Michelangelo and ObamaCare Reform - The Libertarian Institute

Michelangelo and ObamaCare Reform*

March 25, 2017

By Mencken's Ghost

It was almost a certainty that ObamaCare would not be replaced or reformed enough to restore a consumer market in medical care/insurance, one in which the consumer is at the top of the pyramid instead of the bottom. 

Why was it almost a certainty?

Because the government has been chipping away at a consumer market in medical care/insurance for at least 75 years, so that what remains today has little resemblance to a market. To use an analogy, it's as if a vandal had chipped away for days on Michelangelo's statue of David and left behind a badly marred chunk of unrecognizable marble. Even if it were somehow possible to glue the chips back together, it would take a long time to do so, and even then, Michelangelo's masterpiece would never be restored to its former beauty.

Restoring the medical care/insurance market is even more complicated than restoring a statue, for the restoration has to be done through a political and governmental process, a process that was designed by the Founders to move slowly. It's also a process that has been hijacked by powerful special interests, ranging from large corporations, to government bureaucracies, to unions, to physician associations, to hospital associations, and to so-called consumer advocacy groups that pretend to care about the entire populace but in actuality care about some segment of society (e.g., AARP and Planned Parenthood).

And underlying all of this is a political reality: that once an entitlement, subsidy, handout, or tax break is in place, it is nearly impossible to take away. The fact is, there is a lot to take away in medical care/insurance to ever have a true consumer market.

Let's look at what needs to be taken away to have a market in medical care/insurance that is comparable to the markets for food, clothes, housing, cars, furniture, restaurant meals, electronics, entertainment, and insurance for houses, cars, and lives.

We'll begin in 1942, which is when wage controls were instituted during World War II. To get around the wage controls, employers began giving employees non-cash benefits in lieu of wage increases, especially benefits in the form of company-provided medical insurance. The Department of Labor and courts later ruled that such benefits were matters for negotiation in union contracts, just like pay. And the IRS began allowing companies to get a tax deduction for the expense of the benefits, as well as not taxing the benefits as income to employees.

These developments severely damaged the consumer market for medical care/insurance, as they put employers in charge of much of the market instead of consumers. It also put the self-employed at a tax disadvantage and a clout disadvantage in purchasing medical care/insurance on their own, as they didn't get a tax deduction as corporations did and didn't have the purchasing power of large employer group plans.

Even more damaging was the enactment of Medicare and Medicaid in the 1960s. Putting aside any moral, philosophical and utilitarian questions about the programs, it is indisputable that the programs are socialistic in nature and not free-market in nature. The programs pay for about half of all medical care in the nation, thus leaving only the remaining half that can be reformed into a consumer market. But here's a rub: Even the remaining half is affected by the socialized half, because Medicare and Medicaid cause industry-wide distortions in the supply, demand, pricing, and competition for medical services.

Other damage was caused by HMO legislation enacted under the Nixon administration, by ERISA enacted under the Ford administration, by the Medicare prescription drug benefit enacted under the G. W. Bush administration, by the Affordable Care Act under the Obama administration, and by other laws too numerous to name here. Each one produced thousands of pages of regulations, gave birth to scores of interest groups, affected tens of millions of voters, and put even more distance between medical care/insurance and a true consumer market.

In the spirit of nonpartisanship and honesty, this believer in markets has to admit that medical care wasn't that great prior to 1942, even though there was less government interference in medical and insurance markets than there is today. Yes, care and insurance were relatively inexpensive, partly due to expensive medical technologies and treatments not being developed yet; but care and insurance were spotty, and much care was provided outside of a true consumer market. For example, many workers received care in clinics provided by their employers, especially in rural areas, and many other people received care from charitable hospitals run by organized religions (e.g., Catholic hospitals) or fraternal associations (e.g. Shriners). So many Americans did not have good medical care (and nutrition) prior to World War II that 20% of enlistees were rejected for service in the war due to physical ailments.

Would these problems have been corrected by the market without the need for government interference as the country became more prosperous? Based on my biases—which in turn are based on the remarkable advances and cost reductions delivered by markets for other goods and services—the answer is yes. But it's impossible to prove that.

In any event, that's not where we are today. Where we are today is having to live with the results of 75 years of the government chipping away at a consumer market for medical care/insurance. It would not necessarily take 75 years to reverse the damage and restore a market, but it's foolish to believe that it can be done in one presidential term and in one congressional term—especially when the other political party will attempt to reverse market reforms when it runs the government again.

Republicans should have been honest about this, should have planned accordingly, and should have closed ranks around some initial reforms that would've been difficult for Democrats to rescind when they get back into power. Instead, the conservative wing of the party thought they were Michelangelo and could create a beautiful consumer market in short order, as if they were starting from scratch with a new block of marble instead of having to deal with a badly damaged block and hundreds of fragments.