Today we are pleased to present a guest contribution written by James Kwak, professor at the University of Connecticut School of Law. He is the author of Economism: Bad Economics and the Rise of Inequality, and contributor to The Baseline Scenario.
Republicans are in a pickle. Last week, the Senate and the House of Representatives passed resolutions directing their relevant committees to write bills repealing the Affordable Care Act—responding to Donald Trump’s campaign promise to “ask Congress to immediately deliver a full repeal of Obamacare.” Congressional leaders had been hoping that they could vote now to sunset Obamacare later — perhaps even after the 2018 elections—both to reduce political fallout and to buy time to develop a health care plan. But now Trump is insisting that the replacement must be passed “very quickly or simultaneously [with repeal], very shortly thereafter” — while most insiders doubt that there is a consensus behind any actual plan.
These are the surface manifestations of a more fundamental problem. As Colin Powell summarized Pottery Barn’s (nonexistent) policy before the Iraq War, “You broke it, you own it.” After stoking popular opposition to Obamacare for six years, Republicans suddenly have to do something about it. And Trump has painted them into a corner by promising, among other things, that “we’re going to have insurance for everybody” and that people “can expect to have great health care … in a much simplified form, much less expensive and much better.” Tom Price dug the hole deeper by saying, “it’s absolutely imperative that individuals that have health coverage be able to keep health coverage.”
They have to say these things, because everyone agrees on the desired outcome: high-quality care that is accessible and affordable for all people. When it comes to environmental regulation, for example, Republicans can simply deny that anthropogenic climate change is an issue. With health care, they have no such luxury; people tend to notice if they are no longer covered. And no politician is willing to say that some people should have to go without health care.
Economism and Health Care
Of course, there is an answer. For years, Republicans have been saying that free markets, competition, and incentives could solve our nation’s health care problems. As Trump said on his campaign website, “By following free market principles and working together to create sound public policy that will broaden healthcare access, make healthcare more affordable and improve the quality of the care available to all Americans.” (No, that isn’t a sentence.)
The idea that free markets are the right way to deliver any goods or services has been an article of faith among Republicans since the Reagan Revolution and among conservatives for more than half a century. After World War II, Friedrich Hayek and Milton Friedman, among others, took a central lesson of Economics 101—that competitive markets maximize social welfare—and elevated it into a universal worldview that I call economism. Over the following decades, economism became a primary lens through which many people interpret social and economic reality.
Today, “free market” principles occupy center stage in Republican health care proposals: promoting high-deductible plans, which will supposedly make people smarter consumers of health care; allowing insurers to sell policies across state lines; limiting the tax subsidy for employer-provided plans; eliminating minimum benefit requirements; and giving insurers more flexibility when setting premiums. According to the rhetoric, the choice is between command-and-control regulation (“death panels,” anyone?) and the magic of the marketplace. By allowing markets to operate with less regulation, these policies will deliver more care to more people for less money. Why? Because that’s how markets work.
Markets in Health Insurance
But here’s the problem: Few people actually want to live in a world where health care is distributed by a free market. Textbook markets allocate goods and services to the people who are willing to pay the most for them—on the assumption that this maximizes social welfare. As Paul Samuelson wrote in his seminal 1948 textbook, “John D. Rockefeller’s dog may receive the milk that a poor child needs to avoid rickets Why? … Because [supply and demand] are doing what they are designed to do.”
If you have a chronic illness that is likely to require $30,000 in treatment, the correct market price for your health plan is more than $30,000. That’s not a market failure; that’s the price at which a profit-seeking company should sell you a policy. But as Jacob Hacker wrote in The Great Risk Shift, “Most of us think it’s fine that some people can’t buy fancy clothing or fast cars. But most of us draw the line at basic health care.” In practice, health insurance markets only work because of an information asymmetry: sick people can buy coverage because they know more about their health than insurers do. Obamacare protects this asymmetry by prohibiting medical underwriting, but this introduces adverse selection, which creates the need for the individual mandate, which motivates insurers to cherry-pick healthy customers, which requires behind-the-scenes, after-the-fact risk adjustment among insurers. Take away those regulations, and sick people will be unable to buy insurance at a price within their budget—because that’s how markets work.
Obamacare is a valiant attempt to force markets to produce a morally tolerable outcome—most people can get some coverage at a price they can almost afford—through a maze of regulations. Even before the election, the system was struggling with the multi-dimensional problem of attracting insurers while keeping prices affordable. Insurers are raising prices or pulling out because the penalty for not being covered isn’t high enough to draw healthy people into the market. On the consumer side, the biggest complaint about health insurance is high and increasing out-of-pocket spending. But higher deductibles and copays are just the market trying to do what it is supposed to do: make the price of care reflect the cost of care. As the total price shifts from up-front premiums to out-of-pocket cost sharing, healthy people pay less and sick people pay more—which is how a health insurance market is supposed to work.
In short, free markets want to make health insurance and health care unaffordable for poor and sick people. Because everyone agrees that would be an unacceptable outcome, Obamacare imposes severe distortions on the market. It can only solve its current problems by distorting the market even more. The simplest way to bring healthy people into the risk pool is to force them to participate (by collecting the full price of a policy in taxes), and the simplest way to control out-of-pocket spending is to tighten the existing limits on out-of-pocket spending (currently $14,300 for a family plan, but the limit doesn’t apply to everything).
At that point, we would have something perilously close to a single payer system (while paying tribute to insurance companies’ shareholders). But when you try to constrain “markets” to produce results that markets don’t want to produce—decent health care at a price the poor and the sick can afford—something has to give. You can force everyone to pay what she can afford for a more or less standard product—what you get with single payer—or you can give up on universal access.
Right now, Republicans from Donald Trump on down are pretending that they can have both: free markets and cheap health care for everyone. At the end of the day, they are likely to find that market forces will only push more families into plans with high out-of-pocket expenses or into the ranks of the uninsured. And then we will have to ask: do we care more about markets, or about people?
This post written by James Kwak.