Preventing Extortion

Roosevelt signs the Tennessee Valley Authority Act The debate about a public health insurance option mirrors the debate
about public power in the 1920’s and 30’s. The arguments then were very
similar to the arguments we hear today.

The principal issue then was whether the federal government should
enter the public power business by investing taxpayers’ money to build
the Tennessee Valley Authority and to harness the Columbia and other
rivers for electrical energy, or whether the sites should be transferred to the
private sector. A second issue was who should build transmission lines
and set wholesale prices when the Federal government built dams.

The answer to the second question was first enunciated on the Senate
floor in the fight over the Wilson Dam in 1920 by Senator John Sharp
Williams of Tennessee. He said, “The government should have somewhere a
producer of these things that should furnish a productive element to
stop and check private profiteering.” Thus was born the yardstick
federal policy which later found its way into TVA legislation through
the efforts of Nebraska’s Senator George Norris. In a 1932 campaign
speech in Portland, Oregon, Franklin Roosevelt referred to his TVA and
other regional proposals as “yardsticks to prevent extortion against
the public.”

Roosevelt’s statement enunciated America’s public power agenda, which
through the years has saved the federal government and electrical
consumers hundreds of billions of today’s dollars. This public
investment provided the electrical energy to build the bombers and the
atomic bomb and was a critical factor in winning World War II.

At the time of the Yardstick Public Power legislation of the 1930’s,
most of the farms and homes in rural America were without electrical
power. Only in the cities could private power companies make a profit
selling electrical energy. With the launching of the New Deal yardstick
pricing, together with publicly owned electrical cooperatives and
public utility districts, rural America was electrified and  private
utilities ended up serving a large majority of rural consumers.

Because we adopted yardstick pricing back in the 30’s, today America
possesses a healthy and balanced mix of private, public, and
cooperative electrical systems.

The public power analogy might be a useful device in combating the
brutal campaign against a federal public health insurance option.
History is repeating itself. We see the same epithets of socialism,
unfair competition, and government interference with private enterprise.

Both America’s constitutional system of government and our free
enterprise economic system are built upon the fundamental notion of
balancing power between institutions. It is only when there is an
imbalance of power within one of the two systems or the share of power
between them that we fail . Recent disasters created by imbalance,
including Enron and California energy manipulation and the collapse of
the American banking system, wiping out our citizens’ retirement
accounts, are painful examples.

Most importantly and perhaps most painful for great numbers of our
citizens today, America trails all developed countries by many years in
fashioning an effective national health services delivery system .

There is no industry that has a more shared and complex mix of
nonprofit, government, and private for-profit delivery systems. Yet we
have a system that is neither cost-effective nor meets the needs of our
citizens, whether insured or not. It is a system that is out of balance.
It desperately needs an effective yardstick.

The imbalance in our system began in 1975 when the Supreme Court gave
the green light to commercialization of medicine by removing medicine
from protection of the antitrust laws. The imbalance was greatly
exacerbated in 1980, when the American Medical Association changed its
ethical guidelines to declare that medicine was no longer a
professional service but both a business and a profession. The other
factor of great influence that has led to imbalance is the dominance of
investor-owned private insurance companies born from the establishment
of employer-based health insurance systems.

Thus began the corporatizing and domination of Wall Street in
organizing and pricing for-profit medical services.  Rather than a
system organized to deliver cost-effective medical services to
patients, today we have a system designed for profit .

Despite the roles of federal Medicare, state Medicaid, members of
Congress health care programs, federal delivery systems such as the
Veterans Administration, and nonprofit group health cooperative
associations, the balance of power in our national health care delivery
system is now largely in the hands of Wall Street-driven for-profit
enterprises. Every medical procedure from putting on surgical gloves to
sending bills to the insurance company has become a profit center. And
the pricing for all the services are set largely in an oligarchical
framework of administered pricing. There is absolutely no competitive
pricing. Have you or anyone you know ever negotiated the price of
medical service?

So history repeats itself. The Democratic party is charged with
formulating another national yardstick policy that will have enormous
consequences for the health and welfare of our citizens in generations
to come. Like Franklin Roosevelt, President Obama is simply leading the
nation to create sufficient power in the public sector to balance
against the private sector and the Wall Street pricing effect. Or in
President Roosevelt’s words, “a yardstick to prevent extortion against
the public.” And, as President Obama stated, “to keep insurance
companies honest”.

The failure of Congress to build in an effective market yardstick for
pricing medical services would cost future generations trillions and
fail to deliver cost-effective medical care to all our citizens. No
amount of regulation will suffice. Only the market mechanism will
provide effective cost reduction to pay for universal coverage.

Jack Churchill is a political economist living in Agness, Oregon.

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5 replies »

  1. What prevents extortion of the public at the hands of government? We are not in a healthcare crisis today because of private insurance, it is the impending financial collapse of Medicare and Medicaid dictating that something be done now.
    We have come to a cross roads where the government is extorting the little remaining piece of our health they haven’t already consumed and destroyed. The analogy is off by decades. The power plants where already built in the 60s and 70s and we are paying a ridiculous price for their government power. The governemnt to keep them up and running and now trying to nationalize the few remaining private power plants that are cheaper and of better quality.
    If you want an accurate comparison our healthcare crisis today is more similar to what Chaves did/is doing to Venezuela’s oil industry.
    We had healthcare well before government intervention. Before Medicare 85% of seniors had no trouble paying for all of their healthcare. Medicare was sold as a catastrophic plan to protect grandma from a long illness, even though it provided for a very limited benefit period. This is why even Democrats at the time of it’s passage said the public was hoodwinked. Medicare went into those rural communities and took the power away they already enjoyed.
    “Yet we have a system that is neither cost-effective nor meets the needs of our citizens,”
    Perfect example that you have no idea what you are talking about. We have thousands of systems that deliver the best healthcare in the world at competitive prices. That is why 80% of people with insurance don’t want to lose what they have. What we suffer from is a failure of existing public plans. Your statement completely ignores the facts.
    “The imbalance in our system began in 1975”
    BS, it started in 1906 when Liberals started proposing plans to nationalize our healthcare. It got worst when liberals started lying about their plans to trick the public into nationalizing parts of the system even though the public clearly said year after year they were not interested.
    It got far worse when Medicare passed and government became the dominate rule maker and price setter.
    It got even worse still in 1973 when Ted Kennedy write and passed the HMO Act forcing companies against their will to offer federally subsidized HMOs. It continued to get worse year after year as the government passed more and more regulation.
    “The other factor of great influence that has led to imbalance is the dominance of investor-owned private insurance companies”
    Your really going to claim the <15% of the market investor owned insurance companies have makes them dominate?
    “There is absolutely no competitive pricing.”
    More ignorance, you obviously never heard of self funding and the 60 million people covered by it.
    “Have you or anyone you know ever negotiated the price of medical service?”
    Yes I have numerous times and know hundreds of people that have as well. Maybe you need to step out of your ivory tower and reconnect with reality. I take it you have never heard of Lasik or cosmetic surgery, if you had you would know the price continues to drop because people negotiated the price of the service lower. In your false reality you must not know how to use an internet search engine for if you did cash discount dental or cash discount medical care would show you are wrong. The fact there is a thriving medical tourism industry where people negotiate trips overseas for cheaper care shows you are wrong. Have you never once heard of bus trips to Mexico for cheaper services or Canada for drugs, what are these people doing by their actions?
    How you can get away with writing such propagandist trash is beyond me. This is what happens when we listen to political economist who don’t have any clue what they are talking about. If you don’t even grasp the reality of the current system no wonder you can’t make an accurate comparison.

  2. Jack Churchill writes:
    > [Medicine] desperately needs an effective yardstick
    Hasn’t it been argued recently that there are yardsticks: Mayo, Kaiser, Cleveland Clinic, and Intermountain? You could say that the VA is another. Lots of people on THCB hold up every western European country as a yardstick and some few hold up the UK and Canadian systems. There are plenty of yardsticks.
    There is another yardstick too: we have some few for-profit hospital chains. If we can presume that they’re doing about the best that can be done in the current context, we can look at their EBIDTA and get an idea what ought to be possible in the not-for-profits as well. Can’t we?
    And as long as we’re dreaming, one thing that could be done is to transfer the government and every federal employee into the VA system over the next few years and watch it quickly approach the levels of the best systems. Some say it is already there, I don’t really know. Then publish, publish, publish! You’ll have your yardstick.
    > the pricing for all the services are set largely
    > in an oligarchical framework of administered pricing.
    > There is absolutely no competitive pricing.
    This will never be otherwise — medicine is very much a locally-produced and consumed good, and barriers to entry are high.
    > It might be worth also pointing out that it may not
    > be possible to have a true free market in health
    > care, because patients are not consumers.
    Even if the behavorial economists are wrong and people can make cold, steely-eyed, rational choices, so long as they’re insured it will be coldly rational to spend a lot. If we want something that looks consumer-driven then it seems to me that insurance should pay cash upon diagnosis, and then sit back and see how people spend their money. Unless we do this we’ll have “administered” choices.

  3. This was a very nice historical analysis.
    It might be worth also pointing out that it may not be possible to have a true free market in health care, because patients are not consumers. As Kenneth Arrow noted in 1963, patients cannot be steely-eyed consumers. They do not have enough information about the benefits, harms and costs of their possible choices. They have trouble understanding the ambiguity and uncertainty of the medical context. And most important, they may not be capable of the cold cognition the free market model requires, since they may be dealing with choices whose potential outcomes prompt extreme emotions, and in many cases, they may be too frightened, sick, or cognitive impaired to make fully rational choices.
    I’m glad you brought up Goldfarb vs the Virginia State Bar, and the AMA’s abandonment of its prohibition of commercialized medicine. But I’m not sure I understand the connection between the two. As I posted here:
    knowing this important bit of history raises more questions than it answers:
    * The Supreme Court decision apparently involved interpretation of law, not the constitution. Therefore, why didn’t organized medicine pursue a change in the law that would allow physicians to continue to enforce their traditional professional values?
    * The Supreme Court decision was primarily directed at lawyers, not physicians. Since the decision, to my knowledge, the law profession has maintained strict rules about conflicts of interest. (For example, no legal CME is sponsored by corporations whose products they seek to have the attendees favor.) Why did the decision wreck physicians’ but not lawyers’ abilities to regulate their own conflicts of interest?
    * The Supreme Court decision only affects US law. Why have physicians in other countries also abandoned their traditional values about commercial entanglements?
    * Why did this application of US antitrust law have such significant effects during an era when antitrust enforcement in health care was generally declining? (Insurance companies and hospitals that dominate local markets have not feared antitrust enforcement.)
    * Why did only Dr Relman and Prof Bloche seem to care about this up to now?

  4. Thanks Jack Churchill-
    The analogy you present seems valid and I appreciate the relevant history lesson.
    Yes- Balance is the key. In US health care we lost that balance as the unmanaged free market model dominated our nation’s health care system especially in the last 30 years.
    I like to say, however, that it is all cyclical. But real people get hurt at the extremes of the cycles.(and some get very rich)
    So it is time to rebalance and try to flatten the amplitude of the swings in the future.
    Thanks again for your good post.
    Dr. Rick Lippin