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Friday, October 22, 2010

Obamacare Reality Bites

And HHS waivers.

One might think that letting government officials exercise discretion in the enforcement of bad regulations would be a good thing. I’m not so sure.

The Obama-inspired overhaul of medical insurance has just started to kick in, and already reality, in the form of economic law, is biting back. Companies are canceling or threatening to cancel coverage because the new terms of doing business make business as usual uneconomical. For example, some insurance companies announced they would no long write child-only policies. The new rules say that beginning now, no insurer can refuse coverage to an already-ill child and that the premiums can’t be higher than those charged for well children. (In a few years the “antidiscrimination” rule will apply to adults.)

Anyone with a smidgen of economic knowledge – heck, how about just some common sense? – would know that this cannot work. How can you run an insurance company when parents can wait until their children are seriously ill to buy coverage — and then the insurer can’t set the premium according to the expected medical services. That’s not insurance. It’s welfare filtered through business.

Well, now, when the companies announced they would stop writing those policies, the Department of Health and Human Services relented and waived the rule (at least for a while).

A pattern emerges. Companies claim they can’t live with a particular Obamacare mandate, and HHS secretary Kathleen Sebelius issues a waiver. When McDonald’s and other companies said that their limited mini-med policies would become prohibitively expensive if the government enforced its no-benefit-cap rule, Sebelius granted a waiver. She is now considering a request for a waiver of the rule mandating no less than an 80-85 percent medical loss ratio on mini-med polices. That’s the percentage of revenues paid in benefits rather than administrative costs. Companies with a high workforce turnover say insurance administrative costs are naturally higher than with a stable workforce and thus the mandated medical loss ratio is impractical. (It’s been pointed out that the medical loss ratio was not intended as a measure of efficiency.)

At issue here is not the details of the more than two thousand pages of law. It’s the discretionary power the government has acquired because of it. A one-size-fits-all law was written by Congress. During the debate over the legislation many of us warned that such an approach would defy the laws of economics and would therefore have undesirable unintended consequences. We said, for example, that price caps which ignore real market conditions would cause producers to exit the market, leaving people without services they want.

Now these warnings have proved valid. But what does the government do? Repeal the law? Of course not. That would be a confession of error, something politicians and bureaucrats are loath to do. Rather they confess error implicitly by granting waivers in cases where the consequences not granting them would be embarrassing (especially right before an election).

So Secretary Sebelius is busy granting waivers. On one level this is good: The direct consequences of Obamacare will be less severe than they would have been. But at another level this is not good at all. Obamacare has increased the amount of discretionary power bureaucrats have over our lives. Whatever standard HHS uses in judging waiver requests will be arbitrary. How big does a hardship have to be before a request gets a favorable ruling? Will a company’s CEO have to be careful about criticizing the Obama administration – even on nonmedical issues – for fear that a future waiver request might be turned down? Bureaucrats are human too. (Sebelius has warned insurers not to publicly blame premium increases on Obamacare mandates.)

What’s New?

I am not suggesting that government discretion in the application of law is new with Obamacare. All laws have to be interpreted by those who execute and judge them. (See my “The Rule of Lore.”) Discretion and subjectivity are inescapable. As John Hasnas writes, “The law is an amalgam of contradictory rules and counter-rules expressed in inherently vague language that can yield a legitimate legal argument for any desired conclusion.”

But even so, there is something offensive in HHS’s explicit power to grant or withhold waivers now that this vaunted “reform” is starting to bite. This growth in power is unsettling indeed.

Would it be better if there were no waiver provision at all? I’m saying it would be better if there were no Obamacare at all. But the second-best solution is Obamacare without bureaucratic discretion. Sure, if waivers are selectively granted, some of the harms of Obamacare will be mitigated. But if no waivers can be granted, people will see the full effects of Obamacare and may rise up to demand its repeal. Of course, we need to go further and radically deregulate and disestablish the medical and insurance industries, opening them up to real market competition. But first things first.

Finally, we readily describe the negative effects of this law as “unintended consequences.” I’d like to suggest that they may not be so unintended. It is hard to believe that some of the higher-ups did not realize that price controls and similar restrictions would push insurers out of the market. I would not be surprised to learn that this was widely anticipated and that the ruling elite intended to exploit problem to amass even more power over medical insurance. One need not be a conspiracy aficionado to think this. One need only understand purposive human action.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.