The Dilemma of Obamacare

March 23, 2010

by Mario Rizzo  

The very factors responsible for the passage of Obamacare may make it impossible to fund it adequately. There are certain myths about medical care that make it difficult to contain costs. The central myth, in not very exaggerated form, is that any care less than the best for anyone is the result of a contrived scarcity. If insurance companies were not so greedy for profit people could have the best care they deserve.  

Spurred on by irresponsible politicians, many people object to attempts by insurance companies to save money by denying coverage for pre-existing conditions or treatments whose efficacy has not been proven, refusing to exceed certain pre-agreed-upon lifetime or yearly caps, exclusion of dental care, (previously) poor reimbursement for psychiatric services, and so forth.  

So the supporters of Obamacare turned to government to make things better. Government will eliminate the contrived scarcity insurance market. (Of course, this is contrived by greed, even though this sector is already highly-regulated and filled with mandates.)  

However, for Obamacare to work fiscally certain healthcare savings must materialize. Why? Well, because we live in a world of scarcity. Medical technologies and new drugs can be quite expensive. They can have small, but often noticeable benefits, in diagnosing, curing or alleviating illness. Some may give people just an extra few months of life or make what remains of higher quality.  

But many people have an enduring faith that government knows how to eliminate greed in the provision of healthcare and to distribute it “fairly” when true scarcity raises its head.  

In the first place, we do not have any generally-agreed upon notion of fairness when it comes to the allocation of (medical) resources. Second, because of this there is plenty of room for politically powerful interest groups to push resources in their own direction under the banner of fairness.  

Greg Mankiw helpfully published some of the cost-savings caveats that the Congressional Budget Office issued as a supplement to their cost estimates for the latest bill:      

The reconciliation proposal and H.R. 3590 would maintain and put into effect a number of policies that might be difficult to sustain over a long period of time. Under current law, payment rates for physicians’ services in Medicare would be reduced by about 21 percent in 2010 and then decline further in subsequent years; the proposal makes no changes to those provisions. At the same time, the legislation includes a number of provisions that would constrain payment rates for other providers of Medicare services. In particular, increases in payment rates for many providers would be held below the rate of inflation (in expectation of ongoing productivity improvements in the delivery of health care). The projected longer-term savings for the legislation also reflect an assumption that the Independent Payment Advisory Board established by H.R. 3590 would be fairly effective in reducing costs beyond the reductions that would be achieved by other aspects of the legislation.  

Under the legislation, CBO expects that Medicare spending would increase significantly more slowly during the next two decades than it has increased during the past two decades (per beneficiary, after adjusting for inflation). It is unclear whether such a reduction in the growth rate of spending could be achieved, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or through reductions in access to care or the quality of care. The long-term budgetary impact could be quite different if key provisions of the legislation were ultimately changed or not fully implemented.  

It seems to me that seniors are a very powerful interest group when it comes to getting health-care resources. And I have no doubt that they will be able to put a sympathy-inducing face on their plight. They will say there is “no need” to cut their services to provide services to others. They will find some greed somewhere to blame for this – perhaps the greed of the rich who don’t pay enough in taxes.  

This is how it will go. Decisions will be politicized, and not made in accordance with the ideas of an Ethics Tsar. 

Some will no doubt say that government-sponsored healthcare takes money out of medical decisions. Instead of rationing by ability to pay we shall have allocation by other, better criteria.  

Yet the criteria of special interests (with money) are not obviously better than willingness to pay. At least the latter has the advantage of spurring innovation. 

What we need is a recognition that not everyone can get the best care all of the time and that resources must be used efficiently. The question is will this be done in a market-friendly way (medical savings accounts, competition of insurance companies across state lines, etc.) or by central  direction?  

This, as always, is the question of our age.

13 Responses to “The Dilemma of Obamacare”

  1. Whitney F. Says:

    Finally, someone took the emotion out of this debate, and discussed that we are replacing one evil (insurance cos.) with another (special interests/Big Government). This plan does not provide access…it is a well-intentioned hope-for-the-best plan that discourages innovation and encourages people to either opt out of coverage or wait to get coverage until they need it. I hope I’m wrong, but if history is any indicator, this will be one more government-sponsored program we will be saddled with for years to come. There is a reason UPS and Fed Ex are successful companies, and the USPS is just keeping its head above water…

  2. Jean Bennett Says:

    Re your statement that “seniors are a very powerful group” implying that seniors will be able to persuade Congress to let us keep a decent health care plan (Med Advantage) … how wrong you are; seniors brought the wrath of their power and it did no good. I am going to be denied my Med Advantage, a decent health care plan that allows me to pay lower co pays than Medicare, and allows me to afford decent medical care on my social security. It was taken away from me in this Bill. So I guess you have to apologize to seniors, or eat your words; which I doubt you will be willing to do. TheCSM is so far to the right it makes Armey and Gingrich look like liberals.

  3. Semra Guler (student) Says:

    It is hard to understand what Americans really want! You guys were the ones who complained about the lack of having a reasonable health insurance option. You were the ones who said, “the insurance companies don’t accept us due to the pre-existing health conditions”, but now Obama administration succeeded to pass the health care bill… and you are still complaining! We are talking about 32 million uninsured people here. Of course, it is not going to be easy to apply this health care reform… but American government has to start solving this problem. It could take years, decades, but I am sure it will be worth applying this health care reform. Some of you talk about how private companies are successful, and how American government institutions are inefficient. Well… at this point I would like to ask a question; why have you been criticizing the insurance companies for being greedy then? If we should talk about success, then I have news for you, the insurance companies are very successful. They are making a lot of money, and paying so many bonuses to their CEOs and other officers. If you still think that this is success then they are successful. The insurance companies know how to rip American people off without giving any proper service. The United States of America is not a third world country, but it has been like one when it comes to the health care system! If you can’t serve your people even with a basic health service, then it doesn’t make a difference whether you have the latest medical technology. Look at Europe! Look at some Asian countries! They know how to be innovative and to serve with a good health care system to their people. Everything is about incentives, but you need to put a limit to the bad incentives. Otherwise, those bad incentives will hurt you too someday. Health care is not something insurance companies should make too much money from and get bailed them out by the taxpayers’ money when they screw up everything. Health care is a human right not luxury like a HD TV. Health care is an essential necessity, and it is inelastic, meaning that price changes have a small effect on demand for services. Health care shouldn’t be something that insurance companies can make so much profit from it. Health care is not something that should be considered in the conditions of a free market. It has been in a free market for decades, and we have been witnessing the bad results out of it. Americans file for bankruptcy because of the high hospital fees. Obama administration offers a basic health care for everyone. Smart cards could be used to track down the activities, and the government could pay standard fees to the greedy hospitals and insurance companies for their service to uninsured Americans.

  4. Pietro M. Says:

    I’ve read (on an italian site) that private US health insurance companies have a perspective debt on future expected services which is about six times US GDP. Is it true? Is the health system as bankrupt as the financial one? I wouldn’t be surprised, as they are the two most regulated markets, but I’ve seen no reliable data about it.


  5. Excellent. And thank you for not saying that markets “ration” better than government. Markets are series of exchanges by property (including money) holders. The “distribution” of resources in a (freed) market therefore is not the result of rationing but rather of discrete purposeful transactions.


  6. I’ll follow up on Pietro and Sheldon. The most regulated industries exhibit the most problems, and health care and financial services are the most regulated. They are the forward edge of corporatism in America.

    Just as the financial giants require repeated bailouts, bailouts for health insurers will be next. Then we will get a Medi Mac for health insurance.


  7. Holman Jenkins has a very good piece on the topic in today’s Wall Street Journal: “Now, Can We Have Health Care Reform?” He characterizes Obamacare as doubling down on a failed system.

    http://online.wsj.com/article/SB10001424052748703621104575139732486806838.html

    He correctly analyzes the bill as insurance industry bailout legislation. It does nothing to halt the rising costs of healthcare, but removes the consequences of cost increases and puts them on the Treasury’s books.

  8. Bill Stepp Says:

    I haven’t read Jenkins’ piece but will soon.
    The basic economics of healthcare over the past 75 years has been an inexorable rise in the demand for it, helped by third party payment, subsidies, and related insulation of consumer demand, service delivery, and from payment, and ongoing downard pressure on the supply of it, thanks to taxes, regulations (e.g. licensing of doctors, restrictions on immigration of physicians imposed in the mid-1990s–see Barkley Rosser’s recent comment at the Coordination Problem blog, state regulation of health insurance, etc., etc.), drug patents, etc. etc. With that dynamic, there’s only one way the price of healthcare can move and it’s not down.

    And in response to Semra Guler’s statement that healthcare is a right, why it it a right? If it is a right, then that implies that someone is obligated to satisfy the demand for it, which boils down to slavery. No one has a right to food either. People have a right to property, and to offer goods and services in the market in order to earn income to buy things such as food and healthcare. If healthcare professionals want to offer medical services pro bono, that is their right; but no one has a right to force them to provide medical services to anyone.

  9. Bill Stepp Says:

    Sorry for the typo above. People have a right to their justly acquired property, not a blanket right to property, which might be read as implying a right to someone else’s property. Property titles are gained by homesteading unowned property and mixing one’s labor with it, or by trading justly owned property titles for other justly owned property titles. People can also receive property by gift or bequest. The only othe way to gain property is by the way of the State or the highwayman–theft.

  10. Roger Koppl Says:

    @ Jean Bennett:

    Good comment! As the population ages, the interests of the elderly become more like the general interest and less like a special interest. Thus, we can expect a *decline* in the political influence of the elderly as the population ages. (Didn’t Milton Friedman make this point long ago?) Maybe the healthcare bill is the first big example of such a decline in influence.


  11. Roger,

    So the old folks should favor immigration. Lots of new young folks to tax to preserve inter-generational transfers.

  12. Roger Koppl Says:

    Don’t young people have a stronger interest in immigration? They should favor immigration to help share the tax burden of supporting all those old folks. The permanent income of young people depends more on immigration than that of old people who are more likely to have paid off their mortgages and so on.

    At least one poll suggests that support for a path to citizenship for illegals declines with age. Presumably the pattern is the same for one’s overall support for immigration.

    Here’s the url:

    http://pewresearch.org/pubs/1421/where-the-public-stands-on-immigration-reform

    OTOH the link between such opinions and one’s economic interests may not be very strong. Expressive voting and all that.

  13. Mccray Says:

    Are you proud of me?


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