Seeing the Statrix
Summary: What is the biggest drawback to government’s involvement in American life? Higher taxes? Onerous regulation? Barriers to innovation? While all of these inconveniences are the result of government, it is the loss of imagination that is most costly to those living in systems controlled by the state. Find out how regulatory capture and crony capitalism limit the possibilities that innovators can dream up for improving health, education, and transportation.
The Health Care Statrix
Unpacking America’s health care statrix is a daunting and book-length task. In this section, I’ll focus on just one prominent part of our system: health insurance. How did health insurance become the predominant way many Americans pay for health care, and how did so many of us come to rely on getting health insurance through our jobs?
There’s a surprising answer to this story and it begins with the American Medical Association (AMA) which, starting in the late 1930s, decided health insurance was their preferred model of paying physicians. Using their political and regulatory clout, they made sure that health insurance, and eventually employer-provided health insurance, was supported and protected.
Here’s the simplified story in terms of the steps of the statrix. The details will be more fully explained below:
- Concept: In the 1920s and 30s, the AMA was primarily concerned with establishing and preserving physician professionalism and autonomy, and it feared business models that were too commercialized.
- Implementation: Using both political power and control over the licensing of physicians, the AMA encouraged the insurance-payment model and pushed policies that influenced how insurance was provided.
- Reorganization: Insurance companies and doctors’ practices slowly reorganized around the insurance model. Initially, insurance companies had been reluctant to get into health insurance due to fears of exorbitant costs. If insurers were supposed to pay for all health-care expenses, there would be little incentive for either doctors or patients to economize on care. After the insurance-model was established, costs did increase, and the companies initially passed the increases on to the purchaser. When the cost increases began to upset politicians and the public, insurance companies reorganized their businesses to contain costs through more physician and hospital oversight.
- Crowding Out: The AMA-backed insurance model didn’t just crowd out competing payment structures, such as prepaid plans or mutual-aid societies, but in many cases those payment structures were also essentially prohibited via the AMA’s control of medical licensing (this is related to step 7; the steps of the statrix are sometimes blurred).
- Collusion: After the insurance model grew and began to control large amounts of health-care spending, the AMA, insurance companies, drug manufacturers, and other organizations worked to ensure the model was “locked in.”
- Inadequacy: The third-party payment insurance model proves to be particularly inadequate at controlling costs and delivering certain types of integrated care.
- Prohibition: Some states’ insurance regulations prohibit many types of bare-bones, “catastrophic” health insurance plans, and under the Affordable Care Act (ACA) businesses that have 50 or more employees must offer their employees health insurance. Finally, also under the ACA, qualifying individuals must pay a fine (tax) for not having health insurance.
If anything, the health care statrix is more pronounced than the education statrix. Even with our system of government-funded schools, people are still aware that private schools exist and can offer an education as good or better than their government school counterparts. With health care, however, people don’t see many free-market alternatives. We’ve come to accept that getting health care requires multiple phone calls and referrals, convoluted forms, fleeting visits from the doctor in which he briefly drops by the examination room, the lack of coherent or knowable prices, consistent billing errors, medical errors, and other headaches. Not having seen any free-market alternatives, people rarely demand them, just like Soviet citizens with grocery stores.
But it didn’t have to be this way. Like the history of education, a little history of the health care system can give us a window into roads not traveled and possibilities lost.
Health Care Before the Statrix
Going to a doctor in the late decades of the 19th century or the early decades of the 20th century was not a fun experience. Of course, going to the doctor at any time is rarely fun, but before medicine began to broadly incorporate modern scientific breakthroughs, such as the germ theory of disease, doctors had little professional standing that differentiated them from other “healers,” such as snake-oil salesmen and homeopaths. Starting in the last decades of the 19th century, however, the AMA began pushing state governments to establish or strengthen licensing regimes. On top of that, in the early decades of the 20th century, the AMA began extending its control of the profession to medical schools by determining which schools were qualified to have their graduates take the licensing exams.
The AMA’s goal was to establish and maintain the professional standing of doctors and to ensure that doctors preserved their autonomy. In the 1920s and 30s, the organization feared that medical care would be subsumed into the emerging corporate model, and doctors would become dependent “organization men” who were at the mercy of a competitive marketplace. Thus, the AMA policed how doctors were paid.
There were many payment systems being tried at the time. Mutual-aid societies and fraternal orders pooled resources to contract physicians, who came to be known as “lodge doctors.” Businesses employed doctors to keep track of the health of their workers. Such practitioners of “industrial medicine,” an accepted specialty at the time, would oversee the work environment and provide on-site clinics. Henry J. Kaiser, the father of modern American shipbuilding, created a medical care system for his employees that employed doctors on a salaried rather than on a per-patient or per-service fee—a model still used by what would become Kaiser Permanente. Labor unions used dues to cover members’ medical bills or negotiate services with physicians and hospitals. Finally, doctors grouped together to form multispecialty clinics, such as the famed Mayo Clinic, and they were paid either by a form of insurance or by prepayment of dues. The prepayment model became popular due to its ability to combine many specialists together under one roof—no need to wander around town getting referrals—and for its ability to control costs.
To the AMA, all these models posed a threat to physician autonomy and professional standing. In these payment models, the organization saw the seeds of excessive bureaucratization, commercialization, and corporatization. Ironically enough, the AMA feared that large medical organizations made a government takeover easier, arguing that “insurance schemes in the hands of the profession at the outset, drift inevitably, as do all plans initiated by private groups, into bureaucratically administered compulsory insurance under government control.”
To enforce its policy preferences, the AMA utilized all the force at its disposal, that is, force it acquired by essentially controlling the government-imposed licensing system. Physicians who practiced under forbidden payment systems had their licenses and hospital-admitting privileges revoked. Doctors colluded to refuse to refer patients to group practices and insurance groups. The AMA also went to war against specific, widely known doctors, such as the Ross-Loos group in Los Angeles, California, by expelling them from the association and threatening those who worked for them.
Yet, the times they were a-changing. The 1935 Social Security Act showed the AMA that there was a real possibility for government-mandated and -funded insurance. In fact, FDR had rejected a proposal to include government-funded health care in the act out of a fear of AMA opposition. By 1938, however, more proposals for government-funded insurance had come out, and in July, the Department of Justice filed an antitrust suit against the AMA for its persecution of physicians associated with the Group Health Association, a prepaid group that served federal workers. The AMA saw the writing on the wall, and in an emergency session of its House of Delegates, the organization approved private insurance.
But the AMA was still fixated on a professional, anti-commercial, and autonomy-maximizing view of physicians. Therefore, it required that approved insurance plans finance individual doctors rather than groups; send indemnity payments to subscribers, not to doctors; pay for care on a fee-for-service basis; and allow for complete doctor autonomy. These four requirements created “an inherently inefficient structure that fragmented health care services and fueled cost increases,” in the words of historian Christy Ford Chapin in her book Ensuring America’s Health: The Public Creation of the Corporate Health Care System, which more completely documents this story.
The era of a health insurance-centered health care had begun. The employment-based health insurance model began to pick up steam in 1954 after Congress made employer contributions to employee health care plans tax-deductible. That tax break made employer-provided health insurance the most financially attractive way for patients to finance health-care expenditures. Over time, the government-preferred method crowded out the competing payment models.
Health Care After the Statrix
In America’s health care statrix, health insurance is nearly synonymous with health care. But health insurance is not health care, it’s a method of paying for health care. Only in a topsy-turvy, government-created artificial reality would such things be conflated, but that is another effect of the statrix.
Via the actions of the AMA and other interest groups, as well as politicians reacting to their constituents’ demands, we’ve created a health-care payment system that essentially guarantees rising costs and poor service. Imagine if we predominantly paid for groceries via a “grocery insurance” model, and we received grocery insurance through our jobs. He who pays the piper calls the tune, and grocery stores would understandably respond to the demands of the insurers more than the customers. And if the grocery-insurance model included a guarantee to pay for whatever groceries the customer chooses, as the fee-for-service model essentially does, then customers would buy only steak and lobster. Business practices (such as increased insurer oversight of grocery stores) and regulations would be put in place to constrain what customers can choose. Insurance companies would have to begin monitoring purchases to determine whether they were truly “necessary.” People would begin fretting about out-of-control grocery costs.
In response to rising grocery-insurance costs, perhaps the government mandates that everyone must buy grocery insurance (as the Affordable Care Act essentially did in health care). That would, of course, be a serious misdiagnosis of the problem, which began when grocery insurance became the main method of paying for groceries, eventually reorganizing the entire grocery industry around that payment method. But that system can’t be disturbed. There are too many special interests relying on the grocery-insurance model, and Americans have come to accept that grocery insurance is a reasonable way of paying for groceries. After all, they’ve never seen anything else.
Americans have such a difficult time imagining a world where health insurance is not the primary payment method that showing them even the smallest innovation in health care provision can be shocking. Take direct primary care, an old but increasingly popular model that resembles the prepayment structures that were popular before the AMA chose health insurance as its preferred model. Direct primary care physicians don’t take insurance, Medicare, or Medicaid and, as a result, they’re able to strip away the red tape that in many ways defines American medicine.
Dr. Ryan Neuhofel runs a direct primary care practice in Lawrence, Kansas. For a flat membership fee of $35 (18 years old and younger), $55 (19-69), or $75 (70+) per month, or $130 for a family of four, Dr. Neuhofel will take care of most basic health care needs. Members get yearly wellness checkups, clinic visits, flu shots, and routine labs and tests. Dr. Neuhofel’s patients also can freely call, email, or text him—something that seems like science fiction to those raised in the health care statrix. For an additional modest fee, Neuhofel also makes house calls.
Dr. Neuhofel’s website, NeuCare.net, features transparent pricing for medical services. X-rays are $40-$60, and MRIs are $450-$600. In traditional American medical practices, pricing is not transparent because there is no single price for a given procedure. Everyone pays a different price, be it Medicare, private insurance, or out-of-pocket, and since the consumer isn’t paying, physicians have no reason to be upfront about pricing.
For those who have been battered by the American medical system, looking at Dr. Neuhofel’s website can seem like a hallucination. NeuCare offers a small glimpse into what’s possible—a tiny peek outside of the health care statrix. The prepayment method was once a popular way of delivering care and constraining costs, but the AMA and friendly lawmakers almost drove it out of existence. Although direct primary care is growing, perhaps future interest groups and politicians will view the model as a threat and prohibit it. Then, those who experienced something resembling a free market in medicine will tell their children and grandchildren how there once was “for-profit” medicine—and it worked! The kids won’t believe them, of course, because how could effective health care could be provided without the government?
The first time I stepped into an Uber, I looked furtively left and right, wondering if I was doing something wrong. But I got in, and I got out at my destination.
I was blown away.
How was that legal? Why didn’t it exist before? Why have cabs been so unwilling to adopt this simple yet effective business model?
Then UberX rolled out, and I was soon zipping all over D.C., getting rides from total strangers. It was like the future, except traditional yellow cabs are fixtures in even our most imaginative sci-fi settings. Blade Runner, Total Recall, The Fifth Element—their creators could imagine mind-binding technologies and trips to bizarre worlds, but they couldn’t get out of the mindset that taxicabs are the past, present, and future.
This article is an attempt to explain why that is. Not only why it took so long to come up with ride-sharing apps like Uber, but why, if you’re like me, you were amazed when you first tried them. It’s about why we settle for a less dynamic, efficient, effective, and free world, and why it’s so difficult for even our most forward-looking science fiction authors to think beyond traditional taxicabs.
Companies like Uber also showed us a path toward exposing antiquated government-controlled services. Free-market think tanks like my employer, the Cato Institute, could have devoted all their energy for the past 40 years to exposing and reforming taxicab cartels, and they would have done less than Uber did in six months. Most people don’t read policy papers or pay attention to the statrix that’s around them, but show them a viable alternative and they’ll demand it.
We can and should demand more from our government, but few people demand what they’ve never seen or believe is impossible. That’s the primary harm of the statrix: impoverishing our imaginations and leaving us with a constrained view of what’s possible.
Yet there is reason for hope. Uber was just the first and most prominent example of our new interconnected world changing the state-created status quo. Uber showed people what was possible, and in turn they demanded it.
But there’s still much to do. Many government-created and -protected industries need to be “disrupted,” in the parlance of the times, and the new digital age gives entrepreneurs the tools to do it. Sometimes, we need break the world to remake it and show people what they’ve been missing. A simple trip to the grocery store can help change the world.