Monday, November 11, 2013

Consequences of the Failure of Obamacare

In reading critics of Obamacare, I occasionally come across an interesting, if mildly paranoid, theory—that it was designed to fail in order to bring in the single payer system that its supporters really wanted. I would not be surprised if there were supporters who saw it that way, but I doubt that they represented a significant fraction of those that initially supported the program. It is, however, worth thinking about whether that strategy, deliberate or not, will work. If Obamacare turns out, as now seems likely, to be a clear and massive failure, what will come out of its collapse?

The theory I described makes most sense from the standpoint of people on the left who were strong supporters of a single payer system. Many of them saw Obamacare as a compromise with the Devil, a kludge that retained an unnecessary and inefficient system of private insurance. Some even said so. From their standpoint, the obvious implication of its failure would be that it did not go far enough.

Whether or not they are correct in their view of what should happen, I do not think their view works in terms of what will happen. Obamacare, having been fiercely opposed by Republicans and especially conservatives, is widely perceived as a form of socialized medicine. After observing that the glittery promises offered to pass it were wildly false, I do not think voters are likely to conclude that it went in the right direction, just not far enough.

What I would like to see come out of its collapse is a shift in the other direction, away from the extensive government involvement in medicine and medical insurance that already existed before Obama. While people often talk as though the pre-Obamacare system was private, about half of all medical expenditure was by governments and the rest  in various ways regulated. I have seen it claimed, whether correctly I do not know, that the anomalously high cost of American medicine, the one part of the standard criticism that is clearly true, only dates from the introduction of medicare. Perhaps one of my readers can offer data to support or refute that claim.

Two obvious reforms in the direction of something closer to a free market would be to permit interstate selling of insurance and to eliminate the regulations, I think largely at the state level, that, like Obamacare, constrained what insurance companies had to offer their customers. It makes sense that suppliers of mental health services would lobby governments to force insurance companies to cover what they sold—whether or not most purchasers of insurance thought such coverage was worth its cost. Similarly for  other services.

Readers interested in discussions of these issues by someone who knows much more about them than I do may want to look at the website of the NCPA, John Goodman's organization.


John M. Becker said...

There's going to be another battle after it becomes clear that Obamacare needs modifications and I'm not sure that the Republicans will be able to defeat proposals for a single payer system given their complete lack of creativity and vision on this issue up to this point. After all, they had about 15 years to come up with a counterproposal after the Clintons tried to create universal coverage and did nothing instead of firing back with market based reforms that might actually work.

Anonymous said...

"After observing that the glittery promises offered to pass it were wildly false, I do not think voters are likely to conclude that it went in the right direction, just not far enough. "

The question of what will the public conclude. If the general was good at connecting the dots between policies and their outcomes, we wouldn't have a minimum wage (to put it simply.)

Also, it seems to me that the facts you brought up lead to the opposite conclusion. As you said, the pro-Obamacare system was a mix of government and market. The conclusion was its shortcomings would be fixed with more government and not less.

Why should the conclusion be any different this time around when Obamacare fails?

Nancy Lebovitz said...

What sort of failure are you expecting?

Tom Hudson said...

On what concrete data do you base your prediction of clear and massive failure?

James Hanley said...

Two responses. Let me preface by noting that I'm a moderately libertarian political scientist who is no fan of Obamacare, but at the same time doesn't see it as the greatest socialist evil the world has ever seen.

First, when you say you don't "think voters are likely to conclude that it went in the right direction, just not far enough," are you basin that on what seems like a logical conclusion to you, or on how you think actual real-live voters who aren't you will perceive it? This is the issue my colleague (a fervent Obamacare supporter who would prefer single-payer) and I keep tossing back and forth. We're just not sure, either of us.

Second, without in any way disagreeing with your point about the mental health care industry's incentives, doesn't suggesting that we go to a more market based system where such things are frequently not directly affordable to the consumer lead to the same politically unpopular results that led to Obamacare? I'm aware that in any system we actually pay, I'm not making the mistake of assuming that coverage requirements truly make health care less expensive; I'm talking about how consumers experience those costs (after all, the great trick of clustering costs through government is that we don't feel them directly, right?). So would a move to a market based health care system work politically?

I want to emphasize that I'm not arguing about the economics here. I'm fully on board with you there. It's the practical politics of those economic realities that I'm interested in.

John C. Goodman said...

David, thank you for the mention on your post. You and your readers can also go to my health blog where I discuss these issues, and many others, in more depth.

dWj said...

It felt to me, 8 years ago, as though there was a political consensus, at least among ideologues on both sides, that it made no sense to have a financial/medical product tied to people's employment, and I was a bit surprised when all of a sudden we swung the other direction with the employer mandate.

There were about 8 states that had fairly extensive regulation (viz. outlawing of inexpensive insurance) and community rating before 2010, and I'm not sure that outside of those states allowing interstate purchases would have really made that much difference. (My impression is that Kentucky actually adopted such a hyperregulated system and then later repealed it. If this is correct and somebody knows more than I do, there's probably something interesting and useful to be gleaned from that.)

I do think Bush's tepid promotion of medical savings accounts was moving us very slowly in the right direction, but largely agree with John Becker that Republicans haven't taken much leadership on this, apparently assuming that the status quo was good enough and that they could continue to simply oppose moves in the wrong direction forever.

jimbino said...

Two measures that would rationalize Amerikan health care are:

1. Force providers to publish prices for all procedures by CPT code, as is done for Medicare.

2. Enable, if not encourage, healthcare dollars to be spent overseas.

Bob B said...

I'm not sure that politicians (either on the right or the left) care what the public 'concludes' about anything. What matters to them is who their donors (the insurance companies) think - and by their account it has been a huge success.

After all, every American MUST purchase insurance now - or suffer a penalty. Think of all the extra mandatory customers that has generated for the insurance business. As for all these poor people with 'preexisting conditions' - do you think the insurance company actually worries about them? Of course not, any extra 'expense' is passed on to the rest of the consumers. The insurance companies will make money hand over fist due to this law, and the politicians will get paid off.

We lost this war long ago with mandatory car insurance. It is immoral to force people to purchase anything - and it doesn't matter if it is the state forcing you into auto / health insurance, or the mob forcing you to purchase protection.

Anonymous said...

nah, they will get it to work and in 20 years time GOP will be defending it.

give me an example of ANY piece of the welfare system which was abolished in USA or uk once it was enacted.

JWO said...

and to eliminate the regulations, I think largely at the state level

It seems absurd to me to regulate an industry at the state level and pay for it at the national level. This could inspire that states to try to maximize Government spending in their states by pushing up medical costs.

I.e. MD's lobby the state to restrict the number of doctors to keep their income up so they can get more medicare/insurance money to be spent in the state.

jimbino said...

The smart medical consumer will not join Obamacare and will arrange his tax withholding so as never to pay a penalty either. Then he will find health care at a Walmart clinic or with a doctor of his choosing in Mexico, Colombia, Costa Rica, Brazil, Europe, Thailand or India.

Bob B is wrong about mandatory auto liability insurance. What is required is proof of financial responsibility, not insurance, though insurance is one means of establishing such.

Handle said...

I think 'designed to fail' is fairly ambiguous. I don't think Obamacare was designed to 'fail', I think it was designed to serve as a gradualist bridging strategy to single-payer.

First, between Medicare, Medicaid, the VA, and Public Employees and Retirees, a very large percentage of the population is already on government-provided health care, and I expect that percentage to grow.

Second, the President himself has expressed a desire to break the connection in the American mind between employment and healthcare. There are good things to be said for such a development from various political perspectives, but I guess the President sees it as a path to National Socialization.

The break of the connection has three aspects of its method of incentives.

1. Employer Penalties are too low.
2. New premiums, if provided by employers (non-subsidized) are too high (partly because minimal, catastrophic plans are out)
3. Individual premium subsidies are generous.

Because of these three features, many millions of low-wage workers will lose employer-provided health insurance and receive heavy subsidy from the government to receive one of the government-approved health-insurance plans.

Also there is profound turnover in the government direction. New employees will never be offered employer-provided healthcare in the first place, and old employees will retire and/or go on Medicare.

Combined with the above, that will mean a very, and increasingly, large portion of the population is on some version of government health care. And so in a few years the proposal that there should just be "Medicare for all" will not seem to have major radical effects.

Eric Rasmusen said...

dwj-- only 8 states in 2010 that outlawed cheap insurance? I can't believe that. Could you really buy insurance with a deductible of $20,000 in all but 42 states? You're wrong on mental health benefits---see

Really, the strongest argument for regulation from a paternalistic point of view would be to outlaw *broad* insurance plans such as almost everybody has, since it is hard to argue for them based on economic rationality. Instead, only catastrophic care insurance should be allowed. Of course, if catastrophic care insurance were legal, it might be that the irrationally broad plans would be competed out of the market.

Ted Levy said...

It always amazed me that politicians could argue with a straight face that prices would drop due to Obamacare when there were several provisions--free screenings!--to increase demand but no provision to increase supply. Free market options to increase supply of medicine (shy, of course, of ending medical licensure) is automatic reciprocation among states for medical licenses (like drivers licenses), automatic acceptance of foreign medical licenses (at least from Western Europe, though I would include the Pacific Rim and Australian/NZ as well), expansion of autonomy of non-MD healthcare providers (nurse practitioners, physician assistants, etc.), revision of medical school training toward the goal of decreasing the sum of medical school/intern/resident/fellow training years. Among other things.

Eric Rasmusen said...

It seems to me that Obamacare is illustrating in many ways why socialist health care is a bad idea. Obamacare itself is not socialist in the sense of government ownership, but in every dimension in which government is involving itself in health care, disaster is ensuing. That implies that more government involvement would be even worse. We see:
1. The government can't design a simple web sales site, partly from incompetence, partly, no doubt, from corruption (e.g., Michelle Obama's college friend's company).
2. The government contracts advisor positions out to political allies, and fails to require them not to hire felons to process social security numbers and suchlike.
3. The government goldplates insurance polices.
4. At the same time, the government reduces quality in another dimension by limiting doctor choice.
5. The government had no idea that the website disaster was coming.
6. The government gives special favors (exemptions) to political allies.
7. The government uses a health program to advance other goals (e.g. birth control and the taunting of religious people).

A lot of this is brought out in brighter colors because this Administration is more corrupt and less competent than typical, but these are all the sorts of dangers conservatives routinely warn about.

Will McLean said...


It sounds like you think "to permit interstate selling of insurance" means that the state the insurance is sold from is the only one that can regulate the sale, and the state where it is consumed can not. That sounds like a ferocious bundle of perverse incentives. What happens to the ability to vote with your feet in the insurance market? Won't insurers rush to low-population states where their influence is magnified? How much will those voters care about out-of-state insurance customers? And what about federalism?

Greg Jaxon said...

Sometime during the dawn of modern inflation in 1972-74, I recall reading the first loud complaints about how health care costs were among the fastest prices to rise. Even as a high school student with fairly liberal leanings, I recall thinking and saying "when the government is writing a blank check, of course the prices of what they buy will go up!" Frankly I have yet to discover any way around that fundamental economic roadblock. The problem which these laws are supposedly solving is one the laws themselves created. And not solely the regulation of insurance and/or health care industries. The logic that underlies this failure goes directly to the new definition of money (circa 1971). It isn't sound, and the economy it has begotten is rotten,

David Friedman said...


If interstate sales are legal, the consumer has the choice of buying insurance produced under the laws of Massachusetts or under the laws of Utah--he doesn't have to pick up and move to make the choice. There is no need to vote with your feet when you can let your fingers do the walking instead.

David Friedman said...


The obvious failure is the one that's already happening, the inability of the online marketplace to do its job. The incompetence exhibited there suggests that other parts of the system are likely to also have similar problems.

Further down the road, Obamacare prevents insurance companies from basing the price of a policy on the actual risk, which makes policies a relatively good deal for bad risks, especially the old, and a bad deal for good risks, especially the young.

If it works as intended, the young are compelled to buy policies--and will observe that they are paying much more than before, which is a failure given the claims made for Obamacare. It wasn't advertised as a program to tax young people in order to subsidize old people.

But it isn't likely to work as intended, because the penalties are not high enough--many young people will find that they are better off paying the penalty and going without insurance, especially since if, as is possible but unlikely, they do develop an expensive medical problem, they can buy insurance then--no refusal permitted on the basis of preexisting conditions. With only the bad risks in the program, the cost will be high--and it will also be high because the rules require coverage of many things that many consumers will not find worth the cost. So you end up with the young paying the penalty and the old getting insurance at a substantially higher cost than before.

It's a straightforward case of adverse selection--compulsory adverse selection, since the insurance companies are not allowed to use the information that the customers also have about how good a risk they are. That's the reason everyone was supposed to be required to buy insurance--but it wasn't politically possible to give that requirement sufficient teeth to work.

MamaLiberty said...

Take a look at the Surgery Center of Oklahoma.

This is as close to a free market medical model as is possible today. It's working very well, and it will do that as long as they continue to refuse to play the Medicare/Obamacare game. It has been so successful that other medical providers are starting to follow the same path. There IS a viable and equitable solution to our health care woes, and government is not part of it - except to get out of the way.

One of the major outcomes of Obamacare will be the rapid decline in the number of doctors and other health care professionals willing to work within this insanity, for many reasons beyond the reimbursement limits.

The other outcome is increasingly evident, and very exciting. The silver lining in the cloud, so to speak. A great many people are increasingly seeking alternative and natural health practices, improved diet, stress management and so forth, discarding the big pharma model of medicine.

Insurance as a commercial good, like bananas or cars, is a wonderful idea as long as the contract is private and voluntary. Involuntary, it is nothing more than an extortion racket, and redistribution of our rapidly vanishing wealth. That is vanishing because those who are able to create wealth see no reason to do so when it will simply be stolen from them.

Those who wish to live on other people's money must soon face the fact that there isn't much of that left. Atlas is shrugging.

Will McLean said...


Suppose that 49 states want to prohibit discriminatory pricing of health insurance based on customer genetics, and Wyoming allows it. Under your proposal, Wyoming hoovers up the genetic elite, and everybody experiences de facto genetic discrimination in pricing, regardless of their own policy preference.

James Stein said...

David Friedman asks for data about the claim that the "anomalously high cost of American medicine ... only dates from the introduction of medicare."

I offer data from John C. Goodman's "The Regulation of Medical Care: Is The Price Too HIgh?", Cato's 3rd Public Policy Research Monograph (1980). The table on page 92 offers data for several years between 1950 and 1975. If you graph the average hospital cost per day in constant dollars, the plot bends upward at an elbow at 1966, the year after Medicare was introduced.

I have plotted this data for you at

David Friedman said...


Correct. In other words, insurance is not income redistribution.

If Massachusetts wants to subsidize people with the bad luck to have a genetic tendency to have heart attacks, it can do so directly--there is no need to wreck the insurance industry by forbidding rates based on actuarial risk.

Will McLean said...


Why should the average consumer of health care prefer your solution? Members of the Lucky Gene Club get a discount, paid for by shifting costs to everybody else.

Starting behind a veil of ignorance, this is already a bad deal. Because of deceasing marginal utility of net income, a consumer should reject a proposal to gamble 50% chance of spending $10,000 more against a 50% of spending $10,000 less.

But its worse than this because figuring out who is in the Lucky Gene Club is not free, and these costs will be passed on to the customer.

David Friedman said...

"Members of the Lucky Gene Club get a discount, paid for by shifting costs to everybody else."

You have it backwards. Members of the lucky gene club are not shifting costs, they are getting a low price for insurance because the cost of insuring them is low. You are the one who wants to shift part of the cost of those in the unlucky gene club to those in the lucky gene club. Your utility point is a standard utilitarian argument for income redistribution having nothing to do with insurance.

What's true is that, if there were some way in which individuals could prove that they did not have their own genetic information, the risk of bad genes would become an insurable risk and the private market would do what you want.

I find it a bit odd that you made your earlier argument in favor of people voting with their feet. If interstate insurance is banned and Massachusetts follows your advice by requiring insurance companies to sell insurance at the same price to good and bad risks, the good risks have an incentive to vote with their feet by moving to a state with no such policies.

Your preferred arrangement only works to the extent that they can't vote with their feet, that the cost of moving is too high.

Will McLean said...


Cost shifting as you define it also occurs when currently healthy people pay more than they would otherwise because inssrers are not allowed to not renew existing policies when a previously healthy person develops a chronic condition. Cost shifting from the currently sick to the currently healthy is a feature, not a bug, for health insurance.

Under my preferred police, if health insurance is regulated at all, it is best regulated by the state in which it is consumed, where the regulators are accountable to the people that consume it, rather than whatever state is most congenial to the sellers of a particular insurance product.

Now, as you say, unusually healthy people will have a tendency to move to states with policies that favor the healthy and disfavor the unhealthy. But this is limited by the fact that health insurance policy is only one factor in many people consider in choosing where to live. Do not you yourself live in the People's Republic of California?

And of course, an unusually healthy person may have household members that are unusually unhealthy, negating any advantage to moving for health insurance reasons.

GregS said...

"I have seen it claimed, whether correctly I do not know, that the anomalously high cost of American medicine, the one part of the standard criticism that is clearly true, only dates from the introduction of medicare."

I want to pick a nit with the part where you say, "the one part of the standard criticism that is clearly true." It is not at all clear how you compare the cost of medicine in the US to the cost of medicine in, say, Britain. (Or Singapore, or take your pick of developed country.) These markets are so regulated, price controlled and (partially) nationalized that the prices in them are meaningless. You can't simply sum up accounting entries to get the "cost" of healthcare in these countries. Terrific post at NCPA's healthcare blog from just this week on the same point:
The charge that Americans pay more for medicine is widely repeated and taken as gospel, but I have no idea whether or not it's true.
Another great series at The Incidental Economist lays out some of the data. Unfortunately, it looks like they just take the cost figures as a given and run with them, without considering the "mismeasured prices" critique.