The Anatomy of a Healthcare Cartel

(This post is subject to revision, but is offered as a collection of resources for interested readers.)

Historically, in several countries, Mutual Aid Societies successfully provided healthcare services to their members. Each member would pay a regular fee into a common fund, and in times of need could draw on the common fund for aid. Membership was voluntary, one contracted with the organization of one’s choosing and could leave the group at will. Roderick Long describes these voluntary organizations thusly:

In the late 19th and early 20th centuries, one of the primary sources of health care and health insurance for the working poor in Britain, Australia, and the United States was the fraternal society. … As recently as 1920, over one-quarter of all adult Americans were members of fraternal societies. (The figure was still higher in Britain and Australia.)

… The principle behind the fraternal societies was simple. A group of working-class people would form an association (or join a local branch, or “lodge,” of an existing association) and pay monthly fees into the association’s treasury; individual members would then be able to draw on the pooled resources in time of need. The fraternal societies thus operated as a form of self-help insurance company. … [T]he most commonly offered [services] were life insurance, disability insurance, and “lodge practice.”

“Lodge practice” refers to an arrangement, reminiscent of today’s HMOs, whereby a particular society or lodge would contract with a doctor to provide medical care to its members. The doctor received a regular salary on a retainer basis, rather than charging per item; members would pay a yearly fee and then call on the doctor’s services as needed. If medical services were found unsatisfactory, the doctor would be penalized, and the contract might not be renewed. Lodge members reportedly enjoyed the degree of customer control this system afforded them. And the tendency to overuse the physician’s services was kept in check by the fraternal society’s own “self-policing”; lodge members who wanted to avoid future increases in premiums were motivated to make sure that their fellow members were not abusing the system.

Most remarkable was the low cost at which these medical services were provided. At the turn of the century, the average cost of “lodge practice” to an individual member was between one and two dollars a year. A day’s wage would pay for a year’s worth of medical care. By contrast, the average cost of medical service on the regular market was between one and two dollars per visit. Yet licensed physicians, particularly those who did not come from “big name” medical schools, competed vigorously for lodge contracts, perhaps because of the security they offered; and this competition continued to keep costs low.

How Government Solved the Health Care Crisis by Roderick T. Long

Given the historical success of voluntary associations in procuring healthcare, and other services, for their membership, it stands to reasons that such institutions could probably do so again in the future.

Unfortunately, in the U.S., today, Federal, State, and Local governments have created, and continue to maintain, several barriers to any attempt at bringing voluntary, mutual aid based healthcare back to the forefront of the field.

  • Biases in the U.S. tax code presently encourage us to rely on our employers for healthcare, rather than, say, mutual aid societies or unions. Employers can write healthcare benefits for their employees off of their taxes. Unions and mutual aid societies, and other similar organizations, can not. This, (combined with the high prices and low availability of care,) makes us more dependent on our employers, (or, for some, on the government, if that’s their primary source of coverage,) and thus makes it harder for us to bargain with our employers for better wages and working conditions. Bargaining power is thus systematically taken from the working class and placed in the hands of bosses and capitalists by the government’s actions.
  • “Certificate of Need” laws require prospective service providers to obtain the government’s permission before providing specific services in specific geographical areas. These laws lead to a number of harmful effects, including lowering the supply of care and increasing emergency room wait times. Practically speaking, the existing providers in an area often have the ability to directly prevent new competitors from starting up in an area, as they often have a direct say in whether new providers get permission to start up in the area in question. (Kevin Carson points this out in his fantastic C4SS paper on healthcare.) These laws fail to decrease healthcare spending, (one of their stated goals,) and likely raise prices by restricting supply. The general population does not benefit, on net, in any obvious respect from these laws, they exist merely to help maintain the U.S. healthcare cartel.
  • Price controls in some states force providers to either a) charge higher prices than they want or need, or b) stop providing the services in question. One such case of this occurred in New York in 2009, during the “Great Recession.”
  • “Scope-of-Practice” laws also limit supply of care by restricting what sorts of work nurses and physician’s assistants can do, while failing to demonstrably improve patient care. Occupational licensing laws more generally may have similar effects. Alternative means of improving care and limiting medical malpractice, e.g. through malpractice insurance and voluntary certification programs, are discussed by Shirley Svorny and Tom Baker and Charles Silver elsewhere.
  • Some Mutual Aid Societies, historically, ran their own hospitals for their members. Unfortunately, while these organizations had enough funding to provide care that their members generally found satisfactory, or even better than for-profit care, eventually new regulations raised the costs of legally running hospitals beyond what these associations could bear. Historian David Beito describes these events:

By 1960 both hospitals were feeling financial pressures. Former employees cite the impact of new regulation as the culprit. … The commission gradually shifted from its previous policy of regulatory laissez-faire and started to issue citations, finding the hospitals guilty of infractions such as inadequate storage and bed space, failure to install doors that could swing in either direction, and excessive reliance on uncertified personnel. In response to one mandate, the Taborian Hospital expended hefty sums to replace cane fiber walls with fire-resistant material that could be more easily scrubbed. The two hospitals never seems able to satisfy the demands of the commission, however.

From Mutual Aid to the Welfare State by David Beito – page 195

While one could argue that hospitals could improve their service by meeting at least some of the requirements described, shutting down a hospital for failure to meet such requirements seems more likely to leave many patients without professional care altogether than to magically grant them the opportunity to obtain better care.

  • Intellectual property in medicine dramatically increases the prices that patients have to pay. According to one study: “The most important factor that allows manufacturers to set high drug prices is market exclusivity, protected by monopoly rights awarded upon Food and Drug Administration approval and by patents.” (Also see this article. Sorry for the link, I can’t find the original anymore.) If you’re worried about abolition of intellectual property lowering incentives to do research, I believe the “first mover effect” would still give a bit of an advantage to inventors in the absence of intellectual property, and, further, that crowdfunding can help raise the necessary funds for research. (Here’s an example of one successful crowdfunding campaign for medicine.)
  • Some states restrict telemedicine, limiting the ability of patients to consult with their doctors long-distance as an alternative to seeing them in person.
  • Prohibition of drugs like marijuana, lsd, and psilocybin limits research and use of these drugs to treat various ailments.
  • The ACA, among many other things, placed restrictions on creation and expansion of doctor owned hospitals. This is a direct prohibition of worker ownership and management of businesses in this industry. The linked article claims that many projects for creation and expansion of hospitals that were being worked on before the law was passed were cancelled once it was signed.

While all of these laws carry costs to the general population, especially the poor and working class, defenders of government intervention are quick to argue that many of them also benefit us. A comprehensive cost-benefit analysis of each category of law would escape the scope of this blog post. However, the overall effect of these laws is, demonstrably, to restrict the availability of care, maintain prices far above market levels, and likely lower the overall quality of care provided. Many of the laws mentioned do not demonstrably benefit the public in any way, and those dealing with patient safety could arguably be beneficially replaced with voluntary systems of patient protection, as mentioned above.

Those healthcare providers and insurers safely tucked inside their cartel’s insulary walls may benefit from their ability to charge oligopoly prices and provide subpar services, with little threat of competition from mutual aid associations, but we can reasonably predict that tearing down the barriers and creating alternative services could aid us, the general populace, in improving our living conditions and working towards a free society.