Source of Obamacare Woes: Economic Ignorance

It seems that every day new revelations emerge regarding the Affordable Care Act (ACA).  Supporters of the ACA are now starting to distance themselves from it as we hear reports of insurance companies dropping subscribers, households subscribing on the exchanges in unexpectedly low numbers and insurance costs higher than promised. Even the liberal New York Times ran an op-ed piece entitled “Obamacare, Failing Ahead of Schedule.”  Earlier this week President Obama vowed that, “I’ve run my last political campaign, but I’ve got one more campaign in me and that’s making sure that this [APA] law works.” The goal of the ACA, according to the White House’s website, is that it puts into place “comprehensive reforms that improve access to affordable health coverage for everyone and protect consumers from abusive insurance company practices.”

Why this apparent disconnect between the law’s intentions and how it is actually playing out in recent months? Let’s take a step back and look at some basic indisputable facts.  Any introductory economics textbook will tell you that it is a fact of life that resources are limited.  There are only so many physicians, clinics, MRI machines, and other health care assets available at any given time.  Genesis 3:17-19 indicates that scarcity is a condition of our fallen humanity. No government can legislate it away any more than King Canute could order the tide to stop coming on the shores of England.  The only two ways to mitigate the scarcity (but not eliminate it) are to increase the supply of these resources over a period of time or to use existing health care resources more efficiently.

Health and Human Services Secretary Kathleen Sebelius states that the basic economic goals are increased access to health care and reduced costs while at the same time maintaining quality.  Increased access includes using the existing health care resources to meet the new demand from the newly insured.  This places a greater burden on the health care system and leads to higher costs.  Pushing down one end of the seesaw simply makes the other end go up.  The reform shifts the responsibility of bearing the costs from one person to another. That is why the individual mandate that everyone must have coverage or be fined is a lynchpin to the entire program.  It needs the contributions of healthy individuals who use few medical services to keep the insurance fund solvent. By the way, this approach relies on demand-side economics, where health care usage is increased in the hopes that supply will respond.  However, the reform does little to encourage a greater supply to come forth. Elementary economics demonstrates that reliance on the demand side to fix problems always leads to higher prices. Given the reality of scarce resources and cost shifting, are the headline news of increased insurance premiums for many surprising?

In fact, instead of increasing the availability of medical services, Obama’s policies threaten to make them less accessible. According to the Catholic Health Association of America, about 13 percent of nonfederal short-term hospitals are Catholic institutions. The US bishops went on record that they will not comply with the HHS contraception mandate and if Catholic health institutions follow their lead then the loss of these facilities as the IRS fines them out of existence would place an even greater stress on the remaining health care resources.  Again, simple supply and demand indicates that costs must rise under Obama’s program.

 

What about the promised cost efficiencies to lower costs?  Our first indication of efficiencies under the new system—the issues with the federal health care website in spite of the fact that private companies have successfully used the technology for years—is not encouraging.  The British experience of socialized medicine is instructive here.  One of the lessons that came from the National Health Services is summed up in “Gammon’s Law.”  As Dr. Max Gammon explains it, when researching the NHS he discovered that the growth of a bureaucracy “involves the progressive displacement of productive activity by non-productive and often counterproductive bureaucratic activity.”  It is important to note that he draws a distinction between administering a program, which is guiding and facilitating it, and bureaucracy, which is implementing rigid rules that stifle individual initiative.

Perhaps more than any other pope, John Paul II understood bureaucracies and inefficiencies since he suffered through decades of communist rule.  His teaching on human dignity and its connection to work and productivity are relevant here.   The Genesis account of the fall indicates that the call to creativity still exists even as we struggle against the natural world.

Using language echoing Gammon’s Law he warned that the welfare state, “… leads to a loss of human energies and an inordinate increase of public agencies, which are dominated more by bureaucratic ways of thinking than by concern for serving their clients, and which are accompanied by an enormous increase in spending” (CA, 48).

In contrast, economic freedom and a market properly oriented toward the common good would allow workers to respond to the call to creativity and produce new resources and wealth.  By mandating the terms of the insurance contracts the ACA hampers the free exchange between subscribers and insurance companies.  This reduces the incentive for companies to sell products that best meet the needs of the insured.  As John Paul puts it, individual initiative in the market encourages “the ability to foresee both the needs of others and the combinations of productive factors most adapted to satisfying those needs that constitutes another important source of wealth in modern society” (CA, 32).

The Church presents a very different view of the nature of the human person and of economic reality than is assumed in the ACA.  The Act is based on the premise that the solution to problems of health care access is to slice the proverbial pie of a fixed size differently so that some will receive more.  Because of limited resources this implies that others will receive less.  The increased bureaucracies, stifling of creativity in addressing problems, and the loss of religious health care institutions would shrink the pie over time.

In contrast to the ACA’s static perspective the Church offers a more dynamic understanding of the economy.  God gave us the dignity to reflect His infinite creativity.  We have the intelligence to live out the call to create new goods and services, including those needed for health care.  In other words, made in God’s image we have the ability to increase the size of the pie.  The historical evidence is on the Church’s side when we look at the tremendous growth of market-based economies over the past few centuries.  President Obama will probably run one more campaign to make the ACA law work.  However, even the president of the United States cannot stop the tide from coming in.

Emil B. Berendt

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Emil B. Berendt is Assistant Professor of Economics in the Business School at Mount St. Mary's University in Emmitsburg, Maryland. He earned his doctorate in economics at City University of New York.

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