The Challenges For Capitalism
Article 2: To Regulate Or Not To Regulate?
Copyright © 2003 Dorian Scott Cole
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This article series is about destructive tendencies within the capitalist economic system and the need to control the system so that it works for us, but not against us. Specifically this article is about the role of regulation.
Extreme capitalists prefer that competition run wild and free, devoid of regulation... except when competition works against them, of course.
To Regulate Or Not To Regulate?
- Does regulation work?
- Essential industries: To regulate or not to regulate?
Does regulation work?
There exists in the US (and other countries) a number of products and services that are questionable as to whether they should be fully private or regulated. The medical industry is a "compassionate" industry that has long been populated by charitable, governmental, and private organizations. The utilities (water, natural gas, electric), and transportation, deliver basic necessities that people must have to live, and exist in the modern world. Should compassionate and essential industries be allowed to run wild and free, demanding top dollar for their products and services regardless of the ability of people to pay?
Pharmaceutical companies have always been reluctant to spend research dollars on medicines for diseases that affect few people. There simply is no dollar return on that type of research. Another example is medication for the poor. The aging and elderly use more medications than all other people because of diseases that begin or advance with age. Most of the pharmaceutical development in the last decade or so has been targeted at the elderly, and these medications are very expensive. Yet the elderly are the least able to afford these medications, and there has been no prescription drug plan available to them, so there choice is typically to do without the medications, or do without food.
Since most of the pharmaceutical industry is private and unregulated, the needs of some people will never be addressed except possibly through other programs. So do you regulate or deregulate, or even provide the service through the government?
Some things the government does very successfully by partnering in programs with private industry and investors. In the arena of medical care, the government has proven itself effective in creating a complex system to administer Medicare and Medicaid. The "Health Care Financing Administration (HCFA), which is a division within the Department of Health and Human Services, is tasked with administering the Medicare program.
HCFA contracts with various health care insurance agencies across the country, like Blue Cross and Blue Shield, to manage the program locally. Insurance agencies contracted to handle Medicare Part A claims are referred to as "Fiscal Intermediaries," while those agencies contracted to handle Part B claims are called "Carriers." As a result, while there are national Medicare policies, there are also Local Medical Review Policies (LMRPs)."*1
Similarly, the government has been effective in supporting the housing industry and keeping the money flowing, by using such agencies as Freddie Mac and Fannie Mae. These agencies are mandated by Congress, but are actually in private hands. When people want a home, the money is there.
While we usually shudder at the idea of government involvement, many programs that the government does are very effective and efficient. There are exceptions which are worth reviewing, to understand the governments limitations in regulating. Public transportation and education are not good examples of competence. I'll review a few.
A good case for the need for public transportation, such as bus, light rail (subways and elevated), and heavy rail (Amtrac trains), is made by traffic jams, lack of transportation for the poor, automotive air pollution, and suburban living that is inaccessible to many for lack of transportation. People hate their long and tedious automotive commute. But whenever the government creates one of these modes of public transportation, it often operates at a loss and very few are tempted to give up their cars. The problem remains the same.
The typical government strategy is to select "experts" to devise a solution, and then impose the solution on people. What the government doesn't seem to do is ask what kind of solution people want, and then try to offer that. What people want is their own space, with comfort and convenience, and a ubiquitous system that will get them from either a commuter lot or their home to where they work, with convenient schedules. From such an infrastructure, other supporting systems can grow, such as electric cars for getting around town or to the commuter lot.
Perhaps though, government is learning. Boston's "Big Dig" central artery tunnel is a step in the right direction for handling commuter traffic. It is "the largest, most complex and technologically challenging highway project ever attempted in American history." The project connects five different heavy traffic Boston areas through new viaducts, bridges, roads, and tunnels. The Big Dig means that traffic will flow with fewer traffic jams; it means the revitalization of some areas; it means that carbon monoxide levels in Boston will drop 12 percent; it means commuters will arrive faster with fewer headaches.
It remains to be seen how Los Angeles, California and Atlanta, Georgia will fare with their transportation projects. Atlanta has completed all of the Interstate artery expansion that it plans to do, yet area commuters still have the longest commute of any US metropolitan area, logging more than 100 million vehicle miles traveled every business day. Atlanta continues to expand its modern Marta rail and bus service farther into metropolitan areas, and has coordinated the two services for wide coverage, but Atlanta still has trouble getting people to ride these services. The trend continues for businesses to move to the fringes of the suburbs to avoid rush hours that are several hours long, and a common hour and a half commute time from the fringes of the metropolitan area to downtown.
Chicago expanded its popular elevated ("L") railway service from downtown to O'Hare airport about 20 years ago. The L is faster and ~1/25th. the expense of common alternative services (except the bus). Around 16,000 people a day come or go from O'Hare on the L service (around 7% of the total of employees and passengers).
Los Angeles's new heavy rail system (MTA) has tunnels that had to be built to resist earthquakes of up to 7.5 magnitude. The project, like many public transportation projects, went way over budget - at least double (must have been a military contractor on the freewheeling cost plus plan). Adding to the expense were stations of elaborate design, which isn't necessarily a bad thing. Given the cost overruns, the citizens decided to stop subway construction for a while.
While the cost is questionable to the public, the expanded Los Angeles Red Line has been a success, meeting its rider ship target in the first days of service, and is continuing to grow, with 120,500 daily boardings, an 85 percent increase, and spurring growth in the overall rail system with a total of 211,000 daily boardings. This means that about 100,000 cars stayed at home, reducing: traffic jams, travel expense, wasted hours in traffic, and pollution.
In cities like New York, San Francisco, and Chicago, there is a long established tradition, or culture, of using public transportation. In other metropolitan areas that grew up in a different era, the tradition is the automobile. In Boston, the government went with the automotive tradition and found a way to improve commuting. Rail expansion in Chicago and Los Angeles have been successful. In Atlanta, improvements to arteries were temporary and the traffic problem has continued to grow, with no more artery expansion feasible. Atlanta now has the opportunity to grapple effectively with the problem and become a showpiece.
The government can't get away from its role in public transportation - it is considered essential. But whether it can find ways to entice those with automotive traditions to switch to public transportation remains to be seen. Meeting needs that go beyond basic transportation seems rarely to have been in the government's planning, and unless the government can demonstrate that it can effectively address the needs of the people, its competence in understanding complex issues in areas where it has experience, remains questionable.
In the utility arena, the government sponsored Tennessee Valley Authority (TVA) brought economical electrical power to millions of non-metropolitan residents and businesses who otherwise would not have gotten power for many generations, if at all. TVA is a good example of the government taking on an appropriate role of providing utility service and river management, through another agency.
President Franklin Roosevelt needed innovative solutions if the New Deal was to lift the nation out of the depths of the Great Depression. And TVA was one of his most innovative ideas. Roosevelt envisioned TVA as a totally different kind of agency. He asked Congress to create "a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise." TVA was established by Congress, May 18, 1933.*2
TVA mission and method: "...basic harmony in nature involves a balance between human beings and natural resources. This view is at the heart of TVA's mission and method: treating nature, including the river, the land, wildlife, and human beings, as a harmonious whole, and developing each part of this "seamless web" for the common good.
In some states, the government built dams with hydroelectric power generation. In other states, private groups banded together to provide electrical power through rural electric cooperatives. Had these coops not existed, private companies still would probably not have supplied economical power to rural people. Sometimes the government or nonprofit groups have to provide services directly.
Private companies have changed little since the 1930s. The television cable companies certainly don't see rural areas as a market. Infrastructure buildout to those areas would bankrupt them. (Telephone companies managed to do it.) Not that rural areas need cable - surveys indicate that people using satellite dish systems are more satisfied with their service than cable customers are with their service.*3
Satellite service is also less expensive than cable, except if you need high speed Internet service for your computer. To retain its market, the cable industry resorts to negative ads, calling the dish "a disease," and of course the satellite companies retaliate with their own negative ads. Negative ads are a sure sign that the advertiser has no winning product or service to offer.
Petroleum and natural gas
Petroleum and natural gas prices affect our transportation costs and utility costs. Natural gas is used for home heating, and natural gas and oil are used in the production of electricity. Transportation, heating, electricity, and water are services that are essential to the modern way of life. Natural gas has been regulated, and in some places still is.
On the one hand, gasoline is like cigarettes to the government. Considerable tax revenue comes from both. In 2001, the major oil companies earned $50.8 billion in profits from their petroleum products. In that same year, the government collected nearly $78 billion in taxes from them.*4 The tax on gasoline is around 45%, while oil profits are more like 7.3¢ per gallon. Their profit margin remains around 6% regardless of income, less than many other major industries. This doesn't sound fair for the petroleum companies until you realize that profit margins don't tell the full story.
On the bad side, their profits were $53 Billion in 2000, but plummeted to 7 Billion by 2002.*5 In 2000, pump prices in the Atlanta suburbs was as low as 94¢ per gallon, while oil profits were high. When prices fluctuated around $1.60 per gallon, although prices were up, oil profits were low. These profits contradict intuitive thinking about income and profit. After the 9-11 attack, petroleum prices shot up, and they haven't come down since. On the good side for the oil companies, profits became high.
Why the strange anomalies and fluctuations in profits? In 2000, mergers and efficiencies helped the oil companies and gave them a good profit that year. Oil producing countries that supply the US (largely Mexico and South America), have also had political unrest that inflates prices. As the price per barrel that the oil companies pay for petroleum goes up, their profits go up on the higher sales price, even though their profit margin percentage remains the same. Profit margins are not a good indicator of actual dollar profit. Despite high petroleum prices, oil companies actually made a lot of money behind the cover of that "less than 6% margin" they typically get.
Profit margin does help tell the financial health of an industry, and gives investors some idea of the annual dividends on profits that they might expect. (Dividends are actually where long term investors make money, not on buying and selling.) What profit margin doesn't tell you is the actual profit of a company or industry. The corner gas station doesn't make a fortune on a small profit margin. Keep in mind that gasoline prices are set at tenths of a cent! It all adds up. When you multiply the small profits by hundreds of thousands, the resulting international pile of money is huge.
I don't have a problem with oil margins. What happens though, is that during times of high revenue, oil companies drive up their own costs to keep profit margins "low." In other words, they have a lot of money, so they spend it wherever they can in ways to benefit their company. Production costs remain relatively the same as productivity increases, so they spend more on other expenses. For example, oil companies are now investing 20 to 30% of revenue into the expense of oil exploration (investment in exploration equipment, contracts, and manpower).
I don't really have a problem with money going into exploration either. That money finds new oil reserves, and so secures the future of the company for employees, investors, and consumers. But the story gets a little warped when the industry tries to hide behind "less than a 6% profit margin." Profit motivated price gouging is not tolerable to consumers - that should be caught and punished.
The main culprit in oil prices is the cost of crude (petroleum), and the government has no incentive to pressure the oil companies to reduce prices in a bad economy because the tax revenue, a whopping 45% of the price of fuel, is desperately needed. When the price of gasoline doubles, government gasoline tax revenue also doubles. The official sounding government position, however, is that prices are high because individual states apply different manufacturing requirements to fuel, so the cost to suppliers for these "boutique" fuels is higher. At the quantities produced, stored, and sold, efficiency would be high, so this story is unlikely to be true as a major factor in gasoline prices.
What about crude oil prices? The price of crude oil extracted from the ground, is not set by economic prices such as supply and demand. Because the supply of oil is so unlimited (for the near future) that competition would reduce the price to near $0.00 per barrel as competing suppliers had a gas war. Production quantities and prices are set by a consortium of Oil Producing and Exporting Countries (OPEC). In the US, such a practice would be deemed illegal "anticompetitive conduct." But OPEC doesn't reside in the US, so OPEC prices would be very difficult to regulate.
The price of crude oil went up, according to OPEC, ostensibly because of the weak dollar. The dollar is worth 20% less compared especially to European currency. This means that US products cost less in foreign countries, and we have to pay more for their products. This hurts our trade deficit, which, as pointed out in Article 1, is something we definitely don't need. Higher oil prices hurt our deficit even more.
Following announcements that Shell and other companies are restating their oil reserves to lesser amounts, the companies are investing an additional 20 to 30% in exploration. Reserves are the known quantities of crude contained in oil fields that they have the rights to. Since 2000, global spending on exploration and refining increased from slightly over $80 billion to slightly over $140 billion.*6
As a last curious item, what about gasoline prices that fluctuate from one area to another. You purchase gas at one station, and drive past the same brand a block away and it is 10¢ cheaper. This doesn't make much sense to most of us, but distributors won't reveal their complex pricing formulas (obviously for competitive reasons, and to avoid the price wars that used to drive gasoline stations out of business). Note that with today's high prices, competition is almost irrelevant.
One can speculate a lot based on observation. Major distributors appear to maintain their prices in buying areas at competitive prices (two stations side by side usually have identical prices), and they depend on brand loyalty to pull in customers. Smaller regional distributors appear to often have lower prices, and now having established a loyal market, they then also depend on brand loyalty... they can afford to at such high margins - their prices today are typically identical to other brands.
Prices as a whole seem to depend on what the market will bear and the price of delivery. For example, brands located near major Interstate highways typically have higher prices for their captive market than prices within towns. More traffic, more demand: higher price. Greater transport distance, higher expense: higher price. Wealthier area: higher price. Nearby competition: same price, but established by the preceding factors.
"Market will bear" pricing is not based on manufacturing cost or value to the consumer. For example, the economy is supposedly governed by supply, demand, and consumer need. At an auction people bid for an item, and whoever has the greatest need, or the most money, bids the highest. Most auctions are governed by the very limited supply and the value of the item to the buyer, based on need. The bid price is somewhat affected by the ability of people to pay.
"Market will bear" pricing is very different. It is based on the highest price that you can charge without running into negative consequences, such as decreasing your revenue by losing too many sales, or driving buyers to the less expensive competition. Competitors have no interest in supplying something to everyone at a reasonable price. No one cares if a few are squeezed out of the market - most will buy at the higher price.
Should there be any regulation, or control in some fashion, of the petroleum industry? Maybe. The question is whether such practices as "market will bear pricing," on a product where supply is controlled to affect price, and occasional price gouging, are acceptable on a product considered essential to the nation, people, and business. Petroleum prices have a major impact on the cost of manufacturing products, as well as on power, gasoline, and heating fuel.
Profiteering: To make excessive profits on goods in short supply.*10
Controlling the prices of refined petroleum products (gasoline, diesel fuel, heating oil, etc.), and natural gas, might be a necessary step in reducing some of the volatility and profit taking in the market by putting pressure back on crude oil suppliers. Oil companies would have to negotiate better prices for crude to stay in business. This would benefit suppliers, consumers, and the government through profitable but more stable prices and taxes.
The natural gas industry was recently deregulated in many states. Deregulation of the gas industry was supposed to lower consumer prices by encouraging competition. It had the opposite effect. Dividing the market into more players simply did away with the benefits of size and made each new competitor bear a disproportionate amount of business overhead (marketing, billing, etc.). Natural gas prices skyrocketed. And this year 2004, natural gas prices are expected to be even higher.
Regulators typically had only one natural gas provider to control in an area, and to get a price increase the provider had to justify the need by reviewing its books in a hearing. Deregulation ended that. In states that deregulated natural gas, they apparently failed to study the impact of deregulation on the industry. The economy of scale ended. When the provider monopoly morphed into several different providers, each provider had to form its own business infrastructure: marketing department, sales department, billing department, service contacts, business infrastructure, and begin advertising. These things are expensive, and the expense is simply passed on to the customer. The natural gas supplier could charge as much as it wanted for the physical gas and delivery infrastructure. Gas prices shot up.
In support of this is the fact that natural gas prices remained relatively stable when they were regulated, with no ill effects to the companies and consumers. There was pressure to control prices. With the pressure removed, the big suppliers (oil companies) already knew well how to manipulate the market, and prices shot up and are continuing their upward spiral. A certain amount of regulation just seems to keep things from spiraling out of control.
Profiteering: To make excessive profits on goods in short supply.*10
Deregulation in other industries has met with varying degrees of success. Deregulation of the airline industry led to expected mergers (of the weak with the strong), and now may be a major contributing factor in the demise of many of the major airlines. I wasn't especially saddened that airlines with the appearance and maintenance of a NYC taxicab have gone out of business. But many of us were saddened when the pioneer of the industry, Pan Am, left the arena.
Even stalwarts like United, with exemplary maintenance and pioneering employee ownership participation, are teetering on the brink of survival. Bankruptcies in some airlines, like US Air, are leaving employees with minimal or no pension plans for their retirement. While deregulation isn't the only financial problem encountered by the airlines, it is a significant cause.
Education is another government learning experience like public transportation - one that doesn't seem to end. In the US, we have long had educational systems that were failing; we seem to have lost interest in science and won't graduate enough engineers to meet our needs; many students simply can't afford college; physical education programs are gone and students don't know enough about exercise to keep their bodies at physical condition - overweight and obesity are now health problems; and in spite of taking the dross out of schools, students still don't learn. At this point, private enterprise seems to be doing a better job of teaching and may replace the public school system. Who knows how it will work out.
The government success in planning, regulating, or providing services through agencies, has been mixed. Regulating has typically been beneficial to the consumer. Deregulating has often been damaging to both the industry and the consumer. Government involvement doesn't mean success, but it doesn't mean disaster. These examples given above aren't exhaustive, but seem to favor government oversight and regulation in a wide variety of areas.
Compassionate industries: to regulate or not?
The profit motive may not be the best incentive, nor the most publicly beneficial approach, for many industries in that fuzzy land between what should be public sector*7 and what should be private sector. Profit is suspect as a motive for hospitals, pharmaceutical research and manufacturing, utilities, and transportation.
Pharmaceuticals are a great example. Pharmaceutical profits are the highest among US corporations, and US consumers pay the highest prices in the world for medicine. According to the industry, low profit would mean that less money would get invested in research. As already mentioned, high prices also simply mean that those less monetarily fortunate, the aged and the poor, won't get medication. And while tremendous numbers of people in 2000 - 2004 have suffered with unemployment or no income increases, pharmaceutical prices have had double-digit price increases every year for the last five years.*8
High profit in pharmaceuticals also means that doctors are pressured by pharmaceutical sales representatives rather than relying solely on independent studies of drug effectiveness, and more money is spent by pharmaceutical companies to influence the public through marketing than is even spent on product research - often to promote drugs that are less effective than other drugs that are currently on the market, and to promote old drugs in new marketing wrappers rather than doing new drug research. Capitalism and the public sector may be a poisonous mix that not only doesn't promote the public welfare in essential compassionate areas, it actually is counterproductive to the public welfare.
Reality is that companies do invest less in research when their profits are lower, perhaps by design rather than consequence, as witnessed by the oil companies. Now that profits are up, oil companies are investing 20 to 30% more in exploration. Where the profitability cutoff occurs for pharmaceutical research, no one really knows - it is one of those threats that companies can leave hanging over our head. It appears to me that the electric companies in California, in frustration over expansion regulations, simply ceased to build new power plants.
The electric companies knew that eventually consumption would go over capacity and when consumers began to squeal, regulations and environmentalist resistance groups would have to give way. I can't prove this, of course, so this is just a theory. But I worked for many years for power companies and it sounds like something they would do - they don't just hate regulations and environmental groups, they are literally an enemy to be defeated. But what the electrical power companies can do, who have captive markets, doesn't necessarily apply to pharmaceutical companies who, if they cut their own throats on competitive products, will die.
What is pharmaceutical business like? On one hand, to create a new product takes years and years of expensive research, testing, and government approval. Twelve years would be typical. I worked with one company who pioneered things in the medical field. When they expanded into pharmaceuticals, investors expected quarterly returns the first year, and couldn't comprehend development time that took years. The company finally sold the medical department.
Pharmaceutical development is risky. The product may fail at any point in the process, or not get approval. After gearing up for manufacturing, medical problems may turn up in patients that remove the product from sale and even create expensive lawsuits. Another drug may enter the market and blow your product out of the market. Pharmaceutical companies sometimes spend years of research on products, fail to get approval on any, and have to sell the business to other pharmaceutical companies. Most companies only ever get from 3 to 6% share of the entire pharmaceutical market. Yet all industries face similar risks - if you have experience in a field you can plan accordingly.
In practice, pharmaceutical companies that have been around for a while manage to avoid the foregoing pitfalls. Comparing the profit margins of the top industries, pharmaceutical companies pocket 19% of their revenue (19% is their profit after expenses and taxes are paid).*9 This is the highest profit margin of any industry. None of the other top industries are much more than half as close.
As I previously mentioned, profit margins are a poor indicator. How much actual money do the pharmaceutical companies make compared to other industries? Again they lead the other top industries, at $20 billion.7
Now, this is interesting. Pharmaceutical companies, the highest profit industry in the US, use every means available to prevent US citizens from going to neighbor nations to get the same products at considerably less expense. They have persuaded the FDA to say that imported drugs, which are actually made out of the country by them and subject to regulations as strict as the FDA in Canada, may be unsafe. They try to coerce Canadian suppliers from exporting by threatening to cut them off.
They pressure a "no negotiating price" clause into Medicare reform, while institutions like the Veterans Administration do negotiate prices. However, the pharmaceutical companies do a considerable amount of their testing overseas where they have fewer regulations and less cost. Most of their drugs are actually produced outside of US borders. By doing these things, they further deepen the US trade deficit. Yet to them, exporting jobs, deepening the trade deficit, double-digit inflation during high unemployment, and denying people medication is OK, but consumers shouldn't look outside of US borders for affordable medicine.
So, here is an industry in a compassionate field, raking in the largest profits of any industry in the US, and protecting those profits with every trick they can think of, with the outcome that their pricing policies deny drugs to people who need them for health and life. If there is an industry begging for government intervention to promote the public welfare, it is pharmaceuticals.
Profiteering: To make excessive profits on goods in short supply.*10
The entire medical field is rapidly spinning out of control, as I have spelled out in other articles. The dynamics within the field between care providers (hospitals, physicians, pharmaceutical companies) and administrators (insurance companies), and lawsuits, continue to push prices up.
Unaffordable Health Care
Do we want a world in which medical care is in chaos?
Do we want a world in which only the wealthy can afford medical care?
It is difficult to get much perspective on what the sources of the problems are, until you compare the overall medical field to another segment of the medical field, cosmetic surgery. Cosmetic surgery is not covered by insurance, and prices in that segment remain relatively stable. Of course, prices have always been so high in this field that most people can't afford the service anyway. But there would be upward pressure on prices if insurance were added to the dynamic.
Insurance changes the dynamic from an unaffordable, and thus unobtainable service for individuals, to an affordable one for everyone. It does this to any system. If the system is affordable through insurance, then it can support price increases, and other elements in the system demand (negotiate for) increases in their revenue. The current system lacks any kind of representation for the perspective and pressure of the uninsured - the system simply is no longer established to address the uninsured, who are left behind with nowhere to turn. The reason is because the system financial leaders have transferred it from a compassionate industry to a profit motive industry, and you don't get profit from uninsured people. The system simply can't address their issues.
As an example of insurance company power, physicians are becoming less and less able to make referrals of patients to other specialists whose services they trust and with whom they have a working relationship. Instead, the patient has to contact their insurance company to find a specialist. The insurance company's goal is not effective treatment, but to minimize their expenses through staying inside their provider network for services. Physicians and patients have conflicting priorities from insurance companies, and the insurance companies have seized control.
The medical field protects its interests just as much as the pharmaceutical segment does. Over the decades, physicians have been extremely hesitant to reprimand one of their own for misconduct or using bad practices, even though they have review boards to do so. Review, reprimand, and action are extremely rare. Similarly, hospital review boards seem to be more about protecting the hospital and responsible physician from malpractice suits, than actually resolving problems.
Malpractice suits have driven them all into even greater protectionist mode. For example, autopsies often turn up mistaken diagnosis, undiscovered conditions, and treatment errors. As many as a third of autopsy findings differ from the clinical diagnosis. But autopsies are performed on less than 5% of hospital deaths today, and statistics on autopsies are no longer kept.*11 If nothing else, this prevents the medical field from learning of discrepancies and improving. It certainly hides the potential for legal action.
It is the dynamic in the medical field that is the problem - the self-interest of the major players - and it requires government intervention to get the field under control. There has to be something to bring the uninsured into the system, and represent their interests. Profit should not be the controlling motive of the medical field. The medical field is a compassionate field, people die if they can't get care, or they lead miserable lives. The system is not set up to address those without insurance - the system only addresses the major players: providers and insurers. The uninsured simply can't afford the system, and they never will be able to. Even those who are insured can hardly afford the system. Every player in the system is clamoring for more money.
Insurers now control every aspect of the medical field to the point that they control which physicians and specialists people see, which hospitals they enter, which procedures they get, how many days they stay, what kind of rehabilitation they get, and which medicines they take. As two negative examples, hospitals and physicians are selected for no other reason than they are in the "network," not because of their specialty competence, and pharmaceuticals are selected because of cost, not effectiveness or hospital formulary. Rising costs are forcing employers to abandon insurance benefits to stay competitive. Soon, no one will be able to afford medical care or insurance, and the people working in the field won't be able to afford to stay in it - these trends are happening right now. It is a systemic problem.
To promote the public welfare, the government needs to intervene in the entire medical field to get it stable and make medicine available to every citizen.
What to do?
Industries scream about government regulation that supposedly ties their hands. Yet when their hands are untied and they are allowed to act like businesses, the public inevitably suffers. There needs to be appropriate (even new) models. While TVA and rural electric coops aren't necessarily popular images today, they are one such way of addressing needs. They are as necessary, timely, and appropriate as another lifesaving nonprofit organization, the Red Cross.
In the area of health and medicine, while amazing basic biological research comes out of universities (government sponsored through government agencies such as the National Institute of Health (NIH) and military SBIR contracts), this type of research (basic science) is not product oriented except in some cases, and lacks the continuity required for bringing drugs to market (typically 12 years or even 20). Government financed positions don't keep the best and brightest - they usually gain experience and then migrate to higher paid private positions.
But the bottom line is, when I want to know about the effectiveness of a noncommercial compound that may become a potential medicine, I look at NIH research studies. They are unbiased and available - the opposite of pharmaceutical company information. And when the US and other countries need quick response and assistance with an emerging disease or trend, they turn to the Center For Disease Control (CDC) to get information and help.
As shown in several examples, including the NIH, CDC, TVA, and Medicare, the government is quite capable, usually relying on the strengths of private industry in deploying an effective service. Yet when the government is suggested as a possible service supplier, everyone cringes, fearing creating another massive out of control entitlement program like Welfare, which poisons the image of the government providing any services, directly or indirectly. And of course, the extreme right republicans and extremely powerful lobbying groups create train loads of negative publicity and kill the idea, apparently afraid of losing the opportunity for massive profits. Although I am not anti-Republican, hopefully the next election will make some headway in getting these extremists and lobbying groups under control.
One way to simplify this is to understand and classify what things are critical to people and their "pursuit of happiness." In the article, "The Challenge For Freedom," I talk about the things that tyrannize people that should be monitored and supported collectively by us, through our government, to make sure that none of us fall under tyranny.
Most of the Western World has universal medical care in one form or another. Some of it is notoriously bad, with physicians having no incentive to perform any more thoroughly than a typically rushed HMO/PPO physician, but at least they have medical care. In the world's wealthiest country, many do not have medical care. In the US, healthcare is a hodgepodge system left up to industry, government, and the individual... Each dreads involvement with the albatross. We are seeing alarming signs now that the system is uncontrollable and spinning out of control to the point that even those who have medical benefits are losing them. This is one good reason to stop and look at our system, and evaluate what we want as a society - whether to be victims of the system, or make the system benefit us.
No government, no individual, and no industry can support medical care costs out of thin air. Ways have to be found to provide support that does not overburden the government, make industries uncompetitive, or ruin individuals financially. One way or another payment for services has to come out of our economy... out of our individual and collective pockets. Collectively we have much greater strength to make it happen efficiently and universally. One of the keystones of influence in the economy is the consumer, who must be ultimately in charge, not victim.
What to do? In Article 7, I outline some strategies and recommendations that guide my suggestions on some possible ways of creating a better capitalistic world for ourselves, and specifically in the medical field, the elements of an effective medical care model, from what I have examined, seem to be the following:
1. Government sponsorship through tax funding - our collective payment system.
2. Private (profit-making) agency to administer the plan (not selective of providers, procedures, or medications except in extreme circumstances.)
3. Separate conduit for funds disbursement (to prevent administrative misuse*12), which pays standard local amounts.
4. Individuals pay most physician visit costs up to a $500.00(?) total annually, except for those assessed as very needy. This would keep pressure on both the patient and service providers to keep costs down. Full physician visit coverage would be at additional cost to the individual. Existing tax-free medical savings plans which accumulate funds over multiple years, would help individuals cope with these medical costs.
5. Pharmaceutical co-pay: 20%, except on Medicare. Drug prices negotiated nationally, and generics used unless specified by brand.
6. Minimal paperwork and no pre-approval required for most services. (That is, you require an auditable record as a safeguard, but don't require paperwork for typical services, just standardized bills, eliminating 15% of the cost.
7. Merge with Medicare and Medicaid to prevent duplication of services and easy auditing.
8. Require a medical standards organization (like ISO) to approve medical procedures, formularies, and hospital best practices. Payment for services would depend on medical approved model, except when exceptions are justified. Require a government oversight member to make sure that this industry serves a compassionate role without becoming blinded by profit motives and self-protection, but still makes a reasonable profit. Require members of the public to be present in the organization to keep prices lower, the public interests represented, assure patient rights, and assure the needs of the elderly and poor are addressed. Patients would be able to make informed decisions on using those institutions that don't endorse the standards, or violate them. The combined effect would most likely bring malpractice events, and law suits, under control.
Current hospital certification seems to be of little value. Physician and hospital review boards fail to effectively police themselves; Insurance companies are notorious for allowing laymen to make medical necessity decisions to approve or disapprove payment, and for underpaying hospital, physician, and consumer claims - the companies simply disapprove or reclassify services after they are performed, and don't pay.
9. Require publicly accessible reporting over the entire medical system to provide consumer knowledge and control.
10. Eliminate COBRA coverage and administrative expense.
These items would assure universal medical care, and put the system back in charge of the people who use it, patients, physicians, and hospitals, and bring the price of medical care under control, without governmental regulation.
The challenges for capitalism
Is there a social contract to consider in capitalism? Do companies have the right to plunder, pillage, and profiteer, leaving in their tracks the sick and the dying whom they could have helped? The question is being asked around the world, as people find the cost of life is simply too expensive. Market will bear pricing leaves a wide wake of suffering.
Quoting Henry Kissinger, "...prices established by administrative fiat lose their relationship to cost... the pricing system becomes a means of extorting resources from the population."*13 Kissinger said this about the communist/socialist systems, not capitalism. How sad that this statement now applies to capitalism.
Some segments of society have to be held accountable to a higher standard than greed. The challenge for capitalism is to establish a social contract for compassionate industries, and possibly even for essential industries. The products, services, and serving a need, must come first. Profit later.
Article 2 footnotes, references, bibliography
1. http://www.apa.org/practice/medinfo.html APA Online - General Medicare Information.
2. TVA history
3. DBS Satisfaction Hits the Roof
4. National Policy Center for Public Analysis. Gasoline Taxes. http://www.ncpa.org/iss/ene/2003/pd090503d.html.
5. Conoco/Phillips Newsroom: Oil Company Profits. http://www.conocophillips.com/news/energy/oil_profits.asp
6. BusinessWeek, News Analysis & Commentary, Why Is Oil So Expensive Again?February 9, 2004.
7. "Public sector" is commonly defined as those services provided by the government, such as education, military, roads, public transit, and safetynet healthcare.
8. According to Congressional testimony, prescription drug prices have increased at a double-digit rate every year for the last five years, typically in the 11 to 19% annual range.
9. New Figures Prove Pharmaceutical Industry Continues To Fleece Americans. http://bernie.house.gov/prescriptions/profits.asp.
10. The American Heritage® Dictionary of the English Language, Third Edition copyright © 1992 by Houghton Mifflin Company. Electronic version licensed from INSO Corporation. All rights reserved.
11. What the Body Knows, New York Times, March 3, 2004. http://www.nytimes.com/2004/03/04/opinions/04THU4.html.
12. Administrators have come under recent criticism or indictment for misuse of public funds." Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970 to create a continuous flow of funds to mortgage lenders in support of homeownership and rental housing." In Freddie Mac, (June 2003) money allegedly was embezzled by administrators. http://www.freddiemac.com/corporate/about/
A Red Cross administrator resigned after criticism (leveled by Bill O'Reilly on the Fox News Network) that money that the public had given for 9-11 affected people, was treated as normal public giving and distributed into various Red Cross aid channels instead of being solely reserved for 9-11 aid as the public apparently wished.
13. Kissinger, Henry, Does America Need A Foreign Policy?: toward a diplomacy for the 21st. Century. (Simon & Schuster, 2001.) p142.
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