If Congress really wanted to ease the burden they’d go home … for the decade.

FEE Timely Classic:
“Planners, Go Home!” by Lawrence Sullivan

Economist William Niskanen writes, “We did not have a health care crisis in 1940 when few people had health insurance.”  In fact, that year only 10 percent of Americans had such insurance (henceforth imagine ironic quotation marks). But World War II was a bonanza for the industry, especially Blue Cross Blue Shield. Government economic controls prohibited firms from attracting or keeping workers with higher wages. So someone hit on the idea of supplementing wages with noncash compensation, specifically, health insurance. The government said okay and the rest is history. Employee insurance was untaxed, creating a bias toward employer-provided health plans. If an employer bought a $5,000 plan for a worker, that worker got the full $5,000 benefit. But if the employer paid the worker $5,000 in cash, the worker would pocket $5,000 minus federal and state taxes. He’d need more than $5,000 to buy a $5,000 policy.

The government intervened in another way. According to Niskanen, “[T]ax and regulatory preferences for the Blues displaced the older form of commercial indemnity policies with policies providing cost-based reimbursement.” This act of social engineering — arrogant politicians and bureaucrats always think they know better than the collective wisdom stimulated by the free market — had huge (and presumably) unintended consequences that account for many of our current problems. Under the old-style indemnity plans (which individuals shopped and bought for themselves), contracting a catastrophic disease triggered a fixed insurance payment — to the policyholder – according to an agreed-on predetermined schedule. The money was hers. If she could find services that cost less than the insurance payment, she pocketed the difference. Of course, this provided an incentive to be cost-conscious in buying medical care. Homeowners’ and other types of insurance still works like this.

In contrast, under the Blue Cross Blue Shield model pushed by government — which began not as insurance but as a prepayment plan for doctors and hospitals — the policyholder never sees a dime. Treatment simply sets in motion a process in which the insurance company sends a check to a hospital, lab, or doctor. No treatment, no payment. The individual has no reason to shop around (there can be great variation in prices), or to question whether a test or procedure is necessary, or to even ask what anything costs. What’s the point? It would seem only to save the insurance company money.

The insurance companies take this into account when negotiating with providers and employers who buy coverage on behalf of their workers. A key problem here is the disconnect between cost and benefit (which would be aggravated by the Obama plan). In most cases employers pay for their workers’ coverage with money that otherwise would have largely gone into cash wages. To the workers, it looks like free (or pretty cheap) coverage. Because of competition among employers and the rigged tax laws, coverage has become more luxurious, including services for situations that are not even insurable. A good example is maternity benefits. Pregnancy is not a disease, is largely preventable, and usually results from a volitional act.  From a true insurance perspective, it’s ridiculous to expect coverage. (It would be like insurance against gaining weight.) The same could be said for many other “conditions” that are covered today. Well-baby care? Is that insurance against a baby’s being well? (Orwell was right: corrupt the language and one can get away with anything.)

State Mandates

To make matters worse, state governments have mandated that all “basic” policies include coverage for situations that are either uninsurable or unlikely to affect most people. Most people shopping for insurance in a free market would never buy this coverage because it would unnecessarily increase their costs. If they decided later on that they wanted, say, chiropractic or acupuncture, they would pay for it out of savings.

Writing in The Freeman, John Seiler reported that the Congressional Budget Office estimated that “for every 1 percent increase in the cost of insurance, 200,000 to 300,000 people nationwide lose their insurance.” He adds, “State mandates keep about one quarter of Americans from getting health insurance, according to John C. Goodman, president of the Dallas-based National Center for Policy Analysis, a free-market think tank.”

In 2007 the average number of mandates in the United States was 36, with a high of 62 (Minnesota) and a low of 13 (Idaho). Might this have something to do with the size of the uninsured population? The Great Humanitarians in Washington seem strangely incurious about that.

You and I could evade the mandate plague somewhat if we were free to buy policies offered in low-mandate states. But — under the federal McCarran-Ferguson Act — we aren’t free. That 1945 decree shelters the states — and the insurance companies — from the interstate competition that might have reined in their regulatory regimes.

Do we have mandates because we are too dumb to know we need coverage for chiropractic, acupuncture, social workers, alcoholism and drug-abuse treatment, marriage counseling, hearing aids, toupees, contraceptives, and so on, ad infinitum? No. We have mandates because the providers of those products and services wined and dined enough state legislators to get these special-interest bills enacted. The insurance companies don’t mind: They can recover the cost from people who don’t realize they are paying for the “free” (or cheap) “services” because they think their bosses are paying for the coverage.

State regulation also sets up barriers to entry in the insurance industry. As a result, each state is a walled fortress that protects established insurance companies from competition. This doesn’t make their profits spectacular (see this), but it creates safety and stability, which are worth something.

No Free Market

So no sympathy here for these state creatures of privilege and protection. We can safely guess that today’s companies look nothing like companies would look in a free insurance market. The federal and state governments — to some extent haphazardly — have almost completely determined the nature and shape of the industry, giving us a classic government-sponsored cartel.

But…

None of this justifies what President Obama and his ilk call healthcare “reform.” They merely propose more of what we already have: more “free” insurance for more people, more coverage for more uninsurable situations, lower out-of-pocket costs — all of which means less cost-consciousness and higher prices, which seeds the ground for price controls and rationing. In the name of creating competition, Obama would further suppress it, rather than dismantling the current anticompetitive regime.

The solution to the problems caused by what I’ve described above cannot be to encourage people to believe, childishly, that they have a right to health care — that is, a right to other people’s labor — or that resources are not scarce. Yet that is what Obama & Co. are doing. A core principle of their scheme is that no one could be turned down for insurance because they are already sick. That’s not insurance; it’s welfare, with the costs to all of us disguised and the politicians unaccountable.

The other night Obama also demanded that insurance companies cover preventive services — physical exams, colonoscopies, mammograms, etc. — for free. He also insists on low caps on out-of-pocket expenses and unlimited lifetime payouts.

But none of this is free. Someone will have to pay the doctors, clinics, and hospitals. Who? The answer is: the insurance companies. Where will they get the money?

One need not sympathize with the insurance companies to see that it it sheer demagoguery for Obama & Co. to rail sanctimoniously against them for not giving away their shareholders’ and employees’ money on demand. They’re businesses not charities. If the “reformers” think they can run a better company, let them try –  in the free market. (That company executives favor most of Obama’s plans tells us that forcing people to buy insurance is worth more to them than the coverage mandates.)

By all means, strip the insurance companies of the privileges governments now provide. Throw them into the free market and let them fend for themselves. Open the gates to new entrepreneurs and innovators. But do not expand the rotten system that increases and hides costs while leading people to believe that medical care is manna from heaven. Pandering to people’s wish for free services ought to get a politician — even a president — hooted off the stage.

Who could be against those things?

Well, Obama for one, followed by House Speaker Nancy Pelosi, House member Barney Frank, and everyone else who favors what is question-beggingly called reform. The word reform suggests not just change but improvement. Therefore, to call the proposals to nationalize the medical-insurance industry reform is to assume precisely what is in dispute and must be proved. The argument is — or should be — over whether the proposed changes indeed are reform. To call them reform before the debate has even begun is to rig the discussion. It’s an old — and sadly effective — bit of sophistry.

But let’s get back to competition and choice. I contend that what Obama favors would produce the opposite of competition and choice: cartel and restriction. This is so clear that it’s hard to believe an intelligent person surrounded by economic advisers wouldn’t know this.

We’ll use HR 3200 as our guide. Most of the provisions of this bill are likely to be in any final legislation, with the possible exception of the government-operated insurance program, or “public option.”

The bill begins with a provision “to establish standards to ensure that new health insurance coverage and employment-based health plans that are offered meet standards guaranteeing access to affordable coverage, essential benefits, and other consumer protections.” No insurance policy would be deemed qualified unless it satisfied the conditions imposed by the government. This is important because under the bill, every individual would be mandated to have a “qualified” health plan. A sub-standard plan that nevertheless satisfied a particular consumer — such as low-cost high-deductible catastrophic coverage — would be forbidden.

According to the bill, a plan would be accepted as qualified only if, among other things, it:

• covered preexisting conditions without limit;
• accepted all applicants;
• guaranteed renewal;
• charged everyone, regardless of health status, the same premium within an area, with the exception of age and family variations defined either by the legislation or by state law;
• had achieved the medical loss ratio defined by the Health Choices Commissioner (the ratio refers to the percentage of revenues paid in benefits; companies that fell short would have to give policyholders rebates);
• imposed no annual or lifetime limit on coverage; and
• was “equivalent … to the average prevailing employer-sponsored coverage.”

The “essential benefits package” would have to cover:

• hospitalization;
• outpatient and emergency services;
• professional services;
• incidental services, supplies, and equipment;
• prescription drugs;
• rehabilitative and habilitative [?] services
• mental-health and substance-use disorder services
• preventive services (Obama has specified physical exams, mammography, and colonoscopy);
• maternity care; and
• well-baby and well-child care

The bill would also set up a Health Benefits Advisory Committee, a public-private panel of “experts,” “to recommend covered benefits and essential, enhanced plans.”

Government Definition

There are other requirements but we need not go into them. The point of this tedious recitation is to convey to the reader how precisely the government would define private insurers’ business practices and products. To varying degrees state governments already define these things; this is part of the corporate-state bargain in which companies get cartel rents through protection against new competition in return for complying with various regulations that they take a hand in writing. But this would be the first time that the national government would dictate what minimum health coverage would include and other company practices. For that reason, such a law would effectively create a national health-insurance cartel. Big Insurance, which has been working with the Obama administration behind the scenes, has no problem with any of this.

Now let’s look at the “public option.” This would be a government-operated insurance plan that would be offered in a “Health Insurance Exchange,” which the government would establish “to facilitate access of individuals and employers, through a transparent process, to a variety of choices of affordable, quality health insurance coverage.”

Apparently members of Congress and the administration don’t know about the Internet, which performs the same function for every other good and service. If there’s no health-insurance market on the Internet, it may be because government forbids interstate competition, in order to protect the states’ ability to burden their residents with coverage mandates for hair transplants, in vitro fertilization, and other things offered by privileged businesses.

In case there is any doubt about the nature of the “competition” that is to take place in the exchange, the bill states, “The Commissioner shall specify the benefits to be made available under Exchange-participating health benefits plans during each plan year.” No company may offer so-called enhanced, premium, and premium-plus plans unless it also offers a basic plan. (These are defined in the bill.) State mandates would continue to apply if a state and the commissioner work up a suitable agreement.

According to the bill, the public option would be a “low-cost” high-quality plan that would have to follow the same rules as private exchange-participating plans. The secretary of Health and Human Services would set premiums adequate to cover benefits and administrative costs. However, the government plan would get a $2 billion starter loan from the Treasury (no interest rate mentioned), along with enough money to cover claims for the first 90 days.

To avoid the charge that the public option would have continuing access to the Treasury, the bill states, “Nothing in this section shall be construed as authorizing any additional appropriations to the Account, other than such amounts as are otherwise provided with respect to other Exchange-participating health benefits plans.” (That’s right — private companies will get subsidies.)

The secretary would be authorized to set reimbursement rates for providers, generally using Medicare rates, except for a three-year “initial incentive period,” in which more would be paid. What happens if a doctor thinks the bureaucratically set rates are too low and refuses public-option patients? I couldn’t find an answer in the 1,000-plus bill, but I don’t think I’d want to be in his white coat. The licensing power is awesome.

The immediate question that should arise about the public option is why — if it must support itself through premiums  — the government needs to set it up in the first place. What’s the point of having one more entity selling the same thing private insurers must sell under the same pricing constraints?

Advocates of the public option would say that since it would be a nonprofit enterprise run by public-spirited personnel, it would keep the private firms honest. We’ll get to this in a minute. I’ll just point out here that “The Secretary may enter into contracts for the purpose of performing administrative functions.” That should allow for plenty of favoritism and rent-seeking.

We are entitled to some skepticism toward the bill’s limitation on subsidies to the public option. Based on experience — the Postal Service, Fannie Mae, Freddie Mac, and the federal flood-insurance program, among others — we can expect that the public option will be bailed out by Congress when it runs into trouble. The language of the current bill can always be amended later. The starter loan could be forgiven (see the flood program). Only naïveté or disingenuousness could prompt one to insist otherwise.

That’s a small part of what the bill would do. But remember, the stated objective is competition and choice. So we must ask: What relation does the bill have to those objectives? If we understand the nature of competition, the answer must be: no relation at all.

Instead of competition the bill would create a newer, bigger insurance cartel, directed from Washington. Calling Obama’s exchange a “competitive market” is like calling a graveyard a “bazaar.”

Discovery through Competition

As Ludwig von Mises and F. A. Hayek elaborated, competition is valuable not primarily as a contest among producers of known goods and services using known methods of production and business practices. Rather, to use Hayek’s phrase, competition is a discovery procedure. (I believe “process” would have been the better word.) What it does is teach us things we didn’t know before the competition took place and might not learn otherwise. What kind of things? Things such as: which hitherto-unknown products best serve consumers’ interests as they see them, at what price, and through which low-cost methods. Such things can’t be known in advance; computers can’t give us the answers after data entry. The most relevant “data” do not exist as such! The information is decentralized and much of it, such as nuanced consumer preferences, is rarely articulated. Rather, it is revealed as would-be producers and consumers go about their business, improvising on the spot in their efforts to improve their conditions. It certainly is not available to a bureaucracy or panel of experts.

The importance of this discovery process should be clear for any good or service, but how much more so for medical services, where the potential for variation in individual needs and preferences is virtually infinite!

Obama’s plan shows no appreciation for competition’s discovery role. He and his experts claim already to know — or will later decide — what insurance products should be offered and what business practices should be used. The bill would permit no variation — that is, no competition. There would be none of the free market’s entrepreneurial trial and error, in which firms offer competitive products, and consumers render verdicts on them.

The public option would not increase competitiveness. On the contrary, because of its implicitly privileged position it could engage in predatory pricing and force private firms out of the market or prevent new ones from entering. The record of the federal flood-insurance program is instructive.

The tipoff that Obama can’t really be interested in competition is his disparagement of profit. Yesterday he said that a good thing about the public option is that “there wouldn’t be a profit-motive involved.” Apart from this revealed bias against self-interest and his failure to understand that mutual benefit can be achieved through its pursuit, Obama shows no sign of grasping the communications role performed by profit and loss in a market. (See Steven Horwitz’s “Profit: Not Just a Motive.”) At any time scarce resources and labor could be used in a large variety of ways to produce a large variety of things. Some of those uses and methods would serve consumers better than others. Tradeoffs are unavoidable. How are consumers to make their subjective preferences known? In the market they do so by, in effect, rewarding profits and imposing losses through their decisions about what to buy and what not to buy. Profit indicates that producers are doing what consumers want: turning lower-valued inputs into higher-valued outputs. The profit-loss system, to the extent it has been allowed to work, has consistently produced more for less. As Mises and Hayek showed, there is no alternative to market prices and profit-loss for directing productive efforts and resources to where we most want them. No bureaucratic approach can solve this “knowledge problem.”

For all his talk about choice and competition, what Obama proposes is more of what we already labor under: corporate-state bureaucratic decision-making. The status quo is not the free market. It is a system of government-business collusion that, among other things, welds workers to their employers. Obama’s scheme would simply be more of the same. The reason Big Pharma and Big Insurance favor the scheme is that everyone would be forced to buy their products or coverage for their products, with the taxpayers picking up most of the tab.

Obama offers no radical break with the present but only a further application of the statism that brought us the current morass.

But some defenders of government control acknowledge that rationing is the logical consequence of their ambition. They parry objections by saying in effect: “So we’ll have to ration. Big deal. We already have rationing — by the market.”

For example, Uwe Reinhardt, an economics professor and advocate of government-controlled medicine, writes, “In short, free markets are not an alternative to rationing. They are just one particular form of rationing. Ever since the Fall from Grace, human beings have had to ration everything not available in unlimited quantities, and market forces do most of the rationing.”

Sadly, interventionist economists are not the only economists who talk this way. Most free-market economists would agree that where there is scarcity there must be rationing and that the most efficient way to ration is by price, that is, through the market.

This is factually wrong and strategically ill-advised. As we’ll see, markets do not ration. Thus the healthcare debate is not about which method of rationing — State or market — is superior.

Let me be clear about what I am not denying. I am not denying that economic goods are by definition scarce and that at any given time we must settle for less of them than we want. I am also not denying that the marketplace is relevant in determining who gets how much of those scarce goods.

I am denying that this is appropriately called “rationing.”

Markets Don’t Do Anything

To see that the market does not ration one need only see that “the market” doesn’t do anything. To talk as if it does things is to reify the market — worse, it is to anthropomorphize the market, ascribing to it attributes — purposes, plans, and actions — that only human beings possess. We may also see this as another instance of literalizing a metaphor, which, as Thomas Szasz has so often warned, is fraught with peril.

I’m not saying that economists don’t realize this diction is a metaphor. Of course they do, and there’s no harm in using this shorthand among those who understand it as such. The problem, as I see it, is that the general public doesn’t fully grasp the metaphorical nature of these statements. For the sake of public understanding, free-market advocates should not welcome a debate in which they begin by saying, “Our method of rationing is better than your method of rationing.”

Better to respond to the interventionists this way: The market does not ration or allocate. The market does not do anything. It has no purposes or objectives. It is simply a legal framework in which people do things with their justly acquired property and their time in order to pursue their own purposes.

This is squarely in the Austrian conception of the market as set out by Ludwig von Mises and F. A. Hayek. The market order “has no specific purposes but will enhance for all the prospects of achieving their respective purposes,” Hayek wrote in volume two of Law Legislation, and Liberty.

The market was never set up by people to achieve a purpose. It is not a device or an invention aimed at satisfying an intention. “Market mechanism” is a metaphor. The market — as a set of continuing relations among people — emerged, unplanned and unintended, from exchanges, initially barter, in which the parties intended only to improve their respective situations. Lecturing at FEE this week, Israel Kirzner recalled that one of the first things Mises said to him as a graduate student was, “The market is a process,” by which he meant “a series of activities.” This is similar to what the French liberal economist Destutt de Tracy (1754–1836) wrote in A Treatise on Political Economy, “Society is purely and solely a continual series of exchanges.”

Mises, Hayek, and Tracy help us to sort out the rationing question. I submit it makes no sense to say that an undesigned series of exchanges rations goods. If we were to observe a free market (wouldn’t that be nice?), what would we see? Rationing? Allocation? Of course not. We would see people exchanging things — factors of production, services, and consumer goods — for money. Where would they have gotten those things? From previous exchanges or original appropriation from nature.

When a person buys five apples in a grocery store rather than ten because he wishes to use the rest of his money for other purposes, it seems entirely wrong to say the market (or even the grocer) has rationed the apples. The customer makes his choice on the basis of his preferences and the money available (which is the result of previous transactions).

It is true that as a result of market exchanges, goods and resources change hands and (except for land) locations. But in no sense is this rationing or allocation. The resulting arrangement of resources is simply a product of many transactions. Of course, people’s choices of what and what not to buy and sell at which prices create an arrangement of goods and resources that tends to be intelligible in terms of consumers’ subjective priorities. But that does not warrant calling the process rationing or allocation.

Those words — especially ration, which shares its root with rational – suggest conscious decision-making — as part of a plan — by an agent. In a free market there is no consciousness overseeing this “distribution” — another inappropriate word when it comes to describing the market process.

I am not saying anything that a good economist or thoughtful person doesn’t know. I am merely pointing out that we can be more effective in the healthcare debate if we are more precise in our language. We do not face a choice between methods of rationing medical services. We face a choice between rationing according to a bureaucratic plan and being freed to engage in mutually beneficial exchanges.