Incentives Matter

by Burt on August 19, 2009

Some kind of socialized medicine has been a goal of the Democratic party for over sixty years. President Truman, in part responding to FDR’s new Bill of Rights, proposed a large government health care program in 1945–but the Republicans, and many southern Democrats, shot it down. From Lyndon Johnson to Bill Clinton to Barack Obama we have seen major efforts by Democrat politicos to change the nation’s way of doing medicine.

What have been the criticisms? First, socialized medicine is unconstitutional; second, it is very expensive; third, it creates perverse incentives.

This last point is especially significant today. When a nation promises free health care, the one certainty is that sick people and hypochondriacs will flood the existing system and thereby force some kind of rationed care. Demand for medical services will outstrip supply. Those people who understand incentives and see how they work tend to be skeptical of any kind of universal health care program. In a similar manner, those who want lower tax rates understand incentives and recognize that higher taxes chase industry out of the country. Incentives matter.

Thus, it was surprising to see President Obama using incentives to defend his program. He described how doctors allegedly prescribe cutting off feet, taking out tonsils, and then doing expensive surgeries all for personal profit. Some critics have pointed out that the president had his figures wrong and that many physicians undercharge patients and give much free medical advice. True, but the larger point here is that the president wants to wage debate on the issue of looking at incentives and how incentives affect the delivery of health care.

Critics of universal health care, higher taxes, an increased welfare state, cap and trade, and the stimulus package need to accept this challenge and study how federal interference changes incentives and produces unintended consequences.

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