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THE CALLING

Some Thoughts on Obamacare, Part II

Unintended consequences.

JULY 19, 2012 by STEVEN HORWITZ

In the first part of this series last week I discussed some of the ways libertarians might talk about Obamacare, including the point that the current health care system in the United States is hardly a free market. I also noted that the U.S. system is still better than other countries’ systems precisely because key market elements remain. In this second part I want to discuss a few of the likely problems that Obamacare will cause. In the third part next week I will look at alternative, market-oriented ways to reform health care.

Like almost all government programs and offices, the Affordable Care Act is named for its intended consequences rather than its likely, unintended ones. By mandating insurance purchases, increasing government control over the production of health care, and thereby undermining the role of prices in allocating medical resources, the ACA will end up making health care less affordable, especially if we include the cost of waiting time, and will create political battles where markets would settle differences peacefully.

Raising Rates

One likely result of mandating the purchase of health insurance is that insurance companies will start to raise rates. Simple economics tells us that if the demand rises, so will the price, even if that demand is enforced by the IRS. In addition, the rule that insurers cannot decline coverage to customers with preexisting conditions (and must charge the healthy and the sick the same price) will drive up insurance costs. Such customers represent definite expenditures that insurers will have to make, and the addition of such customers to the insurance pool will force insurers to raise rates to cover those expenditures. We have already seen this in advance of the provision becoming law.

A side prediction here is that what counts as a “preexisting condition” will slowly expand over time, since once the definition is in the government’s hands, the incentive for patient/customers and the medical providers who will receive payment to lobby for the inclusion of particular conditions will be huge. The Americans with Disabilities Act’s constant expansion is instructive here and will likely serve as the legal basis for expanding the definition of a “condition.”

Insurance plans will likely become increasingly generous. The ACA requires that they have a minimum level of coverage, and this too will likely be subject to furious lobbying since everyone will want their specific concerns covered. Here too we have already seen this in action with the controversy over birth-control coverage in plans provided by religious organizations.

Such controversies will continue and get progressively uglier. The problem with mandates and the socialization of costs is that there is no “exit” option for peacefully settling disagreements by tolerating other people’s choices. For example, if I am a religious conservative who doesn’t like that JC Penney used same-sex couples in their advertisements, I am free to “exit” my relationship with it by shopping elsewhere. I can accept that some will buy from Penney, but I need not. Mandatory minimum coverage means that anyone who objects to the politically determined minimum has no option other than to use the political process to try to change it. Those battles will be ugly and will drive up costs.

Increased Paperwork

The ACA will dramatically increase the paperwork burden on medical professionals, which will drive up their costs and drive down the quality of their services. That burden will also continue to cause doctors and nurses to leave the profession and discourage young people from entering it. Rather than curing disease and keeping people healthy, which is what attracts so many to medicine, they will increasingly spend their days submitting forms as appendages of the government bureaucracy.

We already are facing a shortage of doctors and nurses, and there is some survey evidence that ongoing changes in U.S. medical practice (not all of which are due to the ACA) are leading practitioners to consider quitting. When the ACA goes fully into effect, this will only worsen, with the result being longer waits for care and higher costs due to the smaller supply.

Finally, as more medical resources are allocated by government fiat rather than by market prices, shortages of equipment will increase and innovation in medical technology will be reduced. The United States is far and away the leader in medical innovation, from technology to drugs, and one reason is that the gains from creative destruction can still be captured as profits in the marketplace. Once insurance is effectively socialized through the ACA, you can be sure that political rationales will dominate resource allocation and that medical planners will stumble in the dark trying to use resources efficiently.

Obamacare’s approach to fixing the very real problems of U.S. medical care is exactly backward. It undermines the market-driven parts that are working and expands government control that is not. Next week I look at alternatives.

ABOUT

STEVEN HORWITZ

Contributing editor and Freeman Online columnist Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback. This summer, he will be lecturing for FEE at Rebels with a Cause.

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