Tag Archives: Sanford Ikeda

Health Care and the Dynamics of Intervention

At the heart of the government’s defense of its health insurance mandate is the premise that, as Wall Street Journal reporter Jess Bravin puts it, “40 million uninsured Americans are distorting the health-care market by shifting costs of free emergency-room care to taxpayers and insurance ratepayers.”

In other words, the government believes that there is an externality problem with health insurance. If healthy people aren’t compelled by law to buy insurance, then they will drop out of the insurance pool. This will mean that the average health level of those who remain in the pool will decline. This, in turn, will raise the cost of insurance for all remaining members of the pool.

Of course, insurance companies have a way of dealing with this by attempting to charge people for the (statistical) cost that they impose on the pool. They can do this by charging higher rates for riskier people such as those who are overweight or those who are smokers (this, by the way, is why kids with bad grades pay higher rates for their auto insurance). But the government doesn’t like this solution because it means that some people who are higher risk through no fault of their own (for example, those with unlucky genetics), may end up paying higher rates. So the Patient Protection and Affordable Care Act made it more difficult for insurance companies to charge higher rates to higher risk customers (this is known as “community rating”). They also made it impossible for these companies to deny care to those with preexisting conditions.

According to the Journal, plaintiff’s attorney Michael Carvin doesn’t buy this reasoning. In yesterday’s oral argument he averred:

The failure to buy health insurance doesn’t affect anyone. Defaulting on your payments to your healthcare provider does. Congress chose for whatever reason not to regulate the harmful activity of defaulting on your health-care provider.

In other words, he agrees that there is an externality problem but it is entirely of the government’s making; it isn’t in any way inherent to the industry. There would be no externality if those who defaulted on their health care providers could be held liable.

Image by Duncan Lock

This is an example of what economists call the “dynamics of intervention.” Sanford Ikeda explores the concept in his 1997 book on the topic and credits Ludwig von Mises for its initial development. The basic idea is that one intervention often begets further interventions. Once government says that doctors can’t sue patients for defaulting on their bills and once government says that insurance companies can’t charge higher prices to riskier clients, then the argument for forcing everyone to buy insurance becomes stronger.

(Economists who aren’t familiar with Mises’s or Ikeda’s arguments will still recognize them as a version of “the theory of the second-best” BTW: read the link; it remains one of my favorite blog posts five years after first reading it).

The dynamics of intervention are strong enough to convince plenty of otherwise free-market advocates to countenance new government intervention in the marketplace. Milton Friedman, for example, famously said that as long as we have a welfare state, it makes sense to regulate the border. And a lot of free market advocates are willing to say that as long as we have Federal Deposit Insurance, the government should be allowed to regulate the risk profile of banks.

When PPACA was passed, self-described libertarian economist Kevin Grier found himself countenancing regulation of fast food, sugar, and even exercise (he also hated himself for thinking that way).

Of course, the other interpretation of the dynamics of intervention is that you shouldn’t start down the path to intervention in the first place because it will inevitably lead to much more intervention than you initially intended. That’s my take on it, at least.

I’ll end this already-long post by noting that Congress might have gone about this a different way and greatly reduced the dynamics of intervention problem. Instead of making it impossible to deny care to those with preexisting conditions, and instead of requiring community rating, and instead of requiring everyone to buy insurance, Congress might have left the insurance market alone and reformed Medicaid. It could have turned Medicaid into a voucher program that would allow qualifying recipients to use their voucher to either purchase insurance, or–in the event that no insurers will pick them up–to purchase health care services on the open market. If they were so inclined, Congress could have made the voucher more generous for those with pre-existing conditions (ideally, people wouldn’t be eligible for more generous benefits if they brought on the pre-existing condition themselves through their own health decisions). These reforms would best be coupled with other market-oriented reforms such as equalizing the tax treatment of employer-provided and individually-purchased insurance, legalizing the cross state purchase of insurance, and reforming medical malpractice laws.

My own view is that the most vulnerable in society would be best served by a robust private and charitable market (consider how well the poor are served by our mostly-private markets for necessities like food and clothing). The next best option would be for the states to develop their own safety nets. But the federal reforms in the preceding paragraph seem to me to be far superior to both the status quo and the mess that is PPACA.

Stimulus II: Just Say No

Congress is, incredibly, considering a second stimulus. The reason: it needs to help states with the problems it helped exacerbate with the first stimulus, as the Wall Street Journal notes. (Hat tip: Matt Welch Reason Hit and Run).

The WSJ explains, gaping state budget deficits were not filled and fixed, but made deeper with federal dollars. States have expanded programs with money due to evaporate in 2011. Acceptance of federal money also means states surrender budgetary control.

The Evergreen Freedom Foundation finds when Washington state accepted $820 million in education stimulus money it effectively insulated all but 9 percent of its $6.8 billion K-12 budget from cuts in 2011-2012. On top of this, nearly 85% of Washington’s Medicaid budget is exempt from cuts, as is 75% of its college funding. The upshot is states now have to scramble to raise revenues to support the spending the federal government imposed with the 2009 stimulus; or, make even larger cuts.

Some governors had the foresight to reject parts of the stimulus. Indiana Governor Mitch Daniels and Texas Governor Rick Perry said no to expanding unemployment benefits.  It was the right move. Expanded benefits mean more state spending on unemployment benefits. Spending that is ultimately passed on to businesses via payroll taxes that depress hiring and wages.

In effect, stimulus spending is accomplishing the reverse of its intent which was to stabilize state budgets, stimulate job creation, and economic recovery. What the stimulus does demonstrate nicely is the dynamics of interventionism, developed by economist Sanford Ikeda.

As Richard Ebeling describes it, when policymakers intervene into markets, markets get out of balance- generating surpluses, shortages, creating  losses or diminished profits, leading to misemployed resources. Rather than reject the intervention policymakers make a case for more interventions to address these  “market failures.”

This  process can continue for quite some time until it becomes unsustainable. Considering the U.S. has  been down this interventionist road for several decades, the real outcome of the never ending bailout  may be to discover our point of financial exhaustion.