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Commentary

The Viability of Health Care Reform


     
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Now that the health care reform bill has been signed, it will face legal challenges. The media has focused on legal challenges that will play out in courtrooms. Courts may or may not uphold this new legislation. However, the judges in these cases do not possess the authority needed to render a final verdict on health care reform. The success or failure of health care reform ultimately depends upon whether or not it conforms to economic laws, rather than with the opinions of judges.

In order to judge health care reform by economic laws, we must first ascertain its basic nature. Does health care reform amount to socialized medicine? The single payer and public option versions of reform did not pass. However, Americans will be required to have health insurance, and employers will be strongly pressured to provide this insurance. In short, Congress is funding health care through a combination of some explicit taxes (i.e. the tax on ‘Cadillac plans’) and mandates for buying or supplying “private” health insurance—which amount to implicit taxation. The explicit and implicit taxes of the new system amount to a de-facto single payer. Since the medical industry is now headed towards nearly complete governmental control, we must ask if the politicization of health care will result in a more efficient or more just financing of health care.

It is obvious that the health care industry is highly complex and subject to constant change. These facts have important economic implications. Perhaps the most difficult problem in planning within any industry is rapid adaptation to changes in the particular circumstances of time and place.[1] If the authors of health care reform knew about change in advance, they might have been able to write a complete bill, one that accounted for every contingency. However, the future is largely unknown; we do make genuine discoveries over time. This recently signed health care legislation should be regarded as a permanent work in progress, it will always require revision.

The fact that legislators cannot anticipate all contingencies does not automatically imply that reform will fail. However, this does cast doubt upon the claim that health care reform will reduce costs and lower the deficit. The Congressional Budget Office predicts financial savings, but given that this bill will be revised, and has already been changed, we cannot assume that CBO numbers will remain true. The CBO also predicted that Social Security would generate surpluses until 2016, but the Social Security System recently went into deficit. CBO forecasts will be accurate only if unexpected changes in the costs consist of increases and decreases that tend to cancel out.

While we cannot be sure about the details of future changes in government regulations or programs, economic theory indicates that these costs rise over time. Ideally, legislators pursue what some people term ‘social justice’ through redistribution. The term social justice lacks any objective meaning. People have different opinions as to what constitutes a fair redistribution of wealth, and there is no objective criterion for determining whose version of social justice is correct. No one can comprehend all the factors that would have to enter into an actual estimate of ‘socially just’ income distribution.[2] Claims of social justice are at best based on narrow and incomplete value judgments, and at worst completely arbitrary opinions. Since social justice has no meaning, the pursuit of this goal inevitably degenerates into power struggles among interest groups.

Special interest groups lobby elected politicians. Politicians in a purely democratic legislature can never agree upon an agenda, as coalitions can continually reform.[3] The unstable nature of pure democracy means that ‘legislative dictators’ must set public priorities. This is not just theory; such events occur routinely. The passage of health care reform required numerous highly publicized political payoffs. The reality of health care reform is interest groups competition. Competition often controls costs, but not in politics. Political competition is biased towards narrow and concentrated interest groups. Small interest groups have lower costs of organizing and will divide gains few ways, relative to larger more dispersed groups. Government transfers wealth to smaller better organized groups, and from larger relatively disorganized groups. Special interests have already altered health care reform. Given the amount of money involved, we should expect even more special interest lobbying. The reality of politics is that individual citizens cannot appreciably affect politics, and ‘the people’ as a whole are too diverse and dispersed to ever act collectively on a cost effective basis. Politics is driven by a few elected political powerbrokers and special interests. Anyone who believes that health care regulation will simply, as President Obama has put it, serve the interests of the American people, does not understand how economic laws relate to politics.

We can see the failure of politics in our current Medicare system. Medicare has had serious problems with cost control, and is severely underfunded. The underfunding of Medicare is not an honest mistake. The key problem with Medicare is that politicians did not set aside funds to cover the medical costs of the Baby Boom generation. Politicians knew that the costs of Medicare would increase decades ago. Yet, they have taken the politically popular, and financially unsound, path of profligate spending and low taxes—relative to obvious future burdens.

The economic laws of cost indicate that special interest groups wield disproportionate influence and impose costly and wasteful transfers. Special interests do not simply gain at the expense of the general population. Interest groups compete only by expending real resources, and this competition wastes much of the wealth transferred through politics.[4] The ironic truth is that efforts by special interests to transfer wealth reduce total wealth.

It is reasonable to assume that most Americans who want to move in the direction of financing health care as an entitlement have the best of intentions. However, economic laws and historical experience both indicate that there is no feasible way of realizing their dreams of social justice or improved efficiency through state financing of health care. The term ‘social justice’ is devoid of any real meaning. Economic laws indicate that governmental programs lack effective cost control and result in wasteful transfers to influential special interest groups. The health care industry does need reform. We should instead consider moving in the direction of the only system that effectively controls costs: competitive free enterprise.

Notes

1. Hayek, F.A. 1945. The Use of Knowledge in Society. American Economic Review, September: 519–30.

2. Hayek, F.A. 1974. Law, Legislation, and Liberty: The Mirage of Social Justice. Chicago: University of Chicago Press.

3. Black, Duncan. 1958. The Theory of Committees and Elections. Cambridge: Cambridge University Press; and Arrow, Kenneth. 1963. Social Choice and Individual Values, Second Edition. New York: John Wiley & Sons.

4. Tullock, Gordon. 1967. The Welfare Effects of Tariffs, Monopolies, and Theft. Economic Inquiry, June: 224–232.

Douglas W. MacKenzie is Adjunct Fellow at The Independent Institute and Visiting Assistant Professor of Economics at the U.S. Coast Guard Academy.






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