody the same philosophy as the problems you are trying to solve. Consequently, the results will not be to solve the problem but to replace it with another or compound it.

    To overcome this cycle of failure, we must recognize the true nature of rights and apply that understanding consistently. There is only one basic right, the right to self ownership,to life, to survival. To survive, man must think and be free to act upon his thoughts. But this is meaningless unless he is free to enjoy the benefits of his actions and suffer the consequences. Thus, man must be free of constraints except that he may not interfere with he rights of others. This is freedom; anything else is not.

    Thus, national physician licensing would deny physicians the right to practice as they see fit and patients opportunity to be treated as they see fit and can afford. In practical terms, professional licensing always limits the supply and thus results in higher prices. The regulated professions quickly become a protected political special interests and benefit from a variety of laws and regulations at the expense of their customers. Despite the claim that the consumer is protected by licensing, quite the opposite is usually the case due to limited competition, higher prices, and stifled innovation.

    More control of our lives and more central planning are not the answer. Respect for real human rights, for freedom, is the answer.

  • Dr. Henry M.Chakoian

    I agree that patient control of spending is the only answerto cutting caosts and reducing utilization of care. As stated by Laffer and others, catastrophic insurance with deductable is the choice. No copayment and the deductable per annum to be selected ny patient. Family size, age, health history are factos to consider. You keep what is not spent and the insurance costs are reduced. The same principal can be applied to Medicare and Medicaid. Eliminate supplemental coverage,$2000. to 3000 / year. Credit unused funds to a medical savings account. For Medicade, credit amount (depending on family size) for patient determination. Unused portion to be paid in cash to recpient. This motivation may reduce visits to the ER and unnecssary treatment. Medicare and Medicade costs could see a considerable reduction. An altenative to reinventing the wheel—–by people that dont
    know a hematoma from eschema.

  • M Sherling

    My wife had a baby last month. No complications, minimum amount of time in the hospital (2 days) and the cost billed to my insurance was around $5000. Our first child was born 2 years ago. My wife had complications which resulted in many tests whose necessity I question. In the end, the recommendation from the doctor was bed rest and some anti-itching medication. That ended up costing about $50,000 total. Having insurance allowed me to say “Sure!” to all the tests and procedures, where I would have been much more skeptical had it been “our” money.

    16 percent of GDP currently goes to healthcare. So out of every 8 hour workday, 1 hour and 15 minutes is spent working for the healthcare industry!

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  • Lowell Sherris

    Very nice article. It missed the bulls-eye in a few places. A major problem with our present health care system is a severe lack of innovation because of licensing requirements and government regulations. If we could eliminate licensing (those who want to pay more get docs with more education), the FDA, and drug patents, the cost of medical care would plummet. Entrepreneurs would compete for medical business, and patients would finally have some choices.

  • MJJP

    Govt will not be rationing health care in a single payer system. Single payer is truly the way to go and at the present time is not being offered. Even if it were the fear mongers touting the downside like “rationing” and choice of doctors being implemented either is not true or already exists.The costs will come down because premiums won’t have to be paid. Get sick go to doctor or hospital ,get treated and go home. The govt missed a golden opportunity to get its feet wet with GM. There was probably no greater issue that would have put GM on equal footing with the competition than providing healthcare for its retirees. No I don’t mean pay the insurance premiums I am saying pay for the broken arm of Johnny when it occurs . If the govt paid for actual care it would have cost the govt far less than what we sunk into GM and Gm would have stood or failed on its own as an equal. Foreign car companies already provide govt health care that the companies are not obligated to pay. We have rationing now caused by price and affordability, and if your plan inclused any words like “network” or “in network” you are being told who you can see now. With all the B/S being shouted about socialized medicine somehow I don’t hear many people complaining about single payer that have it like Canada and Europe etc. In fact when polled they are quite happy with it as no one will lose their house and education for children will not be forfeited because of massive health care costs to the family. I don’t want to hear about abuse of the sysem either. In a personal experience I recently went to the emergency room for a work related injury and spent three hours in the waiting room before being seen. I can tell you that no one is going to spend three hours in the emergency room BECAUSE THEY CAN! Even is there is some abuse does it make sense to abandon the idea of single payer because a small minority mighte abuse it? I think not.
    As for health insurance companies existing why is it so important for them to profit unless you hold their stock? Canada gets along quite well without them so why can’t we? The writer is correct in that a bottomless pit of money exists and there is no incentive to contain costs but lets get to the crux of the problem and ask why hospitals need to charge $8.00 for a single asperin? Lets ask why the MRI cost $10,000. Perhaps a better way for govt to get costs under control is to buy the incidentals and the MRI equipement and then tell hospitals and doctors how much they need to charge. Maybe when you take away the need to profit and enrich stockholder value costs will come way down.

  • Jim

    I am not an expert, but I would say that a plain vanilla $2400 deductible before insurance kicks in and you chose your own doctor would be the starting point for pricing. Who wants to go through the entire HMO/PPO/In out of network/ employer pays so much/employee so much, etc smoke and mirrors without knowing what a basic health insurance policy should really cost? Then the fancy add-ons could be sold by insurance companies.

    Just my. .02 from a member of the uneducated masses.

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  • CanadaNorth

    I am from Canada. Government Health insurance is not bankrupting Canada. We are very pleased with the system in general. There may be some delays and shortages for specialized operations, but generally everyone here is dealt with fairly and in good time. Again as other readers have commented, taking care of your own health through self education and maintaining a proper balanced diet and through exercise is a good way to reduce costs as well as personal uneeded suffering for the majority of us. There are others, through no fault of their own that need more medical care.This is the essence of true insurance, where the majority healthy populance help the less healthy minority. Anyway, my two cents worth, CanadaNorth.

  • palpcaso

    I am also from Canada. The Canadian helath care system is a joke. Go to any ER and suffer excruciating pain for hours on end while a nurse sits on her fat ass, sipping Timmy’s and chatting with the other caring health care professionals. When any service is “free”, it creates more demand for that service, guarantees that demand will outstrip supply, thus ensuring that there will be chronic shortages. Go into any Canadian ER and ask yourself how many people really need to be there and how many are there because they have the sniffles and are availing themselves of a “free” service. Besides, why should the majority healthy populace be forced to help the less healthy minority? Besides the dubious morality of forcing people to be their brother’s keeper, doesn’t that create a disincentive to stay healhty because there will always be somebody else to pay for your mistakes?

  • theaccusersgift

    Of all the stupid, idiotic, lame-brained, retarded proposals I have read, this takes the cake. It is obviously motivated by a sick fantasy to return to a long ago vanished past. Here, you mentally challenged writer, is another proposal: ban all health care. Think of how much money America could save, and since medical mistakes are the biggest cause of death, reduce the death rate too! Remember, every-time a countries or cities unionized doctor’s have gone on strike, the death rate has gone down!

    For those of you who think this is a great idea, spend some time with Google search researching what happens to “uninsured patients”. That will open your eyes to how stupid this idea is.

  • Cheri

    Great article for illustrating one of many points why the current proposals are just sweeping the issues under the rug and “rolling” the costs into the future. There is a lot of money and power “up for grabs” and no one will get the care they deserve.
    I work in healthcare and there used to be County Hospitals in CA. Most have closed.
    The whole healthcare debate is being pushed under the guise of “High Quality Affordable and Accessable Healthcare”. It is a power grab by government and the unions. SEIU loves government contracts. The “free pot of money” are our taxes. Honest compassionate hardworking people have rights too.

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