Thinking Things Over March 25, 2012
Volume II, Number 12: What ObamaCare’s Fate Means for the Economy, Through Hayek’s Eyes
By John L. Chapman, Ph.D. Washington, D.C.
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States;…… To borrow money on the credit of the United States; To regulate Commerce with foreign Nations, and among the several States….. — Article I, Section 8, U.S. Constitution
My health care plan saves the average family $2,500 on their premiums and provides the uninsured with the same kind of health care Members of Congress give themselves. That’s real relief, but we can only pay for this if we finally roll back the Bush tax cuts for the wealthiest 2% of Americans who don’t need them and weren’t even asking for them.
. — Barack Obama
Friday, March 23 marked an anniversary for two events connoting polar opposite meaning for students of political economy. Two years ago, President Obama signed into law an historic expansion of health care entitlements in the United States, as contained in the “Patient Protection and Affordable Care Act of 2010” (PPACA, and commonly known as “ObamaCare”). And twenty years ago Friday, F.A. Hayek, the 1974 Nobel Laureate in Economics and champion of constitutional limited government and unhampered commerce in free and competitive markets, died at age 92 in Freiburg, Germany. Ironically, the U.S. Supreme Court hears oral arguments over three days this week on the constitutionality of the PPACA, after 26 states and the biggest small-business advocacy group (National Federation of Independent Business) filed suit to stop the new law’s implementation. Considering the effects of ObamaCare on the economy and the markets through the lens of Hayek’s teachings promotes clarity in estimating the future.
Open-Ended Costs, Questionable Quality, Limited Access
Earlier this month the Congressional Budget Office released updated estimates of the ten-year cost of ObamaCare. Their new gross cost of coverage for the next decade (through 2022) is now $1.76 trillion, but Senator Jeff Sessions (R.-AL), who has studied the bill’s programming closely, says total costs including implementation and oversight will be at least $2.6 trillion, far above the original $960 billion price tag advertised in 2010. What is worse, even the CBO acknowledges that millions of Americans — perhaps up to 20 million — will still be largely uninsured in 2022, and that 93% of non-elderly Americans will be forced to buy supplemental coverage. Related to coverage gaps, both the CBO and McKinsey & Co. recently estimated that at least four million more Americans will be cut loose from employer-sponsored health plans by 2016 (from year-ago estimates), and that number could be much higher: at least 30% of U.S. employers will drop health care benefits after 2014, and that percentage could double in the ensuing three years, says McKinsey. And among employers far more familiar with the PPACA, “this proportion [of those intending to drop sponsored health care plans] increases to more than 50 percent.”
For small businesses especially, it will be logical to do this and pay a small per capita penalty instead, but the slow evisceration of the private health insurance market will of course swell government coverage pools — and program costs. ObamaCare’s regulatory apparatus, now explained in a body of legislative decrees totalling 2.2 million words (or at least 4000 typed pages, single-spaced) so far, entails the creation and staffing of at least 159 regulatory bodies, headed at the very top by a 15-person “Soviet Politburo”-like control board with ultimate decision-making authority over health care program content and structure (including, in the news this week for example, who shall receive new hearts in transplant surgery, and how that decision will be made). And for those companies who continue to provide health insurance to employees, cost reductions are unlikely: the CBO report estimates the decade ahead should still see costs to private firms offering health insurance increase in the 6% range per annum, lower than the decade just passed, but still burdensome.
Meanwhile, access to quality healthcare for America’s most disadvantaged citizens is unlikely to improve very much. Millions of elderly and disabled Medicare patients will now have to compete with tens of millions of new Medicaid patients for the attention of a doctor supply which has barely budged in recent years and will not grow commensurately in the decade ahead. In Boston, state-mandated universal care has led to the longest wait time for new patients (over two months) for any city in the country, and Medicaid-driven patient demand for emergency room services is at an all-time high. Doctors who are forced to accept Medicaid patients will of course ration even more bluntly by preference for those from private healthcare-payors. And in one of likely dozens of unintended consequences of ObamaCare, access will be further limited by a likely consolidation among providers thanks to, in part, mandates by the federal government’s new “Accountable Care Organizations.” Every economics student learns early in his studies that monopolies raise prices and restrict output, and that will be no less true for fewer, albeit bigger, hospital organizations.
And what of the quality of health care provision and services in the United States? There have been numerous comparative studies of both efficacy and cost-effectiveness in the last few decades, as health care delivery has become an increasingly contentious issue in the political systems of aging Western democracies. But as Cato Institute economist Michael Tanner has noted, the United States must be considered to have the finest healthcare system in the world when a full range of metrics is considered. From the U.S. health care sector’s leading position in efficacy rates for a broad range of specific disease states, to the intensive per capita use of the latest technologies (e.g., MRI, CT Scanners), leading innovations thanks to world-renowned biotech and venture capital sectors, medical publishing and breakthrough therapies, and research dollars in academic, government, and industry settings, there is no place more vibrant and dynamic for healthcare outcomes and improvements in patient care than in the United States. And indeed, as Tanner points out in addressing critics of the U.S. lead in healthcare expenditures (as a percentage of the total economy), the simple fact of the matter is that more centralized and government-controlled systems entail rationing — and hence limited access — by means other than price: waiting lists, rationing by control boards, mandated limits on physician access or choice, and the like all ensure that the “price” of lower healthcare costs are less access and, likely, lower quality of care as well.
The Historic Constitutional Moment for the U.S. Economy and Its Citizens
The reason why 26 states sued the federal government in the wake of passage of the PPACA can be reduced in simple terms to the very costly and open-ended mandates for state spending implied in the law. Participating state governments in the main have not accepted the key assertion of Mr. Obama about his historic legislative accomplishment: that it would both drive down costs while improving access and quality of care. Nor do they, in a philosophical sense, accept the ObamaCare apparatus of Washington-directed dictates over a broad swath of economic activity, for not only does healthcare comprise over 17% of total GDP in the U.S., but another very large percentage of output could be considered as healthcare-related, and subject to the purview of Washington-based control boards and review panels.
The Supreme Court’s decision will be based largely on whether or not the law comports with the Constitution’s and associated precedents dealing with the Commerce Clause. The Constitution gives Congress power to “promote the general welfare”, which universal healthcare coverage likely supports. But can Congress, in the name of regulating interstate commerce, compel private citizens to engage in commerce in the first place (through the purchase mandate)? Supporters of ObamaCare point to the Supreme Court’s New Deal precedent in Wickard v. Filburn (1942), when Ohio farmer Roscoe Filburn was forced to destroy wheat crops he was raising on his own farm — for his own use. The Roosevelt Administration successfully argued that Filburn’s production of wheat for his own usse nonetheless affected pricing in interstate markets for wheat, and he was fined and forced to desist; ObamaCare supporters see similar logic in compelling purchase of federally-mandated health insurance.
Opponents of ObamaCare however point to the novel argument employed here: if upheld, this would be the first time ever that Congress forced a commercial transaction and relationship where none previously existed. Citizens under the PPACA will now be forced to engage in this commerce as a condition of citizenship. The implications of this law, if upheld, are immediate and significant: Congress would have ratified for itself a power to compel behavior or expenditure that is in a real sense unlimited. At the least, James Madison’s assertion in Federalist #45 that the Commerce Clause was unobjectionable because of its clear and limited intent to prevent state-against-state tariff laws will have been fully and finally shown to be grossly incorrect.
Ultimately, it is unknown how the Supreme Court will rule, and markets have not “priced in” any outcome one way or another. Further, if the purchase mandate were ruled unconstitutional, the larger body of the PPACA law may be severable and hence left intact, complicating market reaction to the summer pronouncements ahead. This uncertainty will lead to an unprecedented level of Court-watching this week.
What Would Hayek Think, and What Will Happen to the Markets and the Economy?
In a narrow sense, Hayek contradicted himself on this question. In Chapter 9 of his 1944 book, The Road to Serfdom, Hayek supports the concept of limited provision of national health insurance:
Nor is there any reason why the state should not assist individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong… To the same category belongs also the increase in security through the state’s rendering assistance to the victims of such “acts of God” as eathquakes and floods. Wherever communal action can mitigate disasters against which the individual can neither attempt to guard himself nor make the provision for the consequences, such communal action should undoubtedly be taken.
But by 1960 and his magnum opus on political economy, The Constitution of Liberty, Hayek was of a far different and, well, classically Hayekian mindset:
Capitalism is not only a better form of organizing human activity than any deliberate design, any attempt to organize it to satisfy particular preferences, to aim at what people regard as beautiful or pleasant order, but it is also the indispensable condition for just keeping that population alive which exists already in the world. I regard the preservation of what is known as the capitalist system, of the system of free markets and the private ownership of the means of production, as an essential condition of the very survival of mankind.
The argument for liberty is not an argument against organization, which is one of the most powerful tools human reason can employ, but an argument against all exclusive, privileged, monopolistic organization, against the use of coercion to prevent others from doing better….Before we can try to remold society intelligently, we must understand its functioning; we must realize that, even when we believe that we understand it, we may be mistaken. What we must learn to understand is that human civilization has a life of its own, that all our efforts to improve things must operate within a working whole which we cannot entirely control, and the operation of whose forces we can hope merely to facilitate and assist so far as we can understand them……
If one objects to the use of coercion in order to bring about a more even or more just distribution, this does not mean that one does not regard these as desirable. But if we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion.
In other words, Professor Hayek’s seminal insights on knowledge and capitalism as a discovery process apply to healthcare perhaps better than anywhere else (and, his qualified support for government-based health insurance in his 1944 book would likely have been amended here seven decades later, when the results of government-run programs are now more empirically manifest). For Hayek, knowledge of market conditions, production know-how, technological application and the like are radically dispersed, and must be harnessed by the profit motive and coordinating properties of the price system. The problem with healthcare costs spinning out of control is a simple one, at day’s end: there is already too much government interference, and not enough competition, in healthcare markets. Indeed, in sectors of health care where competition does still largely reign (e.g., lasik eye surgery, plastic surgery), costs have been coming down continually while quality and availability have surged.
For Hayek, competitive pressures in medical devices, pharmaceuticals, provider care and service levels, and insurance would guarantee lower costs and higher quality at the same time. There would be a wide range of providers, from outpatient clinics to integrated hospital companies, with pricing arrays differentiated through trial-and-error and service and quality levels. Insurance plans would range from bare-bones to comprehensive, and again offer a menu of deductibles. Employers would compete with each other for labor talent via a menu of options for employer-based care as one variable in compensation packages. Bureaucratic stultification would be kept to a minimum, and perhaps arise mainly in the case of government-provision for truly catastrophic-related health coverage.
What will happen if ObamaCare’s purchase mandate is ruled unconstitutional? Again, while hard to predict, it is likely equity markets in the U.S. will respond highly positively. The negation of the PPACA’s funding mechanism will probably mean a roll-back of onerous aspects of the law itself, and could incite a national conversation about a devolution of more aspects of health care regulation to the states. For companies in the industry, more investment thanks to a more competitive — and higher profit-yielding — environment would lead to higher investor returns and a fuller play for exciting breakthrough innovations and new therapies. Information technology as applied to health care is one way to think about this. And output and service offerings from health care-related industries are among America’s greatest exports, providing another major reason why it is in this country’s interest to have a strong and vibrant healthcare sector.
The upholding of the law, however, if then ratified by an Obama election victory in November (or a more timid approach by a watchful President Romney, in this case), will in the long run be a major driver of a lowered rate of economic growth. This is axiomatic, as universal healthcare has been a key retardant to growth in Europe and Japan thanks to the accompanying higher tax levels. Further, the parasitic copying by the rest of the world of U.S.-led technological innovation and improvement in therapeutic outcomes will of course be slowed down by ObamaCare’s permanent entrenchment into the fabric of the U.S. economy. This will lead to a dulling of growth in living standards around the world.
Gone twenty years now, Hayek and his warnings about any form of coercion being detrimental to economic growth are never more appropriate than for the high-tech world of modern health care. By obliterating the exploitation of knowledge that the trial-and-error of competitive processes yields, government-directed programs such as ObamaCare stultify the very advance of civilization itself, dependent as it is on ever-increasing deployment of advancing know-how. Bureaucratism, in essence, by stamping out the competitive market mechanism and its creation of exploitable knowledge, destroys the very oxygen that continually creates wealth and induces human progress. Such are the stakes before the U.S. Supreme Court this week.
For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, John Chapman can be reached at john.chapman@4kb.d43.myftpupload.com. The views expressed here are solely those of the author, and do not necessarily reflect that of colleagues at Alhambra Partners or any of its affiliates.
Click here to sign up for our free weekly e-newsletter.
Stay In Touch