Thomas Sowell

Those of us who are getting on in years can remember a time when most people had no health insurance, when we simply paid the doctors or the pharmacies and went on our way, without giving it a second thought. I have especially painful memories of having a hospital bill of $50 for the treatment of a baseball injury back in 1949.

You have no idea how big $50 was for me at that time. It was the most money that I had ever paid for anything. But the bill got paid off, a few dollars at a time, over a period of months.

When and why did health insurance, paid by third parties, become widespread in the American economy? Like so many things that the government does, third-party health insurance grew out of problems created by previous government policies.

During World War II, the government imposed wage and price controls. This meant that employers who wanted to hire more workers were forbidden to offer higher wages to attract them. So employers started offering various benefits instead. One of these benefits was employer-paid health insurance.

Since these benefits were not taxed as income, and could be treated as a business expense by the employer, everybody seemed to be better off. But, long after the war was over and wage and price controls were gone, the idea that third parties ought to pay for health insurance continued on. Eventually the government itself got into the business of providing health insurance and now some politicians depict it as a scandal that not everyone has health insurance paid for by third-parties.

This might make some sense if third-party insurance was cheaper or better than insurance that each individual pays for directly. All the evidence is that it is just the opposite. When third parties pay, use of the insurance -- and of the medical resources that it pays for -- has skyrocketed beyond anything contemplated at the outset.

China, Britain and other countries have been surprised to discover that the costs of government-provided health care greatly exceeded the costs initially projected. But they should not have been surprised. It is one of the oldest and simplest principles of economics that people demand more when they pay a lower price, especially when that price is zero.

There is no fixed amount of medical "need." There are some minor ailments that you may either ignore or treat with some over-the-counter medication, perhaps with the advice of a pharmacist. There are some other ailments that might cause you to phone your doctor for advice but which neither you nor he considers serious enough for an office visit. And of course there are other things that require immediate and perhaps extensive medical attention.


Thomas Sowell

Thomas Sowell is a senior fellow at the Hoover Institute and author of The Housing Boom and Bust.

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