The Market Does Not Ration Health Care: Voluntary Exchange Is Not Rationing (Part 1)

by | Sep 12, 2009

That the political health “reform” endorsed by Barack Obama and his supporters would entail rationing is indisputable. It is simply impossible to expand subsidized care and contain costs without rationing. For more on this point, see my article in the Colorado Springs Gazette, John Stossel’s article, or Martin Feldstein’s piece in the Wall Street Journal. […]

That the political health “reform” endorsed by Barack Obama and his supporters would entail rationing is indisputable. It is simply impossible to expand subsidized care and contain costs without rationing. For more on this point, see my article in the Colorado Springs Gazette, John Stossel’s article, or Martin Feldstein’s piece in the Wall Street Journal. No serious supporter of politicized “universal” health care denies this, and various supporters openly brag about the fact as a virtue of their proposals.

In response to the criticism about rationing, advocates of politicized medicine routinely reply that the market also “rations” health care, so the debate is merely about which form of rationing is best. Many critics of Obamacare agree to the terms of that debate and proceed to argue that political rationing is worse than market “rationing.”

But obtaining goods and services on an open market via the price system of supply and demand is not rationing at all. Claims that it is distort the language and obscure crucial distinctions between political rationing and market distribution.

Peter Singer is among those explicitly calling for health rationing. As Don Watkins reviews, Singer writes for the July 15 New York Times:

Health care is a scarce resource, and all scarce resources are rationed in one way or another. In the United States, most health care is privately financed, and so most rationing is by price: you get what you, or your employer, can afford to insure you for. But our current system of employer-financed health insurance exists only because the federal government encouraged it by making the premiums tax deductible. That is, in effect, a more than $200 billion government subsidy for health care. In the public sector, primarily Medicare, Medicaid and hospital emergency rooms, health care is rationed by long waits, high patient copayment requirements, low payments to doctors that discourage some from serving public patients and limits on payments to hospitals.

On this point the Cato Institute’s Jim Harper quite agrees:

Health care is a scarce good, so it will always be rationed. The core question is whether government should take the dominant role in health care rationing over from insurance companies, or whether reform should restore rationing decisions to patients advised by doctors.

(See my July 12 article for an additional example and my preliminary reply.)


Price Distribution Versus Political Rationing

Let us begin by distinguishing clear cases of price distribution and political rationing. Suppose you walk into a department store and pay $20 for a pair of jeans. If the jeans had cost only $10 per pair, you would have purchased two or three pair, but instead you limit your purchase to one pair. If the jeans had cost $40, you wouldn’t have purchased the jeans. Is that “rationing?” No. It is simply a consumer deciding which goods to buy, and in what quantities, according to price and ability and willingness to pay.

It is obviously true that the more money you make (meaning the more wealth you produce), the more goods and services you can afford to purchase. The wealthy may shop at high-end stores; I do a lot of my shopping at Target and thrift stores. So a free market definitely entails a method of distributing goods and services, and this involves a person’s market wage rate as well as a person’s shopping preferences. Put another way, market distribution of goods and services depends on the supply and demand of labor as well as of goods and services.

In no way does price distribution constitute “rationing.” In contrast with the authoritarian distribution of political rationing, price distribution rests fundamentally on the rights of individuals to control their own resources and trade voluntarily with others.

Contrast the market system for distributing jeans with political rationing. What would rationing of jeans look like? One possible impetus for the rationing of jeans would be price controls. Let’s say politicians declared that jeans could not be sold for more than $10 per pair. The obvious result would be a shortage of jeans; amount demanded would jump and supply would fall. So politicians might issue ration cards for jeans; say, one pair per family or person.

Let us turn to the example of gasoline. True, the supply of gasoline is artificially suppressed by anti-productivity “environmentalist” controls. But gasoline is not rationed; consumers choose how much of it to buy depending on its price and their preferences and willingness and ability to pay. If you find gas to be too expensive, you cut back on your driving.

Contrast the price distribution of gasoline with rationing. Last year I found my great-grandmother’s gasoline ration card from World War II.

ration1

ration3

ration4

Here is part of the text:

Each coupon is good for ONE “A” UNIT of gasoline. The number of gallons which each coupon gives you the right to buy will depend upon the demands of the war program; therefore, the value of the unit may be changed. Any change in value will be publicly announced by the OPA [Office of Price Administration].

Do not loosen or tear coupons from the book. Detached coupons must not be honored by the dealer. When buying gasoline, hand the book to the dealer to remove coupons. He must remove enough coupons to cover the number of gallons of gasoline purchased… The dealer is permitted to deliver gasoline only into the tank of the vehicle described on the front over of this book, unless bulk transfer has been authorized by the War Price and Rationing Board.

WARNING

1. Persons who do not observe the rationing rules and regulations of the Office of Price Administration may be punished by as much as 10 YEARS IMPRISONMENT OR $10,000 FINE, OR BOTH, and are subject to such other penalties as may be prescribed by law.

2. Gasoline obtained by use of this book must not be taken out of the fuel tank of the vehicle described on the front cover.

Those who would conflate political rationing with market pricing simply are not paying attention to the real and vast differences between the two.

The Definition and Application of Rationing

Rationing is defined by three essential characteristics. First, rationing means that some central authority distributes goods or services. Second, the property rights to the goods or services are usurped or not clearly defined. Third, under rationing recipients have some recognized claim to a portion of the goods or services. (Note: Diana Hsieh, Paul Hsieh, and Brian Scwhartz helped me to clarify my understanding of rationing.) A closer look at each condition clarifies the meaning of the term and its application to various examples.

Rationing involves some central authority. Price distribution does not. In the usual cases this is unambiguous.

What about a more complicated example of distribution under price ceilings that cause shortages? Under such circumstances, generally two outcomes follow. First, the quality of the price-controlled goods declines. Oxford’s dictionary includes an example from 1892: “The most inferior goods in the market are called ration-tea and ration-sugar.” Second, sellers who cannot sell goods or services at market rates must sell according to other criteria, and often this takes the form of personal favors or prejudices.

Ayn Rand discusses this example in her 1946 letter on rationing (see pages 320 to 327 of Letters of Ayn Rand). Rand argues that it is “counterfeiting” to claim that “apartments are not rented by harassed, hogtied landlords — but are ‘rationed by favoritism.’ Implication: a landlord has no right to choose the tenants of his own property, if there are more than one applicant.”

The essential difference between such non-price distribution under price controls and rationing is that no central authority is involved in the distribution. An authority is involved in setting the price controls, and that is what unjustly disrupts market prices, but price controls in themselves are not an example of rationing.

The second characteristic of rationing is that property rights to the goods or services are usurped or not clearly defined. Under price distribution of gasoline, the gas is owned by its producer (or, later, the retailer), and a consumer’s money is owned by that consumer. The two parties may voluntarily agree to a mutually beneficial exchange. Under rationing, the gasoline is treated in part as the property of the government, which replaces voluntarily exchange with authoritarian distribution.

This point has important implications for health insurance. Insurance is a contract; its buyers agree to pay a regular premium in exchange for coverage under certain conditions. No insurance policy promises to pay for any conceivable health expense. For example, under my high-deductible policy, my insurance company is not “rationing” care by declining to pay expenses under my deductible.

A car insurance company might not cover damage caused to a policy holder’s car if the damage was caused by his drunk driving. A home insurance company will not cover damage caused by the policy-holder’s arson. None of this is rationing.

An insurance company, for instance, may decide in advance to cover established cancer treatments but not expensive, untried new therapies. A consumer who agrees to this policy may not properly complain about “rationing” when the insurance company declines to finance the sort of therapy that is explicitly not covered.

The problem arises when insurance contracts are vague and subject to arbitrary case-by-case evaluations, a problem that I’ll return to in Part II of this series.

Under political rationing, some authority must make ad hoc decisions about the distribution of goods or services. The rationed goods may be distributed equally among the population or according to individual cases. Yet even “equal distribution” requires considerable refinement by the authority. Does every citizen get the same number of gallons of gas? Every family (and what is the definition of a “family”)? Every vehicle?

In the case of health care, obviously an equal distribution of resources would be senseless. Some people never get seriously sick, others incur modest health expenses, and others need (or want) extensive and expensive health services. Thus, simple ration cards for health care wouldn’t work. Instead, some authority must decide who gets what care, based on criteria established by the authority. For example, health care might be rationed according to what is deemed medically essential or necessary. When the rationing authority fails to ration with sufficient stridency, waiting lines serve the function.

In her 1946 letter, Rand defines rationing as “to distribute… by the decision of an absolute authority, with the recipients having no choice whatever about what they receive; it also means that all the recipients involved have an equal claim to that which is being rationed, and are entitled to an equal share.”

Rand’s definition entails the three characteristics discussed above; however, her point about “an equal claim” needs refinement. With food or gasoline, each person might be rationed the exact same amount. However, the example of food illustrates the problem with assigning an “equal share.” Should a three year old infant get the same food rations as a 250 pound, hard-working man? That would be ludicrous. Rationing, then, involves not literally equal shares, but shares considered equitable according to some criteria. A grown man gets more food than a small child. A sick person gets more health care than a healthy person.

In her novel Atlas Shrugged, Rand describes the collectivized distribution of the Twentieth Century Motor Company, which institutes the Marxist doctrine, “From each according to his ability, to each according to his need” (see page 661 of the hardback novel). One of the company’s owners becomes its “Director of Distribution,” who decides what everybody “needs,” and whose “gauge was bootlicking.” (page 667). However, insofar as the Director of Distribution attempts to distribute supplies according to need, she is rationing, though primarily on a case-by-case approach. Rand compares this system to the rationing of a global egalitarian system (page 669).

Nobably, employees of the company voluntarily remain in this system (though the best employees quickly leave). Thus, the rationing at Twentieth Century is crucially different from political rationing. Under political rationing, exit from the system is forbidden or forcibly restricted. One may join a commune that rations goods according to need, but so long as one joins voluntarily and remains free to leave, that is a fundamentally different situation than political rationing, which one is not free to exit. Political rationing is the major form and most important type of rationing.

While rationing involves an authority’s ad hoc decisions, rationing does recognize that recipients have some recognized claim to a portion of the goods or services, the third characteristic of rationing. A king who arbitrarily hands out loot to his favorites acts too capriciously for his actions to be considered rationing, and at her worst the Twentieth Century’s Director of Distribution resembled such a king.

The requirement of a recognized claim shows that charity does not count as rationing. A food bank that restricts recipients to a certain amount of food is not “rationing,” for the recipient has no inherent claim to the food.

Food stamps (which are actually debit cards now) forcibly redistribute wealth. However, if its recipients are otherwise considered akin to the recipients of charity, then food stamps do not “ration” food by limiting the amount of handout that recipients get or the type of food that recipients may buy through the program.

Does rationing apply to a recent case from Oregon? ABC News reported last year:

The news from Barbara Wagner’s doctor was bad, but the rejection letter from her insurance company was crushing.

The 64-year-old Oregon woman, whose lung cancer had been in remission, learned the disease had returned and would likely kill her. Her last hope was a $4,000-a-month drug that her doctor prescribed for her, but the insurance company refused to pay.

What the Oregon Health Plan did agree to cover, however, were drugs for a physician-assisted death. Those drugs would cost about $50.

Jon Caldara characterized this as an example not only of rationing but of a “death panel.”

The problem with ABC’s account is that it counts the Oregon Health Plan as just another “insurance company.” It is not:

The Oregon Health Plan (OHP) is a state program of health care for people with low incomes. This health care includes services for medical care, dental care, mental health and substance abuse treatment. Depending on which benefit package you are found eligible for, OHP benefits may… [r]equire you to pay a monthly premium for your OHP coverage… Some adult clients are required to make a monthly payment for health coverage. (pages 1 and 9)

So did Wagner pay anything for her insurance premium? That is unclear. If she did, then she had some claim to the benefits. If not, then she was like a recipient of food stamps.

If, in a free market, Wagner had sought out voluntary charity, we would not call it “rationing” if the charity did not fund every conceivable treatment for her. No charity can afford to fund every conceivable request of every possible recipient. The difference between a charity and political rationing is that the charity has rightful control over its resources, whereas under political rationing the recipients have some sort of claim to an equitable portion of the goods or services in question.

Notably, if people are forced to pay tax dollars to support a program that provides benefits, then any government restriction of those benefits with respect to those paying the taxes counts as political rationing.

The Market Does Not “Ration” Health Care: Voluntarty Exchange Is Not Rationing (Part 1) by Ari Armstrong (September 12, 2009)
That the political health “reform” endorsed by Barack Obama and his supporters would entail rationing is indisputable.

The Market Does Not “Ration” Health Care: Politically-Controlled Insurance and Rationing (Part 2) by Ari Armstrong (September 13, 2009)
Either people have the right to control their produce and to make voluntary exchanges with others, or their property is collectively owned and rationed by politicians.

Ari Armstrong is a writer for the Coalition for Secular Government and the editor of FreeColorado.com.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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