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Friday, June 19, 2009

Obama’s Impossible Healthcare Reform Promises

In his drive to “reform” health care — that is, redesign 18 percent of the U.S. economy — Barack Obama is clearly terrified that his mission will crash and burn if people think it will cost them their freedom of choice in doctors and insurance. He is surely convinced that this is what scuttled the Clinton plan in 1993 (he’s right), and he is determined not to let it happen again.

So he must persuade us that this freedom will be safe under his plan.

But can he make a truly persuasive case? No, he cannot, for reasons I will outline. Either Obama knows this and is lying to the American people, or he does not know it because he is shamefully ignorant of economics. You decide.

First, here’s what he said in his speech to the AMA this week:

We know the moment is right for health care reform. We know this is an historic opportunity we’ve never seen before and may not see again. But we also know that there are those who will try and scuttle this opportunity no matter what – who will use the same scare tactics and fear-mongering that’s worked in the past. They’ll give dire warnings about socialized medicine and government takeovers; long lines and rationed care; decisions made by bureaucrats and not doctors. We’ve heard it all before – and because these fear tactics have worked, things have kept getting worse.

So let me begin by saying this: I know that there are millions of Americans who are content with their health care coverage – they like their plan and they value their relationship with their doctor. And that means that no matter how we reform health care, we will keep this promise: If you like your doctor, you will be able to keep your doctor. Period. If you like your health care plan, you will be able to keep your health care plan. Period. No one will take it away. No matter what. [Emphasis added.]

Obama will not be able to keep his promise if he gets the “reform” he wants. He favors a “public option,” which is a euphemism for a government insurance plan. Obama says a government plan will keep private insurers “honest” through competition. But what will keep it from being a predatory competitor? After all, it will have a guaranteed source of revenue that no private insurer has: captive taxpayers. So the public option would be able to price its policies below market level and put the squeeze on the private companies.

It is strange that those folks who are always warning about predatory pricing and cutthroat competition in the free market never fret when the government provides services in “competition” with private firms. (See the “public” schools, for example.) But government is the only entity that can truly price predatorily because it can hold down explicit prices to consumers while recouping its costs implicitly through taxation or Fed-monetized debt.

Let’s not forget that Obama favors having a government bureau define the contents of the basic insurance coverage — that is, the state will dictate to insurers what services they must sell to their customers. Plus, the emerging reform plan would outlaw a premium schedule based on risk or existing illness. People who are sick or more likely to get sick could not be charged more than healthy people. (By that logic, the owner of a simple wooden house would pay the same fire-insurance premium as the owner of a brick house.)

Moreover, people would be compelled to have insurance (and then pay taxes on their employer-originated coverage). This will give the government the incentive to impose price controls — “guidelines,” no doubt –  to keep insurance “affordable” and “universal.”

If the private insurers protest that these terms make profitable operations impossible, Obama and his allies will accuse them of profiteering and proclaim that the free market has once again failed to deliver medical care.

At that point insurers may choose to leave the medical policy market. Meanwhile, when reimbursements to doctors and other providers shrink in the name of cost-cutting and red tape mounts, doctors may choose to take early retirement or find other ways to make a living. (Some doctors have stopped accepting Medicare patients.)

But when that happens, what about all those people who are “content with their health care coverage”? Despite Obama’s solemn pledge, they will not be able to keep it. What recourse will we have for the broken promise? A vote at the polls in 2010 and 2012?

Inject Competition

Obama says the public option is needed to “inject competition into the health care market so that [we can] force waste out of the system and keep the insurance companies honest.” But who is limiting insurance competition today?

Government, of course.

Interstate competition in medical insurance is illegal. There is no national market. Americans living in Texas are not free to buy coverage from a firm operating in Maine. (When John McCain proposed legalization during the presidential campaign, he was pilloried for wanting to do to medical insurance what was done to banking.)

One reason interstate competition is not allowed is that states throughout the country, to different degrees, force insurers to provide coverage for all kinds of services that most people might never buy on their own. Mandated coverage results from service providers’ lobbying state legislatures – a truly corrupt rent-seeking system. (See John Seiler’s Freeman article here.) Interstate competition could nullify the mandate system, as people bought policies from companies in states with fewer requirements. Opponents of interstate competition say this would set off a race to the bottom. What they mean is that it would permit people the freedom to tailor policies to their personal requirements.

That the government is the biggest obstacle to full competition in health insurance is also the rebuttal to another idea emerging from the “reform” factory: state exchanges, or federally subsidized insurance “marketplaces.” Imagine that! The government would set up markets. As though there is no market now, hampered as it is by idiot rules from the brains of clueless politicians.

When Obama promises to  make health care and insurance “affordable,” he means he will impose price controls, overt and covert, on providers and insurers. Promises of cost-cutting should get the same credit as past such promises: exactly none. Cost-cutting is not a bureaucracy’s strong suit.

We know where price controls lead: to shortages, decline in quality, queues, rationing, and regimentation. Welcome to healthcare reform.

Obama and John Stuart Mill

Obama’s belief that government can control the distribution of health services according to his personal preferences without effecting production of those services brings to mind John Stuart Mill’s fatal move in his famous economics treatise, Principles of Political Economy (1848 and beyond). Driving a theoretical wedge between production and distribution, Mill wrote:

The laws and conditions of the Production of wealth partake of the character of physical truths. There is nothing optional or arbitrary in them. Whatever mankind produce, must be produced in the modes, and under the conditions, imposed by the constitution of external things, and by the inherent properties of their own bodily and mental structure.

It is not so with the Distribution of wealth. That is a matter of human institution solely. The things once there, mankind, individually or collectively, can do with them as they like. They can place them at the disposal of whomsoever they please, and on whatever terms. [Emphasis added.]

Obama and Kennedy et al., like Mill before them, foolishly believe that government intervention in the distribution of medical services will have no effect on their production. “The thing once there, mankind …. can do with them as they like.” How absurd. Goods and services are never “there” once and for all.  They must be continuously produced — but the producers could decide to stop producing. Didn’t Ayn Rand write a novel about this?

Contrary to the brain trust running Washington and attempting to run the economy, distribution affects — can discourage or render impossible — production. That’s what the American people need to realize as they listen to Obama’s sugared — but fundamentally misleading — words. The people are right to be concerned.

None of this is meant to sanction the system of privilege that the medical and related professions enjoy through licensing, patents, and other interventions. On the contrary, that system must be dismantled if we are to have a free and competitive healthcare system — for that is the only way to make medical care really universal and affordable.

  • 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.