The Social Responsibility of Business is to Increase its Profits

Libertarians like Milton Friedman often believe that profit-maximizing markets are the morally best outcome.  Many libertarian organizations promote this idea and there even some heterodox journals, such as Markets and Morality, that are part of this effort.  Friedman also had opposite ideas that balanced out what he says here.  Some "hard core libertarians" accuse Friedman of being somewhat of a bleeding-heart liberal because Friedman also promoted things like government welfare for the poor in various forms like a negative income tax (which was implemented by Nixon in a weak form as the EITC, partly based on Friedman's ideas).  Milton Friedman wrote the following essay in 1970 and repeatedly promoted these ideas. For example, he reasserted them in 1995 in another libertarian publication.  

The Social Responsibility of Business is to Increase its Profits

...The businessmen believe that they are defending free enterprise when they declaim that business is not concerned "merely" with profit but also with promoting desirable "social" ends; that business has a "social conscience" and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are--or would be if they or anyone else took them seriously--preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.
...The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate. There are not values, no "social" responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form. 
The political principle that underlies the political mechanism is conformity. The individual must serve a more general social interest--whether that be determined by a church or a dictator or a majority. The individual may have a vote and say in what is to be done, but if he is overruled, he must conform. It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.  Unfortunately, unanimity is not always feasible. There are some respects in which conformity
appears unavoidable, so I do not see how one can avoid the use of the political mechanism
altogether. 
But the doctrine of "social responsibility" taken seriously would extend the scope of the political mechanism to every human activity. It does not differ in philosophy from the most explicitly collective doctrine. It differs only by professing to believe that collectivist ends can be attained without collectivist means. That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." 

No Increase in Doctors

Many factors should be increasing the number of doctors in the US.  Rising medical spending, an aging population, a rise in the number of applicants to medical schools, population growth, etc.  But it isn't happening.  

As you can see, the total number of M.D’s awarded by American medical schools has changed hardly at all since 1980 (which is pretty amazing given that the nation’s population grew by roughly 80 million people during that time). Back then, medical schools were graduating roughly 11,500 men and 3,500 women per year. Subsequently, society became more just and civilized and women were given great opportunity. Because both the number of medical schools and the number of annual M.D.’s are tightly limited via cost barriers to entry, regulation, and professional practice, this created approximately a one-for-one substitution effect so that by 2009 the numbers were almost equal: 8,000 men to 7,800 women.

I am glad that there is enough gender-equality that half of new doctors are now female, but female doctors put in less time on the job than male doctors (on average) because they are in a family-friendly occupation which allows them to take more time off for children and they take more time off than men do.  This trend further reduces the amount of doctoring that happens and increases the need for more doctors.  Doctors earn a lot of money and more people would love to go to medical school if the doctors who control medical education would let more people get educated.  In contrast, law schools have increased the number of slots to accommodate more women and they can still fit in men like Saul Goodman (as the link shows, the guy is almost too ridiculous to be true).   

...It’s easier and cheaper to open a new law school than a new medical school, pass the bar, etc.  So what we see here is the number of men getting law degrees per year holding constant (albeit declining in per-capita terms) at around 23,000, give or take, while the number of women nearly doubled, from 11,000 to 20,000.

Overtreated Poll

Reuters:

In a new poll of primary care physicians, nearly half of them said their patients received too much medical care and more than a quarter said they were practicing more aggressively than they'd like to.
That could mean ordering more tests, prescribing more drugs or diagnosing people with diseases, although they would never have experienced any symptoms.
On the other hand, just six percent of doctors believed their patients were getting too little care.
"Physicians at the frontline of medical care are telling us that their patients are getting too much care," said Dr. Brenda Sirovich.

...Excessive tests may also lead to diagnosing conditions that would never have caused any problem in the first place, such as a slowly developing prostate cancer or a slightly elevated blood pressure.Yet after such a diagnosis, it's difficult for doctors not to proceed to treatment, which may cause side effects.
"When you do anything to somebody, whether it is an intervention or a test, you are putting them in to the healthcare system in a way that exposes them to risk," said Sirovich. "Unnecessary care is potentially harmful."
REIMBURSEMENT MODEL TO BLAME?
So why would doctors order tests that they themselves believe are excessive?
Three reasons stood out in the survey, which is based on a random sample of U.S. doctors: fear of malpractice lawsuits, performance measures and too little time to just listen to patients.
Four in 10 also believed that other primary care physicians would order fewer tests if those tests didn't provide extra income. (Of course, just three percent thought that financial considerations influenced their own practice style.)
"I'm not saying that physicians do tests in order to make money -- there is a potential to be a real cynic here -- but I think that the reimbursement model for most healthcare encourages utilization in a variety of ways," Sirovich said.

The 100-Year Anniversary of Medical Education Reform

What kind of schools do you think of as being "private ventures, money making in spirit and object. Income was simply divided among the lecturers. No applicant for instruction who could pay his fees or sign his note was turned down." This sounds like some sort of shady for-profit educational scam like Trump University, but that was how a lot of medical education was characterized in the United States in 1910 when the Carnegie Foundation published the Flexner report. This report helped spur medical education reform and licensing.
Continued on medianism.org

Adverse Selection Example

Byran Caplan: 

If an economist wants to ward off the spirit of laissez-faire insurance policy, all he has to do is repeatedly chant "moral hazard and adverse selection."  The funny thing about this two-part mantra, though, is that the "moral hazard" part doesn't do any of the work.  Almost no one even pretends that governments do anything to mitigate it.

When we get to the "adverse selection" part, the plot thickens.  There is, in theory, a regulation capable of solving the problem: mandatory insurance.  To see how mandates can help, consider a simple example.  Suppose there are two equally common types of people who buy insurance:

High-Risk Consumers: They have a 20% chance of losing $2000.  Since they're risk-averse, they value full insurance at $1000 ($600 more than the actuarially fair premium of $400).

Low-Risk Consumers: They have a 1% chance of losing $2000.  Since they're risk-averse, they value full insurance at $50 ($30 more than the actuarially fair premium of $20).

If insurance companies can't distinguish High- from Low-Risk consumers, an actuarially fair premium for an average consumer would cost .5*$400+.5*$20=$210. 

If consumers purchase insurance voluntarily, though, the Low-Risk will drop out of the market - they won't pay $210 to get a policy worth $50 to them.  With only High-Risk consumers in the market, the competitive price of a policy is $400.  The market fails to realize $30 worth of consumer surplus per Low-Risk consumer.

In a mandatory insurance regime, however, the Low-Risk have to buy the policy.  The result: The regulation is efficiency-enhancing, because it takes $160 from every Low-Risk person in order to give $190 to every High-Risk person.

All insurance produces moral hazard and the more generous the insurance, the more moral hazard it produces.  There is nothing government nor private insurance can do about that except by reducing the generosity of insurance coverage.  I agree with Caplan that moral hazard isn't that much of a problem in health care.  The adverse selection problem comes down to ethics.  For example, insurers want to charge women more than men because women are prone to expensive pregnancies.  Most people think that that is unfair and so governments regulate insurance to subsidize pregnancies by making men pay more than the free market would require.  Adverse selection also causes a race to the bottom on quality of care because insurers want to get rid of sick people and that is another equity problem.  If insurers could only insure healthy people, they would be more profitable, but the whole point of insurance is to help sick people and adverse selection means that healthy people try to get out of helping the sick.  Most people do not object if bad drivers must pay high insurance fees for their recklessness (although we do want them to get insurance because of the externalities), but most people do object when sick people die because insurance companies do not want to cover them. 

Insurance Companies Routinely Reject Claims

 LA Times:

California health insurers reject [over] 1 in 5 medical claims. Six of the state's largest insurers rejected 45.7 million claims for medical care, or 22% of all claims, from 2002 to June 30, 2009, according to the California Nurses Assn.'s analysis of data submitted to regulators by the companies. ...said Nicole Kasabian Evans, spokeswoman for the California Assn. of Health Plans. "It appears that a good deal of the so-called denials are merely paperwork issues," she said. Brown's office said that his deputies would soon review records and complaints. "These high denial rates suggest a system that is dysfunctional, and the public is entitled to know whether wrongful business practices are involved," Brown said. Doctors complain that too often insurers delay, shortchange or deny legitimate claims. "Getting health insurers to pay their fair share of medical claims can be as much of a headache for physicians as it is for patients," said Rebecca Patchin, an anesthesiologist at Loma Linda University and board chairwoman of the American Medical Assn. She said each insurer has a different set of "obscure, bureaucratic rules for processing and paying medical claims" that result in as much as $210 billion of "unnecessary cost" annually, studies have shown.

Higher US Health Prices Explain High Spending

NYT Uwe Reinhardt:

...the health care sector of any country always has the dual goals of enhancing the quality of life of patients as well as enhancing the quality of life of the providers of health care, and, charity care aside, patients are at once objects of compassion and biological structures yielding cash.

...The chart below illustrates the fraction of G.D.P. ceded to the providers of health care in a number of different countries over the last three decades.

¶Although not all countries can be featured in such a chart, the fact is that no other country cedes quite the slice of its G.D.P. to the providers of health care as does the United States. Current projections are that health care will claim every fifth dollar (19.8 percent to be precise) of G.D.P. in the United States by 2020.

 ... a study by Miriam Laugesen and Sherry Glied, published last week in the health-policy journal Health Affairs warrants careful review. The authors assert:.

¶Higher health care prices in the United States are a crucial reason that the nation’s health spending is so much higher than that of other countries. Our study compared physicians’ fees paid by public and private payers for primary care office visits and hip replacements in Australia, Canada, France, Germany, the United Kingdom and the United States. We also compared physicians’ incomes net of practice expenses, differences in financing the cost of medical education and the relative contribution of payments per physician and of physician supply in the countries’ national spending on physician services.

¶Public and private payers paid somewhat higher fees to United States primary care physicians for office visits (27 percent more for public, 70 percent more for private) and much higher fees to orthopedic physicians for hip replacements (70 percent more for public, 120 percent more for private) than public and private payers paid these physicians’ counterparts in other countries. U.S. primary care and orthopedic physicians also earned higher incomes ($186,582 and $442,450, respectively) than their foreign counterparts. We conclude that the higher fees, rather than factors such as higher practice costs, volume of services or tuition expenses, were the main drivers of higher U.S. spending, particularly in orthopedics.

¶Other studies point in the same direction. An early one, “U.S. Health Care Costs: The Untold Story,” by the health economist Mark Pauly, was also published in Health Affairs. Professor Pauly showed that a good many nations in Europe actually transferred more real human health-care resources to patients than did Americans – suggesting that the real-resource cost of European health care is higher than it is in the United States (or was, at the time of the study). But these other nations paid physicians and other health personnel less than do Americans.

¶Higher physician income, of course, cannot explain all or most of the total higher health spending in the United States, as payments for “physician- and clinical services” constitute only about 20 percent to total current health spending ($538 billion out of a total of $2.7 trillion in 2011) and close to half of those payments tend to go for practice expenses, including support staff, malpractice insurance and claims processing.

¶But prices of other, non-physician health-care services and products in the United States also seem to be higher than elsewhere, as is suggested by the annual surveys of health care prices conducted by the International Federation of Health Plans in their comparative price reports.