National Health Insurance and the Welfare State

by Richard M. Ebeling

Part I

       After the experiences of the totalitarian states in the 20th century, logic suggests that the world would have learned the lesson that every growth in state power—every extension of government control in social and economic affairs—threatens the liberty of the people. The alternative is always and ultimately a choice between the freedom of voluntary association among the citizens of a commu- nity and the coercing dictates of the political authority. Whether those coercing dictates originate in the commands of a tyrant who usurps power through military force or through the democratic procedures of election and debated legislation, the end result is the same: the state takes upon itself the right to determine what social relationships will be permitted to exist among the members of the society.
       The Clinton administration is now proposing to extend those political dictates in the form of national health insurance, which in earlier days was referred to more honestly as socialized medicine. In spite of the failure, disappointment and increasing costliness of every attempt by the state to politicize the services that normally are or should be provided on the basis of free, voluntary and private contract in the market, it appears likely that health insurance and medical care will soon be under the tutelage of the American government.
       The drive for socialized medicine is not occurring in an ideological vacuum. It is another step in the trend of ideas that have dominated the world for more than a century. It is a trend founded in the belief that the individual is neither strong enough nor intelligent enough to plan his own affairs and to bear the primary responsibility for his own circumstances—and that the state has the wisdom and capability to manage the individual’s affairs better than the individual himself.

The roots of socialized medicine

       It is useful to understand the origin of ideas and policies to have a better perspective on what they mean and to where they may lead.
       The modern welfare state and the implementation of socialized health care arose in 18th-century Germany, during the reign of Kaiser Wilhelm 11 and the administration of Chancellor Otto von Bismarck. In the 1870s, the Social Democratic Party had acquired increasing support among the German electorate and threatened to obtain a majority in the Reichstag, the German Parliament. The democratic triumph of Germany’s socialist party seemed likely in the near future. The German monarchy and the conservative parties realized that something had to be done to deflect support away from the socialists and back to the established order.
       Thus, the Kaiser sponsored welfare-statist legislation that was enacted by the Reichstag. Bismarck had this tactical goal in mind: the masses would shift their support from the radical program of the socialist movement to a renewed allegiance for the monarchy and the political status quo.
       But it would be a mistake to interpret the birth of welfare- statism purely as a cynical political pragmatism. It was also argued for on the basis of “the social good” and a higher conception of human liberty than a mere protection of life, liberty and property by the state. The proponents of this view were known as the German Historical School, a leading member of which was Gustav von Schmoller of the University of Berlin. They rejected radical or Marxian socialism and advocated what they called state socialism. William H. Dawson, in his sympathetic exposition, Bismarck and State Socialism (1890), explained the difference:
       Socialism would abolish the existing political order altogether, while State Socialism would use the State for the accomplishment of great economic and social purposes, especially restoring to it the function, which Frederick the Great held to be the principle business of the State, of “holding the balance” between classes and parties.
       Bismarckian state socialism meant to save the established order from revolutionary upheaval and societal disintegration by admitting many of the criticisms that socialists made against a market economy—exploitation of the workers by employers, self-interested behavior that fails to serve the general welfare, poverty of the many in the midst of material riches enjoyed by the few—and by introducing a series of interventionist and welfarist policies that were to improve the economic lot of the masses while saving what was good and worth preserving in the traditional social order.
       As von Schmoller expressed it, state socialism proposed “the reestablishment of a friendly relationship between social classes, the removal or modification of injustice, with the introduction of a social legislation which promotes progress and guarantees the moral and material elevation of the lower and middle classes.”
       The German Historical School and the state socialists also rejected the “orthodox” laissez-faire economics of the classical economists and classical liberals. Rather, they insisted, as William Dawson explained it, “No department of economic activity should on principle be closed to the State; whether it should or not participate, side by side with private enterprise, is a matter of expediency and public interest. . . .The jurisdiction of government is a matter not of principle but of expediency.” For the German Historical School, state socialism offered the middle ground between a radical individualism that desired for the state to do nothing and a radical socialism that desired the state to do everything. “State Socialism is the mean between these directions of thought; in it the two extremes meet.”
       And it offered the German people a higher “freedom”—a freedom of security and protection from the vicissitudes of life—that the purely “negative” freedoms of classical liberalism failed to provide. This was explained by Frederic C. Howe (an American intellectual who played a leading role in the Progressive movement and later served in Franklin Roosevelt’s New Deal) in his book Socialized Germany (1915):
       In the mind of the Germans the functions of the state are not susceptible of abstract, a priori deductions. Each proposal must be decided by the time and the conditions. If it seems advisable for the state to own an industry it should proceed to own it; if it is wise to curb any class or interest it should be curbed. Expediency or opportunism is the rule of statesmanship, not abstraction as to the philosophic nature of the state. . . .There is almost no dissent to the assumption of state supremacy, of subordination of the individual, of the necessity for personal and class sacrifice to the Fatherland. . . .The individual exists for the state, not the state for the individual. . . .This paternalism does not necessarily mean less freedom to the individual than that which prevails in America or England. It is rather a different kind of freedom. . . .State socialism in Germany is of two kinds: first, productive socialism, and second, distributive socialism. One means the increase in the amount of wealth [through the use of government-sponsored cartels, state monopolies, protective tariffs and export subsidies] and the other its juster distribution. . . .Of the two the latter is more important. . . .First in the list of such [distributive] activities are the social insurance schemes which distribute to the community the burdens of sickness, old age, accident, and invalidity. These in themselves have freed millions of men and women from fear of the future, from loss of self-respect, and have kept them as producing members of the community.
       While Howe admitted that these programs were combined in Germany with monarchical paternalism and autocracy, and with a sacrifice of many of the personal freedoms that Americans take for granted, he stated that “these sacrifices are not a necessary part of state socialism. The institutions which Germany has developed, and the efficiency that has been achieved are in no way inconsistent with democracy.” And it was these social-welfare programs that made Germany, despite German militarism in the First World War, “a pathfinder in social reform.”

The German welfare state

       As a result, beginning in the 1880s, Imperial Germany implemented the main governmental programs that we today call the welfare state: unemployment insurance, old-age pensions, health insurance, workers’ compensation, workplace health and safety regulations, and many others. These, in fact, were the lasting contributions of Otto von Bismarck, the Iron Chancellor, who espoused “blood and iron.” In the words of Melchior Palyi, in his volume Compulsory Medical Care and The Welfare State (1949):
       Bismarck’s role in modem history is rarely spoken of now-a-days. Undoubtedly, his political and administrative “genius” has shaped history down to our times. . . .When, on January 1, 1884, his compulsory sickness scheme went into operation it literally started a new era-a new age in the history of Welfarism.
       And as German economist Walter Sulzbach expressed it in his monograph German Experience with Social Insurance (1947):
       Bismarck’s fame is mainly based on his diplomatic and military successes and on the founding of the German Empire under Prussian leadership. Of all that nothing remains: The Kaiser is gone, the Reich is gone. . . .In domestic policy he failed to stop the Social Democrats. . . .[B]ut the idea of compulsory social insurance which neither he nor his contemporaries considered even remotely his principle achievement took roots and spread. It has been adopted by many countries, and its expansion continues.
       Nineteenth-century Imperial Germany, therefore, was the starting point and the inspiration for the “social” liberalism—the state socialism—that triumphed over classical liberalism in the 20th century. But besides being an intellectual inspiration for the global growth of the welfare state, it also provided an example of the consequences that would follow once the state undertook the task of provision and supervision of national health insurance. And that experience is worth looking at in some detail.

Part II

       The modern welfare state arose in Imperial Germany in the late 18th century. Under pressure of growing support for the Social Democratic Party in the 1870s and 1880s, Kaiser Wilhem 11 and Chancellor Otto von Bismarck attempted to preempt the appeal of radical socialism by establishing a series of socialized insurance programs for retirement, unemployment and medical care.
       In the 1890s, Bismarck explained his rationale to American historian and Bismarckian sympathizer William H. Dawson: “My idea was to bribe the working classes, or shall I say, to win them over, to regard the state as a social institution existing for their sake and interested in their welfare. It is not moral to make profits out of human misfortunes and suffering,” Bismarck said. “Life-insurance, accident insurance, sickness insurance should not be the subjects of private speculation. They should be carried out by the state or at least insurance should be on the mutual principle and no dividends or profits should be derived by private persons.”
       In his 1913 volume, Monarchial Socialism in Germany, Elmer Roberts enthusiastically explained the goals of the German welfare state:
       The endeavor of German statesmanship has been to hold to everything in existing social arrangements necessary to produce individuality in the higher orders, and yet to intervene in education, sanitation, sick, accident and old-age insurance, the physical training of youth in the army, and to participate in transportation, forestry, mining, farming, and industrial enterprises, designing thus to raise the lower orders mentally, physically, and economically, so that they too become worthy individuals, adding to the power of the state and the monarchy. The intervention of the government is to be determined by expediency. . . .Institutions are to be judged by their benefit to the greatest number. The government can bring this about for the community only by taking interest directly in the social and economic arrangements, and by limiting the freedom of individuals and groups should their activities appear upon examination [by the state] not to serve the general aims of the organized life.

German health insurance

       State-mandated health insurance began in Germany in 1884, and initially covered workers in factories, mines, foundries, banks, dockyards, railroads and inland shipping. The blanket of coverage was extended over increasing portions of the work force in 1885 and 1892, with family members of workers included after 1892. In 1911, workers in agricultural and forestry occupations were added, and by 1928, practically every trade, occupation and craft in Germany was enveloped in the system.
       Before the First World War, anyone making less than 2,000 marks in the covered occupations was required by law to participate in the insurance scheme. By 1928, all those earning less than 3,600 marks were forced to participate. The insurance funds mandated by the German state were organized on the basis of trades and occupations. But the state continually consolidated them, with the result that, while in 1909 there were 23,000 of such funds, by 1914 they had been reduced to 10,000, and to about 7,400 in 1929.
       The insurance funds were managed by representatives of employers and labor unions in an industry. The government required that at least a sum equal to one and one-half of the average wage in an occupation be contributed to the fund by each firm, with the contribution being split on the basis of two thirds being paid by the employee and one third by the employer. And as a result, worker representatives made up two thirds of the members on the board of each fund.
       Benefits first included thirteen weeks of free medical care and a cash payment equal to fifty percent of the prevailing wage in the pertinent occupation, with the cash benefit starting on the fourth day of an illness. After 1903, free medical care and cash payments were expanded to a period of twenty-six weeks. In case of hospitalization, the cash payment was cut in half. Besides these basic benefits, the compulsory-insurance funds often provided cash benefits equal to seventy-five percent of the worker’s pay (depending upon family size), and by the 1920s, these cash payments often started only one day after an illness began. Financial coverage was also extended to include nursing services and convalescent treatment for up to a year after the end of cash benefits. Maternity benefits were mandatory as well.

The results of German health insurance

       The benefits paid out by the state-mandated health insurance system continuously exceeded contributions received from member employees and employers and required government subsidization. Total contributions received by the health-insurance funds from employers and employees in 1929 was 375 percent larger than they had been in 1913. But health-insurance benefits paid out by the funds in 1929 were 406 percent larger than what was paid out in 1913. Costs of administering the mandatory insurance funds had increased 288 percent between 1913 and 1929. And the government subsidy to the system had increased by 270 percent between 1924 and 1929.
       The extension of socialized health insurance also saw an increase in what the German literature called “malingering.” As Walter Sulzbach expressed it in his study of the German Experience with Social Insurance (1947):
       Over a period of fifty years [1880-1930], during which medical science scored one triumph after another, it took the average patient under compulsory health insurance an ever longer time to recover.
       In 1885, a year after socialized health insurance began, the average number of sick days taken by members of the system each year was 14.1. In 1900, the annual average number of sick days per member had gone up to 17.6; in 1925, it had increased to 24.4 days; and in 1930, it was an average of 29.9 days. People also were noticeably sicker around weekends and Christmas and New Year’s Day, particularly in those occupational insurance funds that waived the four-day rule before receiving cash benefits. (The cash benefits were also tax-exempt, so the take-home pay lost by not working was less than fifty percent.)
       The ease with which an increasing number of insured workers were able to receive benefits from longer or more frequent periods of illness was not independent of the behavioral incentives at work on the physicians who were part of the system. Originally, the insurance funds set the fees for services rendered. But in 1913, a doctors’ strike almost occurred, and was only averted at the last minute. After that, the fee schedules were determined by a joint committee comprised of representatives of the medical profession and the insurance funds. An essential ingredient of the fee system was that similar fees were paid for similar services, regardless of the patient’s ability to pay. In other words, the frequent practice of private physicians to charge higher fees to wealthier patients as a means to earn higher income and to subsidize voluntarily the treatment they provided to poorer patients was outlawed. Hence, the determination of income earned by doctors in the system was purely on the basis of “quantity,” i.e., the number of bodies examined at the fixed fee per period, as opposed to the quality of the service provided.
       At the same time, the tendency of a conveyor-belt view of patients resulted in workers insured under the compulsory system demanding freedom of choice in selecting a physician, rather than being assigned to a doctor participating in the system. This was established as part of the agreement of 1913. But it also meant that a doctor now had an incentive for greater leniency in diagnosing an illness and prescribing sick leave. A less accommodative physician ran the risk of losing his steady patients and suffering a decline in his income as fewer patients entered his examination room.
       According to some estimates, by the late 1920s, up to eighty percent of the medical profession in Germany was working for the mandatory health-insurance system, and sixty percent of all earnings in the medical profession came from payments from the compulsory- insurance funds. Pharmacies also were increasingly dependent upon the compulsory system, with as much as fifty percent of their business turnover coming from these insurance funds in 1928; by 1932, that figure was estimated to be as high as eighty-five percent.
       Walter Sulzbach summarized the nature of the system by the 1920s:
       The members of the German insurance funds were rarely satisfied with the medical help they received. There was little personal contact between the patients and their doctors. It was a system of mass treatment under which many doctors spent only a few minutes on each visitor during their office hours and made home calls as short as possible. “Kassenarzt,” meaning sickness fund doctor, was not a complimentary term. “Kassenlowe,” “sickness fund lion,” a term used to describe doctors who made big money from a huge number of insurance patients, was even less complimentary.
       Under the Nazi regime after 1933, the compulsory health insurance system became even more centralized and controlled. The insurance funds lost almost all autonomy and became subservient to the Fuhrer principle. And the employer share of health-insurance payments was increased from one-third to fifty percent. Once the Nazis were in power, explained Melchior Palyi, in Compulsory Medical Care and The Welfare State (1949):
       The ill-famed Dr. Ley, boss of the Nazi labor front, did not fail to see that the social insurance system could be used for Nazi politics as a means of popular demagoguery; as a bastion of bureaucratic power; as an instrument of regimentation, and as a reservoir from which to draw jobs for political favorites and loanable funds for rearmament.
       Thus ended the first experiment in socialized health insurance. Begun by Bismarck as a tool of state policy to fight radical socialism through the implementation of Imperial State Socialism, it ended up as one of the cogs in the wheel of Hitler’s National Socialism.

Part III

       In his recent book, The Walls Came Tumbling Down: The Collapse of Communism in Eastern Europe (1993), historian Cale Stokes suggests, “Students who graduate from college after the turn of the millennium will almost certainly look back on the two great movements of the twentieth century, fascism and communism, with the same sort of incomprehension that students of earlier generations looked back on the religious wars of the sixteenth and seventeenth centuries. How was it possible that two movements whose claims seem so implausible, almost comical . . . should have not only attracted millions of enthusiastic followers, but, on the basis of what these adherents considered high principle, sent millions of people to anguishing deaths?”
       A hundred years from now, as the twenty-first century approaches its end, equally incomprehensible will be the belief in the welfare state. Scholars as well as students will wonder how it was that so many people in practically every corner of the world shared the idea that some of the most personal and important matters of their private and individual and family lives should be placed in the care of the state.
       These scholars and students of the future will be equally puzzled by the fact that the dangers and problems of the welfare state had been clearly understood long before its formal institutionalization in the twentieth century—and that these warnings had gone unheeded. Perhaps they will come across the writings of the early nineteenth-century writer Dr. Thomas Chalmers, professor of moral philosophy at St. Andrews University in Scotland, who, in the 1820s and 1830s, pointed out many of the unintended consequences that always seem to follow in the wake of dependency upon the state.

Early criticisms of the welfare state

       Criticizing the British poor-law system, under which the status of “pauperism” was legalized and on the basis of which individuals and families could draw their financial support from the state, Dr. Chalmers, in Problems of Poverty, saw four serious consequences.
       First, he said, it reduced the incentive for people to manifest the industriousness and frugality to care for themselves and their families, since now they knew that whether they worked and saved or not, the state could be relied upon to provide them with all the minimal necessities of life.
       Second, he feared, it reduced, if not eliminated, the sense of family responsibility. Knowing that the state would care for the old and the infirm, Dr. Chalmers pointed out, “There is a cruel abandonment of charity,” as people develop the attitude that since they have paid their taxes, it is now the government’s duty to do what relatives traditionally did for each other.
       Third, it threatened to harden the hearts of men towards their fellows and diminish the spirit of voluntary giving to others in the community. When assistance to others in society is voluntary, there usually is aroused in us “the compassion of our nature, and inclines us to the free and willing movement of generosity.” But when charity is made compulsory by the state, Dr. Chalmers argued, there is aroused in us “the jealously of our nature, and puts us upon the attitude of surly and determined resistance.”
       And, fourth, it weakened the spirit of community and assistance among those who were less well off. Dr. Chalmers noted that those who live in simple or poor conditions often show a support and sympathy for those around them who fall into even worse circumstances, and this creates a network of mutual help within those poorer portions of the wider community. But when each is made a ward of the state, the ties and connections between people in similar circumstances are weakened, with each now connected by one thread—their own individual dependency upon the state for all they need and desire.
       And it should be added that Dr. Chalmers, in the early decades of the nineteenth century, had already been confronted with all arguments heard in the twentieth century as to why the welfare state could not be repealed. He was confronted, for example, with the counter-argument that without the mandatory provision of the state, the poor would fall into even worse conditions.  And an even more forceful impediment to the denationalization of the welfare state, he said, came from the resistance of those who administered the system, that is, when the proponent of voluntarism “comes into collision with the prejudices or partialities of those who at present have the right or power of management” of the welfare programs.

Looking back at the 20th century

       Perhaps most astounding to those twenty-first-century scholars and students who look back at our own times may be the ease with which the welfare state—after all the failures, costs, abuses and disappointments—was extended in America to incorporate the provision of medical care and medical insurance in the last decade of the twentieth century.
       They will wonder how it was that the vast majority of Americans could once again be fooled to believe that by giving the state the power to control the medical profession and its services, the result would not be the same disastrous consequences that had occurred so many times before when the government had been given the authority to centrally plan some corner of the economy. They will find it a fascinating curiosity about the psychology of collectivist intellectuals that their thinking was impervious to all empirical refutations of their utopian dreams and fantasies—and how persistent the will to power is in the minds of those who dream such collectivist fantasies.
       They will shake their heads when they read private diaries, confidential memos, personal letters and memoirs or transcriptions of taped telephone conversations and discover that, in fact, many conservatives and free-market advocates in the political arena realized what disasters were to come. And how they were unwilling to challenge the premise of state interference in medical insurance and health coverage because they were afraid to lose votes in an election. How they were unwilling to be accused of being stonehearted or insensitive to the needs of the poor. How they were unwilling to be considered beyond the pale of legitimate discussion by the popular press and electronic media. How they preferred short-run respectability in the arena of mainstream politics over a defense of the long- run principles they knew to be true. And how, convinced that the welfare state was here to stay and could never be repealed, they just went along merely trying to undertake a little damage control, trying to make it work a little more efficiently and a little less intrusively in people’s lives.
       For those future scholars of the twenty-first century, the experience of national health insurance in America will be merely one more monotonous chapter in the history of twentieth-century collectivism. At first, they will record, the system of medical service seemed to work fairly well, much as it had before; some people paid a bit more in taxes, while others now had access to services they previously could not obtain. New bureaucracies were started up at both the state and national levels to manage the socialized system, but the numbers of people involved did not seem too outrageous, and the costs appeared to be manageable.
       But as the years passed, the bureaucracies rationalized the expansion of their budgets and their authority over a wider range of medical services. Every election year saw politicians promise more of those services, while someone else was assigned the burden to foot the bill to pay for it. The health-insurance industry and the medical institutions providing the services became state-mandated monopolies and cartels, increasingly working with the state and national bureaucracies to determine the variety and quality of medical care available to the general public. Cost overruns and budget-busting medical care forced the government to establish medical-evaluation boards to ration health care and determine politically who was eligible for what treatment—and finally even to determine who should live and who would die. Medical research and pharmaceutical testing became politicized, as these institutions became increasingly under the control of the state and dependent upon the state for funding and approval of their activities.
       Corruption and black-market activity slowly began to emerge as people desperate enough and financially well off enough bought the drugs or medical care they needed for themselves or their loved one. Scandals frequently filled the newspapers, and congressional committees investigated the illegal activities of doctors, hospitals and insurance companies. Heads would sometimes roll, and prison cells would occasionally be filled with a new type of white-collar criminal—the medical black-marketeer.
       And, for a long time, the arguments would be made that it wasn’t the socialized system that was at fault. No, the problem was not having enough money, or not having the right people managing the system, or not having the right methods of evaluation and accounting, or not having sufficiently draconian enforcement of the rules to stop the corruption and inefficiencies.
       But, finally, sometime in the middle of the twenty-first century, the historians, economists and political analysts of 2094 will explain, the internal contradictions and increasing costs of the entire welfare state became too much for Americans to bear any longer. And slowly, people began doubting the rationales of the system, began searching for the loops and cracks in the system, and began devising private alternatives to replace what the state had promised but had been unable to deliver. Intellectuals began to rediscover the philosophical and political ideas upon which America was originally founded, and they began contrasting the philosophy of individual liberty and voluntarism that was at America’s beginning with the corrupting and abusive statism and collectivism of their own time.

Liberty triumphant

       By the last decade of the twenty-first century, the last remnants of the welfare state will have been repealed. Liberty, after its long collectivist detour in the twentieth and twenty-first centuries, will have once again become triumphant. And at the threshold of the twenty-second century, people will have wondered with bewilderment how those before them could have once believed that the state should be entrusted with the power to control their lives, liberty and fortunes. And these lovers of liberty will have voluntarily contributed their money for private memorials and museums dedicated to the horrors and tragedies of the welfare state, so that men might never forget and never again return to it.

Chapter 1
Table of Contents
Chapter 3