Health Care And Detroit: Killed By Government

28 March 2010

By Gary North

To understand what is going to happen to America's health care delivery system, we must first understand what has happened to Detroit.

Detroit is dying. Yes, I know that there are lots of books on "The Death of. . . ." That word sells books. But Detroit really is dying. it is the first metropolis in the United States to be facing extinction. We have never seen anything like this in American history. It is happening under our noses, but the media refuse to discuss it. To do so would be politically incorrect. Two factors tell usthat Detroit is dying. The first is the departure of 900,000 people – over half the city's population – since 1950. It peaked at 1.8 million in 1950. It is down to about 900,000 today.

In 1994, the median sales price of a house in Detroit was about $41,000. The housing bubble pushed it up to about $98,000 in 2003. In March 2009, the price was $13,600. Today, the price is $7,000. Check the price chart.

There has never been a collapse of residential real estate values of this magnitude in peacetime history, anywhere. Detroit is dying. We are unfamiliar with anything like this. The media are silent. The Powers That Be are not interested in reporting on this, because readers might ask the obvious question: "How did this happen?" Obvious questions tend to lead to obvious answers.

Detroit has been killed by flight out of the city. The 2008 Clint Eastwood movie, Gran Torino dealt with this problem. Eastwood plays an 80-something Korean War veteran who will not leave the neighborhood. His children keep bugging him to sell and move into a retirement home. He will not hear of it. He is alienated from them and from his immigrant neighbors: Hmong refugees from South Vietnam. The Hmong have trouble with the Blacks. Every group is essentially trapped in a neighborhood, with the gangs running the show.

There is no surge of buyers to take advantage of fabulously low prices in Detroit. Can you imagine buying a home for cash for $13,600 in 2009 – a house that had sold for $98,000 six years earlier – and losing half your money? It's incredible.

The Wall Street Journal recently ran one of the most creative stories I have seen in years. The journalist told the story of the history of a 5-bedroom home in Detroit, from the land purchase to its recent sale. It was built by one of the most influential man you have never heard of, Clarence Avery. Avery was on the Ford Motor Company team that conceived of implementing an assembly line for Ford's factory. He copied the idea from a hog-slaughtering operation. His home was a very nice home for the time. The journalist located his daughter, now age 91. She said that she always Thought the home was the best home she ever lived in.

As recently as 2005, the home sold for $250,000. It was purchased by a woman who was lent $200,000 to buy it. It was financed by a subprime loan. The asking price was $189,000. Where the other $61,000 went, the woman has no idea. She defaulted. The deteriorating house was bought by a Christian organization that is renovating it. The house sold for $10,000.

This is simply inconceivable to anyone who is unfamiliar with Detroit since 2005. Nothing like this has ever happened. How can we conceive of a lender lending $200,000 to a woman to buy a $250,000 home offered at $189,000? How can we conceive of a fall in price from $250,000 to $10,000? This is the sign of a dying city. This does not happen in a normal environment. Even with the mania created by Fannie Mae and Freddie Mac, in conjunction with Alan Greenspan's Federal Reserve, nothing like this has happened anywhere else.

If you had predicted anything like this in 2005, you would have been dismissed as a crackpot on crack. You would not have been taken seriously by anyone. Yet it has happened.

The city planners, the Federal government's subsidy defenders, and the welfare state aficionados are all discreetly silent about Detroit.

The city funds its schools with property taxes. Property taxes have collapsed as sources of revenue. An honest property tax system will generate less than ten cents on the 2003 dollar.

Last week, the school board announced the closing of one-quarter of Detroit's schools. The city is out of money. The central agency of propaganda by the government is in the process of closing up shop. This is not "anti-business as usual." This is collapse. The American public does not perceive what is happening in Detroit.

When a city simply shuts down from the effects of government mismanagement, the media say nothing. Detroit has become the poster child of government regulation, welfare systems, and a population that has given up hope. The media say nothing because they are caught in a dilemma. If they say that the local government's welfare programs are not really to blame, what does that leave? The unmentionable issue: 82% of the city is Black. So, that means blaming white employers, who discriminate, despite 40 years of Federal anti-discrimination laws. But the main non-employers today are the region's auto companies, and two of the three are partially owned by the U.S. government. One – GM – is mainly owned by the retirement fund of the United Auto Workers. So, the media are not about to blame the auto companies – not now. That leaves that other politically incorrect issue: the rate of illegitimacy, which is in the 80% range. That social phenomenon represents a moral collapse, but the participants were all educated by the tax-funded schools.

Who ya gonna blame? The media pundits cannot decide, so they simply ignore the collapse. Detroit? Never heard of it."

The lesson of Detroit is this: the experts do not see a collapse coming. They assume that next year will be like today, give or take 3%. They do not believe that anything as complex as a city can collapse. So, they believe that things will continue, as they always have. Taxes need not be cut. Spending need not be cut. Schools should be allowed to educate. Tax-funded welfare programs should be increased. When it comes to tax revenues, "there's always more where that came from."

And then, overnight, the system collapses. The assumptions were wrong. Real estate prices collapse, indicating an irreversible flight of capital from the city. The ability of the government to collect taxes collapses.

OBAMACARE

This brings me to the other subject: the health care law. It is not law yet, but it soon will be. I know what is going to happen.

1. Cost overruns

2. Fraud

3. Additional coverage extended to groups

4. Rising deficits in the program

5. Lower payments to physicians

6. Lower payments to hospitals

7. Delays in payments

8. Rising taxes on the rich

9. Rationing by doctors, hospitals, government

10. Delays in treatment

11. More HMO care: assembly line medicine

12. A search for scapegoats

In 1977, I was involved in an early warning operation. Three teams of physicians and economists toured the country. We hit 30 cities in two weeks. We warned physicians in poorly attended meetings that something like Obamacare was coming. It has now arrived. The physicians we spoke to are mostly retired. They saw some of this happen on a minor scale, but they escaped.

I spoke about the percentage of the GDP (then GNP) devoted to heath care: about 7%. Today, it is 15%. Medicare and Medicaid have increased costs. The care is no better. Except for technology, it is
arguably worse.

Obamacare will lead to an expansion of these forms of medicine:

1. Concierge

2. Wal-Mart

3. ER

4. HMO

5. Mexican

CONCIERGE.

The rich and very rich hire their own physicians. They pay top dollar. The physicians do not take third-party payments, either from the government or insurance companies. They are independent practitioners. They make house calls. The houses they call on are very large.

For the upper middle class, there are fee-for-service physicians. They take no third-party payments. They do not make house calls.

WAL-MART.

These are the walk-in clinics. They are price competitive. They treat minor ailments. They sell services on a one-time basis. They take credit cards. They may or may not cater to the Medicare crowd.
They are assembly-line clinics. There are no major surgeries or other high-cost, high-risk services.

ER.

Large hospital emergency rooms are mandated by law. The poor get treated there. In a life-and-death emergency, they work. People who would otherwise die in a couple of hours are saved. For walk-in patients, the ERs ration by time. Patients demonstrate their patience.

HMO.

This style of medicine is efficient. It cuts costs by cutting services and cutting time. You see the physician on duty. You may not have seen him before. His job is to get you in and out as fast as possible. Time is monitored by the company. Computers make this easy.

MEXICAN.

This is off-shore medicine. In Canada, when you can't get treated for months or years, you come to the United States and pay. This will not be possible for Canadians much longer, except for rich ones.
Mexico will serve upper middle-class Americans as the USA has served Canadians. It is possible to get very good surgical care in Asia and Latin America. You have to know who the good practitioners are. Asian hospitals sell for 25% the same level of services. There is less regulation there. Plane fares are cheap. A stay in a hotel is cheap.

There will be entrepreneurs who set up Websites off-shore that direct Americansto practitioners abroad. The Web allows this sort of advertising.

Physicians who practice alone or in small limited liability corporations will find that they cannot compete under the new payment system. Assembly-line medicine will replace the traditional doctor-patient relationship.

TRAPPED

Most physicians are trapped. They cannot sell their practices. The price of practices has been dropping.

Foreign-trained physicians who can pass the U.S. tests are coming to America. They are competitive.

Technical Services that can be digitized are being outsourced to India and other Asian nations.

Young American physicians begin with a lot of debt. They need income fast. They will be hired by the HMOs and clinics. They will not reach the salary level of this generation of physicians. They will be upper-middle- class income-earners.

There will be specialists, of course. Plastic surgeons who specialize in making rich women better looking will not be part of the new system. They will be able to do well. But for the typical practitioner, his career options have been dramatically restricted by the new law. I think most physicians will stick it out until they retire at age 67. They owe money. They need the income. The law's most restrictive provisions will not kick in until 2014. They will adjust.

Residents of Detroit also adjusted. Then, without warning, the economy changed. Those who were still living in the city saw their capital disappear.

People put up with the devils they know. They do not look for a lifeboat when they hear the ship scrape the iceberg. They assume that it will be business as usual.

Then, one fine day, it isn't.

CONCLUSION

You had better decide which kind of medical care you can live with. Then you had better locate a practitioner soon. This is especially true if you want a fee-for-service physician. People with money will go to them. They are already hard to find. They charge more. It's not easy to become a patient. They are booked up.

If you have an existing physician, do what you can to become an above-average patient. You had better start getting into shape. You can no longer afford to be vulnerable to the diseases and afflictions of a flabby lifestyle. ObamaCare has changed the risk-reward ratio. Risk has just gone up. It will continue to go up.

There will be no roll-back of this law. It is going to be enforced for as long as the U.S. government has money. That may not be as long as Obama thinks.

Gary North is the author of Mises on Money. Visit http://www.garynort h.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

 

 

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