Why ObamaCare Will Fail
Posted on: 2012-06-29 08:19:46
by John Young
Yesterday, the U.S. Supreme Court ruled that the individual mandate clause in the universal health care bill is Constitutional.
The essence of the individual mandate is that anyone who can afford health insurance and doesn't have it will be fined either a flat rate or a percentage of their income for failure to comply.
The 5-4 Supreme Court decision was rather tortured. It is unprecedented for the Federal government to exercise authority to fine someone outside of regulated fields for their failure to act in a prescribed fashion. And, in fact, the Federal government has no such authority. In order to find the individual mandate Constitutional, the Supreme Court engaged in the very twisted logic of interpreting those fines as being taxes, and the ability to levy them as an extension of the government's taxing authority.
The individual mandate is the central feature that makes ObamaCare even remotely workable, but even at that -- it will fail due to fundamental misunderstandings of economics.
The reasoning behind the individual mandate is that young and healthy people who often have access to insurance through employment nevertheless choose to opt out and go uninsured because they are young, feel invincible, and have other priorities for the money.
Insurance is not a lottery. The money that insurance companies pay for claims doesn't materialize out of thin air. That money has to originate from all of the people who subscribe to the insurance. In general, health insurance tends to spread the costs of insurance across a wide group of people so that the relatively few who get sick might be able to collect several times as much benefit as they paid in fees, but because it is spread across so many people, most of whom are healthy, the cost for each person is relatively small.
Insurance companies are in business to make money. Even mutual insurance companies that are theoretically owned by the insured are money making machines for the administrators who run them and collect tens of millions of dollars in annual salaries. An insurance company makes money by paying out less money in claims than it has collected in premiums. If it were to pay out more in claims than it collected in premiums over a period of time, its financial fitness would be exhausted and it would collapse. So in order to remain viable, insurance companies have to be profitable.
The individual mandate is a central feature of ObamaCare because it puts new payment burdens on insurance companies to accept high risks in terms of payout by covering people with serious pre-existing conditions and so forth. These new payment burdens have to be balanced by premiums. Either premiums for existing customers will go through the roof because of the need to spread out those burdens, or the pool of people paying premiums -- especially healthy people who pay without collecting -- will need to be expanded. Thus, the individual mandate is a key feature of ObamaCare that is intended, at least in theory, to keep the cost of premiums from rising in response to the increased payment burdens that have been imposed.
So if the individual mandate had been ruled unconstitutional, the entire health care reform bill would have been rendered unworkable.
Of course, this precedent is ridiculous. Having me pay a tax for NOT doing something, when I am not involved in a regulated enterprise, is a gateway for the government to tax me for failure to eat broccoli and a host of other totalitarian rules. In terms of freedom, this is among the worst decisions by the Supreme Court that I can recall.
But even so, ObamaCare will fail. It will fail because it is based upon fundamental misunderstandings of the health care market.
The U.S. system of health care is the most expensive in the world, and objective measures of its performance don't justify its cost, as less expensive systems have better outcomes. How can this be? Simply because the U.S. system has managed to combine the worst aspects of capitalism and socialism.
Let me ask you a question. Pretend one of your children has been in a terrible accident and will die without care. How much money will you spend to save your child's life? The answer is easy: whatever it takes even if it takes every penny you have.
As you can see, health care is not like other commodities that people can do without or for which easy substitutes are available. Therefore, the economics of health care don't work like the infamous widget examples in economics class.
Now, consider that for both socialist and capitalist reasons, there is a great deal of monopolistic pricing involved in our health care system.
Now, monopolies are not particularly powerful if the commodity that is monopolized is not very desirable or can be easily substituted with another product.
For example, if someone has cornered the canned sardine market and raised the price to $20 per can, you will just switch to tuna for $1 per can. If someone has cornered the market on strychnine-laced pizza, it doesn't matter because nobody wants it anyway.
But when dealing with a life-or-death product for which people are literally willing to spend every penny they have, monopolistic pricing is very powerful indeed. And health care is exactly such a product.
There are many ways in which monopoly and oligopoly are introduced into health care.
For one, there is a series of laws in every state pretty much limiting the practice of medicine to those approved by the American Medical Association -- a private body with the power to limit the supply of practitioners. The required medical schooling is insanely expensive, further restricting the supply of practitioners.
For another, the regulatory burden pertaining to the creation of medical products and devices is such that simply meeting regulatory burdens for a new variety of aspirin would easily cost $500M. These regulatory burdens effectively mean that if you aren't already in the business of making pharmaceuticals, you won't be getting into that business. Hence, the barriers to entry are so high that effective competition from upstarts and innovators is impossible.
Then, of course, there are patents that last as long as 20 years. A patent is an explicit grant of monopoly. Obviously, intellectual property needs to be protected. But in granting that monopoly in a field where people are literally willing to pay every penny they have, we have imposed no controls on the pricing. Hence -- and this is an important point -- the costs of healthcare will always rise to take every penny available to it. This is why a patented drug will cost 500% more in the United States than it does in Canada.
Obviously, the manufacturer is making money on the lower price in Canada, otherwise the drug would not be sold there at all. But in the U.S. system where 40% of the costs of health care are covered by government anyway, the manufacturers have no compunction about raising the price of a drug to five or ten times what they would charge for it in another country. Again, in a monopoly situation where people are willing to pay their last penny for the product, the price will always rise to take every penny available.
As a result, ObamaCare will fail. By making more dollars available in the health care system, and by adding to demand without doing anything to ease supply, the cost of health care will increase dramatically, forcing ever increasing numbers of people onto inferior lowest-common-denominator government approved health plans. Though the plan will cover SOME people who weren't previously covered, it will do so at ruinous cost for everyone else. If you think $4 for an aspirin is a problem today, just wait until hospitals are charging $20 for an aspirin. You'll be longing for the good old days.
Of course, there is another reason that ObamaCare will fail. Obama has recently, through executive order, made hordes of illegal aliens effectively employable. These folks are routinely employed under borderline slave-labor conditions without health insurance. Their poverty will qualify them for government-supplied health care. There are millions and millions of these people. This will add so much to the pool of those taking out of the system that it won't be able to bear the weight.
If we want to fix health care and make it more widely accessible and less expensive, there are many ways.
1. Break the American Medical Association monopoly, and subsidize medical school for promising students who have objectively proven their intellectual promise. This will increase the supply of practitioners. It will be less expensive in the long run to pay for the education than for the increased costs stemming from restricted supply.
2. Re-vamp our regulatory system at the FDA. Not only does it fail to protect us from horrible drugs with ridiculous side effects such as fen-phen, but it erects barriers to entry that make entry into the market nearly impossible for competitors.
3. Establish a system for drug and medical device patents that will inversely relate pricing with length of patent protection. That is, if you want to charge 500% more in the U.S. than you do in Canada for the same drug, then your patent only lasts five years, whereas if you will charge the same price up to 25% more, then you can have a 20 year patent.
4. Establish a maximum market capitalization for corporations generally, forcing them to divide once they reach a certain size. This will permit more competition and innovation while discouraging the "big fish gobbles little fish" approach to business in which profits are derived from legerdemain rather than innovation and productivity.
5. Stop all illegal immigration and deport all illegal immigrants. They place an enormous load on our system without a corresponding increase in premium payments.
How likely are these reforms? Not very.
Do yourself a favor. Go to www.opensecrets.org and look at who has donated to various Congressional candidates. See all the medical concerns?
Now -- ask yourself a couple of questions.
Given the amount of money Big Pharma invests in our politicians, what are the odds that the ObamaCare law ultimately benefits Big Pharma rather than the American people?
Given the amount of money the establishment highly $profitable$ health care system invests in our politicians, what are the odds of TRUE reform of that system that would break up the monopolies?
There IS a way -- but it will require a lot of public pressure on politicians. Enough pressure that they would fear us more than they fear Big Pharma.