The Free Market Medical Revolution
Jeff Deist: Welcome, Dr. Smith. I know you are a University of Oklahoma alum and your surgery center is in Oklahoma City. Are you an Oklahoma native?
Keith Smith: Yes, I am. I was born in Tulsa and lived in the Southeast corner, in the Southwest corner, and ended up right in the middle.
JD: Do you think being a Midwesterner informed your worldview or your medical career?
KS: I think so. Part of the reason I’ve remained in this area is it’s always been my impression that the ratio of people to doctors in this part of the country is higher.
JD: We know each other through your involvement with the Mises Institute, and I’ve spoken to your organization, the Free Market Medical Association (FMMA). You understand me when I ask this loaded question: Medicine in the United States is in big trouble, isn’t it?
KS: Yes. As an eternal optimist, I would say that big medicine is in big trouble. The system is dysfunctional, but people are waking up. There are alternatives out there that are free market, and people are becoming aware that they exist, that they work. With this awareness, it becomes real tough for the big monsters—that is, the cartel that controls the strings with their pal, Uncle Sam—to continue driving the getaway car in this heist.
JD: I hate hearing the term “system” to describe medicine! Nobody talks about the American shoe leather system or the Doritos distribution system. Somehow, we’re able to get all these other goods and services without a “system.”
KS: It’s a system because we in this country look at people as a collective and as groups. And anytime we look at people from a medical perspective as groups or a system, that begs for a central, system solution, and that’s part of the problem.
JD: How did the United States go from having doctors and facilities envied by the world to this third-party nightmare we have today?
KS: I think it happened in the early sixties, when the federal government decided to inflict this monster they called Medicare on us in 1965. It’s no coincidence that this happened right after Harry Truman’s Hill-Burton Act in 1946, which populated the entire country with hospitals in almost every county, whether there was a market for them or not. Those hospitals did not want to deal directly with patients to receive payment, so the federal government created this trough that hospitals could plug into to be paid directly. I believe Medicare followed the appearance of all these government hospitals to ensure that they would all be paid. That was disruptive of what was otherwise a functioning marketplace.
Physicians in the early days objected to this, but the federal government knew that they could buy the support of the physicians by agreeing to pay 100 percent of whatever they billed. Thus, physician charges, no surprise, soared, and physicians were making a lot of money for many years under the Medicare system. Eventually all the objections to it broke down except in very small enclaves of real, true-blue free marketeers, like the members of the Association of American Physicians and Surgeons. Medicare popularized the idea of third-party payment. It increased the wages, the payments to physicians and hospitals for services they provided. That probably was the most pivotal and disruptive move and what brought us this third-party monster that we have now.
JD: So, the federal government was the original third party. How did the ostensibly private third-party insurers, big HMOs and PPOs, for example, become so involved?
KS: It grew quickly in the early 1990s as the Medicare trust fund, whatever that is, began to see that they were running out of money and the current contributions taken from people to support it didn’t begin to satisfy what was going out the door. Medicare then started draconian price cuts. As an anesthesiologist, I was paid $1,100 when I started practice in 1990 for the service I provided in open heart surgery on a Medicare beneficiary. In 1992, President George Bush inflicted the resource-based relative value scale on the Medicare system and on physicians, and the payment I then received for that same procedure was $550. These folks from Harvard decided that they could assign a price to every physician service that was supplied. A year later they came in with round 2, and the last payment I received for a six-hour open heart surgery was $285 for the anesthesia component.
JD: Wow.
KS: So, I quit. I quit filing claims. I don’t mind being charitable, but not at gunpoint. I quit participating in the Medicare system. I took care of Medicare patients, but I quit filing claims. When that happened, it caused a lot of fear across the medical community, and some physicians became attracted to non-Medicare payment sources. That worked for a little bit, but then non-Medicare payment sources, whether it was Blue, Untied, Cigna, Aetna, Humana, whoever it was, realized that they could continue to charge high premiums but use the Medicare fee schedule as a benchmark and pay for medical services at a lower rate, therefore increasing their profitability and their power. That was sort of a marriage where this public-private mess got started, and that’s still where it is now.
JD: And then, of course, Obamacare comes along and literally mandates so-called health insurance for the public. It creates these exchanges and everyone starts talking about the healthcare “marketplace,” but the exchanges represent anything but. You are required to have insurance under pain of penalty, and that insurance is not priced according to your actuarial risk. It must cover things like pregnancy or alcohol abuse. You’re not allowed to have a bare-bones catastrophic policy. Some marketplace!
KS: It’s actually worse than that. They pulled the big companies in to secure their support and had to give them concessions. One was called the medical loss ratio that allowed the bureaucrats and the politicians to use a heavy-handed approach with the insurance carriers and dictated that no more than 30 percent of their revenue could be used for administrative purposes. So that meant all of the insurance companies, except for the giant ones, closed their doors. It was a consolidation and it was intentional. Now there are only four: Blue, United, Cigna, Aetna, and they all had a hand in seeing with that regulation that only the most giant players could endure.
Obamacare also banned the construction or expansion of physician-owned hospitals. That was necessary to gain the support of the American Hospital Association. The administration also recognized Big Pharma’s profits were going to come increasingly from new biologic drugs, and as more and more pharmaceuticals went generic, there was less profit for Big Pharma. To secure the support of Big Pharma, they promised a ban on foreign competition in biologic drugs, and a week after they made this promise, the FDA declared foreign biologic drugs unsafe. There were all sorts of shenanigans like that. It was anything but a marketplace. It’s very devious to call it a marketplace.
Ironically, Obamacare was great for the Surgery Center of Oklahoma because in another big favor to the insurance companies, the federal government allowed deductibles to go sky high. So, the prices we had listed online were increasingly cheaper than people’s deductibles. Obamacare actually drove patients to the Surgery Center of Oklahoma because they became shoppers. They had sticker shock. They were spending their own money to buy the service that they needed and that we provided. It was very ironic that people found out, like the Canadians, the only single payer they could count on, really, was themselves.
JD: In Mises Institute circles we talk about the “financialization” of the economy, referring to how central banking has brought about low interest rates, encouraged mergers and acquisitions activity, encouraged malinvestment, and created a lot of leverage and other distortions in the economy. Insurance for everyday basic services seems to have “medicalized” the country. Many people are sick and addled, using dialysis and taking ten prescriptions.
I was in Pennsylvania recently and saw a billboard touting the largest employer in the state. It’s not a steel company. No, the biggest employer in the state of Pennsylvania is the University of Pittsburgh Medical Center. And it really struck me as artificial.
KS: It’s on both sides. The presence of the third-party payment system, it makes the buyer, the consumer, the patient, more inclined to enter the system if the barriers are low. The presence of a third-party payment drives utilization beyond what it should be. It also invites the unscrupulous on the seller’s side. It was no mistake that when the federal government assigned pricing through the resource-based relative value scale, they got everything wrong and the prices that were too low resulted in shortages in those services and the prices that were too high caused an abundance. Some of the services that were grossly overpaid were in abundance. Suddenly there were residents deciding, I want to go into that field because Medicare pays through the nose for that stuff. The financialization affects both sides. It invites and incentivizes unscrupulous behavior on the seller-physician-hospital side, but it also drives utilization on the patient-consumer side. It’s like Ambrose Bierce said: accountability is the mother of caution. There may indeed be some unhealthy habits that people have undertaken that they might not if they thought “I’m going to have to pay for acting like this.”
JD: Let’s talk about your story. You go through medical school and residency in the late 1980s. Some of the doctors training you at that time (older doctors in their fifties, sixties, and seventies) would have cut their teeth when the country still had an excellent cash system in America. Those days were not so long ago.
KS: I was fortunate to be around some of those physicians, and
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