While much of the recent media coverage surrounding the Affordable Care Act (ACA) has focused on the technical failures of the program's rollout, this fall's website fiasco and policy cancellations are only the beginning. According to John H. Cochrane, the individual mandate is likely to unravel this spring when we see how sick the people are who signed up on the exchanges. Cochrane, a professor of finance at the University of Chicago Booth School of Business and an adjunct scholar at the Cato Institute, discussed the likely impact of the law at a Cato Institute Policy Perspectives event in Chicago in December. Cochrane argues that in the midst of the ACA's many dysfunctions, the way forward depends on devising — and communicating — a better system.
JOHN H. COCHRANE: The Obamacare unraveling presents a historic opportunity for change. Its proponents, of course, call it "settled law," but let's remember what happened with alcohol prohibition. Even a constitutional amendment isn't a settled law if it's dysfunctional enough. One of the great things about this country is that nothing is ever really settled. However, in the case of the Patient Protection and Affordable Care Act, we cannot get rid of it until our political and intellectual representatives are willing to stand up and outline a viable alternative.
The ACA was motivated by a genuine concern surrounding the problem of dealing with preexisting conditions, even though most of those problems were caused by previous regulations. Nonetheless, Obama is right to challenge Republicans and ask, "Where's your alternative?" Sitting back and reveling in dysfunction is easy, but it won't solve any problems in the end.
This fall we saw the cancelation of individual insurance policies. This is a particular tragedy. Here are people who did the right thing: they bought insurance when they were young and healthy, so that they wouldn't have to do so later when they got sick. You cannot think of a better nudge to get them to leave the insurance system than to just kick them out.
The next few years will be revealing. Over and over again we're going to find that we're on page two of a long, tragic Russian novel where everybody dies at the end. The individual mandate, for instance, will surely fall apart as the first few chapters unfold this spring. Given the alternative between $1,000 in tax penalties or $10,000 for health insurance, the choice is clear, particularly if you can always get the health insurance later when you're sick. Besides, the IRS has already told us it's not going to impose the tax. It will be postponed, and you can foresee the downward spiral that will result as only sick people enter the system.
We also have to worry about fraud. J. Russell George, the Treasury inspector general for tax administration, has warned that subsidies to help Americans buy insurance under the healthcare overhaul may be vulnerable to fraud. "The IRS's existing fraud detection systems will not be capable of identifying ACA refund fraud or schemes," he said. There will be fraud, but none of this will bring down the law without an alternative. After all, we already see rampant medical fraud, disability fraud, and subsidy fraud.
Then the "accountable care organizations," the new version of HMOs, will hit us. These stories will take their turn in the news once people find out they're not able to see their doctors. As Cato's Michael Cannon wrote, "That effort is sinking like a stone, because it — like the rest of this sweeping law — is premised on the fatal conceit that government experts can direct the market better than millions of consumers making their own decisions."
Once again, however, we should not just sit back and revel in all of this dysfunction. The ACA was enacted in response to genuine problems. Without a clear alternative, we will simply patch more, subsidize more, and ignore frauds and scandals, as we now do in Medicare and other programs. But there is an alternative. A much freer market in health care and health insurance can work, it can deliver high-quality, technically innovative care at a much lower cost, and it can solve the pathologies of the preexisting system.
At the moment, obscure prices and $500 Band-Aids are legendary in the U.S. healthcare market. The reason is simple: health care and health insurance are strongly protected from competition. There are explicit barriers to entry, such as the laws in many states that require a "certificate of need" before one can build a new hospital. Regulatory compliance costs, approvals, nonprofit status, restrictions on foreign doctors and nurses, limits on medical residencies, and many more barriers keep prices up and competitors out. Hospitals whose main clients are uncompetitive insurers and the government cannot innovate and provide efficient cash service.
We need to permit the Southwest Airlines, Walmart, Amazon.com, and Apples of the world to bring to health care the same dramatic improvements in price, quality, variety, technology, and efficiency that they brought to air travel, retail, and electronics. We'll know we are there when prices are on hospital websites, cash customers get discounts, and new hospitals and insurers swamp your inbox with attractive offers and great service.
Obamacare bets instead that more regulation, price controls, effectiveness panels, and accountable-care organizations will force efficiency, innovation, quality, and service from the top down. Has this ever worked? Did we get smartphones by government pressure on the 1960s phone monopoly? Did effectiveness panels force United Airlines and American Airlines to cut costs, and push TWA and Pan Am out of business? Did the post office invent FedEx, UPS, and email? How about public schools, let alone the last 20 or more health care "cost control" ideas?
In short, only deregulation can unleash competition. And only disruptive competition, where new businesses drive out old ones, will bring efficiency, lower costs, and innovation. Health insurance should be individual. It should be portable across jobs, states, and providers. It should be lifelong and guaranteed-renewable, meaning you have the right to continue with no unexpected increase in premiums if you get sick. Insurance should protect wealth against large, unforeseen, necessary expenses, rather than act as a wildly inefficient payment plan for routine expenses.
People want to buy this insurance, and companies want to sell it. It would be far cheaper, and would solve the preexisting conditions problem. We do not have such health insurance only because it was regulated out of existence. Businesses cannot establish or contribute to portable individual policies, or else employees would have to pay taxes. So businesses only offer group plans. Knowing they will abandon individual insurance when they get a job, and without cross-state portability, there is little reason for young people to invest in lifelong, portable health insurance. Mandated coverage, pressure against full risk rating, and a dysfunctional cash market did the rest.
Rather than a mandate for employerbased groups, we should transition to fully individual-based health insurance. Allow national individual insurance to be offered and sold to anyone, anywhere, without the tangled mess of state mandates and regulations. Allow employers to contribute to individual insurance — at least on an even basis with group plans. Current group plans can convert to individual plans, either at once or as people leave. Since all members in a group convert, there is no adverse selection of sicker people.
Obamacare's defenders say we must suffer the dysfunction and patch the law because there is no alternative. They are wrong. Back in November, MIT's Jonathan Gruber, an Obamacare architect, argued that "we currently have a highly discriminatory system where if you're sick, if you've been sick or you're going to get sick, you cannot get health insurance."We do. He concluded that the Affordable Care Act is "the only way to end that discriminatory system." It is not. In fact, President Obama himself has said that "the only alternative that Obamacare's critics have, is, well, let's just go back to the status quo."Not so. What about the homeless guy who has a heart attack? Yes, there must be private and government-provided charity care for the very poor. What if people don't get enough checkups? Send them vouchers. To solve these problems we do not need a federal takeover of health care and insurance for you, me, and every American.
No other country has a free health market, you may object. The rest of the world is closer to single payer, and spends less. But we can have a single government-run airline too. We can ban FedEx and UPS, and have a single-payer post office. We can have government-run telephones and TV. Thirty years ago every other country had all of these, and worthies said that markets couldn't work for travel, package delivery, the "natural monopoly" of telephones and TV until, of course, we tried it. That the rest of the world spends less just shows how dysfunctional our current system is, not how a free market would work.
While economically straightforward, liberalization is always politically hard. Innovation and cost reduction require new businesses to displace familiar, well-connected incumbents. Protected businesses spawn "good jobs" for protected workers, dues for their unions, easy lives for their managers, political support for their regulators and politicians, and cushy jobs for health policy wonks. Protection from competition allows private insurance to crosssubsidize Medicare, Medicaid, and emergency rooms.
But it can happen. The first step is that the American public must understand that there is an alternative. Then we should all stand up and demand it.