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.

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.

Articles on Single Payer Health Care

• Nationalized Health Care Will Cut Costs? It Just Ain’t So! by Gene Callahan and Robert Murphy
• Medical Misunderstanding by Sheldon Richman
• What NBC Didnt Tell You About Health-Care Reform by Dr. Jane Orient
• Let’s Not Throw American Medicine into Boston Harbor by Dr. Jane Orient
• Socialized Failure by John Goodman
• Health-Care Demagogues by Doug Bandow
• Free-Market Medicine by Larry Van Heerdan
• Health Care: Over the Canadian Cliff? by Doug Bandow
• Single Payer: Neither Simple Nor Smart by Dr. Michael Glueck and Dr. Robert Cihak
• Twenty Myths About National Health Insurance by Mr. John C. Goodman and Mr. Gerald L. Musgrave

Audio on Single Payer Health Care

• Healthcare Policy: The Case for Freedom, not Government by Jane Orient, M.D.