Please don’t blame the free market for healthcare failure

With voting delayed until after the July 4th holiday and a growing list of GOP senators defecting, the Republican healthcare bill is floundering; it will ultimately fail, as it should.

It neglects to address the failings of the Affordable Care Act, leaving its framework mostly untouched, and to reintroduce even the semblance of needful free-market mechanisms. It is, at this juncture, important to explain what is meant by the concept of the free market.

To begin with, the free market — today only a hypothetical ideal — is in no way responsible for the overpriced, mutant state-corporate hybrid in which Americans find themselves trapped. To pretend that it is prevents us from accurately diagnosing the problems inherent in the present system.

Healthcare is, in point of fact, the single most heavily regulated industry in the United States.

{mosads}Healthcare is strangled by an economically clueless, often self-contradictory mess of legal rules and regulations, preventing the price system from broadcasting accurate signals about the relative values of the various good and services that make up the industry.

High barriers to entry, most of which are completely artificial creations of bad public policy, have made even the possibility of genuine competition impossible (at least in the near term).

An exhaustive list of examples could fill volumes. One example, though, is certificate of need laws, which limit competition in the healthcare sector by preventing the introduction of new equipment or facilities within the subject geographical area.

Beginning in the 1970s, federal law mandated that every state must enact a certificate of need provision, the theory being that such restrictions on infrastructure outlays would keep consumer costs under control by precluding needless duplication.

This was shortsighted from the start, because, even at the time, sound economic thinking — accounting for the incentives at play and mindful of less immediate consequences—predicted that CON restrictions would hurt consumers. Where public policy precludes the new services and technology for which consumers are asking, those consumers are left with fewer options, coercively channeled into the facilities that benefit from the prohibitions. It is important to point out here that were consumers not actually desirous of these new facilities and services, there would be no need for CON laws.

Researchers at George Mason University’s Mercatus Center have found that certificate of need laws are associated with lower quality care, less rural access to healthcare services, and higher prices and spending.

In short, CON restrictions yield results exactly opposite those they are intended to, protecting market incumbents and subjecting consumers to higher monopoly prices without a corresponding quality increase. For the institutions to which the benefit accrues, then, CON laws are very valuable indeed. Thus captured, these laws function as privileges for the connected rather than protections for consumers.

The reasoning underlying the Affordable Care Act, like the flawed thinking behind CON laws, conflates resource use efficiency and industry consolidation. The authors of the disastrous law believed that a more concentrated market with fewer players would affect overall administrative streamlining, reducing spending and therefore consumer costs.

The ACA, of course, has not functioned in accordance with the best laid plans of its proponents, widespread industry consolidation translating to much higher prices. Premiums have skyrocketed as firms struggle to remain profitable in an environment in which the law forbids insurance from accounting for and incorporating assessments of risk.

All of this is quite as the ACA’s detractors predicted, consistent with what a basic economic analysis of incentives teaches. These incentives did not simply vanish upon the passage of the ACA; that the ACA does not seriously account for them is a weakness of the law, but one with which the Republican proposals to this point have not bothered to grapple.

Genuine free market solutions are repellent to congressional Republicans because it threatens the status quo, the present system of state-supported monopoly.

Lodge practice offers an illuminative example of the kinds of spontaneous, ground-up solutions people once devised to provide themselves with healthcare. Before the birth of the modern welfare state as we known it, fraternal societies were an important source of the kinds of benefits today associated with government.

The greatest enemies of this voluntary, fraternal system were other doctors, specifically the medical profession’s industry groups and publications. As David T. Beito notes in his book From Mutual Aid to the Welfare State, “Shortly after the turn of the century, articles about the ‘lodge practice evil’ began to fill the pages of American medical journals.”

As Beito explains, medical societies believed that “the keen business instinct of the laity” had made things too good for consumers, that physician pay would sink too low in the competitive scramble.

God forbid that the working poor should receive quality medical care at low cost. The medical profession sought out the means through which they might form a legal cartel, with high pay guaranteed by the suppression of lodge competition.

The profession’s attack on lodge practice represents a pattern in the history of American public policy, that of using rules ostensibly designed to protect consumers to institute a kind of regulatory protectionism. We needn’t necessarily concern ourselves with the sincerity of the doctors fighting lodge practice, only with the actual results of the legal and regulatory means chosen.

In his 1967 article “The Welfare Costs of Tariffs, Monopolies, and Theft,” economist Gordon Tullock points out that “each successful establishment of a monopoly or creation of a tariff will stimulate greater diversion of resources to attempts to organize further transfers of income.” Tullock notes that in the U.S., “large and well financed lobbies exist for this purpose,” mobilized to leverage policy tools not for the public good but for private gain.

Both CON laws and the medical profession’s efforts to regulate away competition from lodge doctors represent Tullock’s basic point. Today’s healthcare corporations are similarly invested in a long-term strategy of rent-seeking.

The healthcare sector is rife with such needless barriers to market entry and thus to robust competition. Indeed, the impact of these countless strictures is evident in the increasing consolidation and lack of competitiveness within the industry (that is, both insurers and provides).

The current legal and regulatory environment has made it difficult to operate successfully, particularly for smaller insurance companies and hospitals, which are “finding it almost impossible to compete with the mega-systems in the industry.” The result has been an eruption of both M&A activity, with large firms growing even larger, and bankruptcies, small, independent companies going out of business.

It is not enough to declare coverage universal or to dictate that everyone must buy insurance. Neither is it enough to deem healthcare coverage a human right, unless the goal is self-satisfied virtue signaling.

Reform must be centered on ideas and institutions capable of effecting the desired outcome—delivering high-quality healthcare to the largest possible number and controlling costs by allocating resources efficiently.

Healthcare must be decentralized and de-monopolized, extricated from the suffocating control of the federal government and its rent-seeking special interest masters.

David S. D’Amato is an attorney, an expert policy advisor at both the Future of Freedom Foundation and the Heartland Institute, and a columnist at the Cato Institute’s Libertarianism.org.

The views expressed by contributors are their own and are not the views of The Hill.