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The Dream of Command Economics



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In today’s Washington Post, Fareed Zakaria offers an unusually stark example of the left’s basic conceptual error in the health-care debate. Arguing (correctly, I think) that the core problem to be solved is the problem of controlling costs without undermining quality, he insists that centralized coordination and control is the only effective way to do so and that conservatives are therefore barking up the wrong tree when they look to markets for help.

Zakaria begins by getting the conservative approach wrong.  He writes:

Republican alternatives to Obamacare, such as Rep. Paul Ryan’s plan, don’t bother with expanding coverage, which is a mistake because they leave in place a broken insurance model in which people can freeload.

Actually, Paul Ryan’s alternative to Obamacare—the Patient’s Choice Act—proposes an enormous expansion of coverage. Among other things, it would transform today’s tax exclusion for employer-provided coverage into a capped universal health-care tax credit, which people could use to buy coverage or care regardless of their circumstances. A similar proposal by John McCain in the 2008 campaign was projected to reduce the number of uninsured Americans by roughly 21 million. Over time the effect would likely be even greater than that since this system would create an enormous incentive for insurers to offer attractive low-premium plans that could be purchased for the amount made available by the credit (simply put, neither consumers nor insurers would leave billions of dollars on the table unclaimed, and the enormous competition among insurers for that money would yield appealing options). So while it wouldn’t always involve insurance as comprehensive as Obamacare would require, it would be likely to get us closer to universal access to health insurance than Obamacare—and without the kinds of violations of individual liberty, the Constitution, and the laws of economics involved with Obamacare.

Zakaria then contends that the inefficiencies of the American health care system—and especially the frequent disconnect between costs and outcomes—are a function of there just being too many different players in the system, each with his own goals. This is the classic liberal complaint: disorder causes inefficiency. Citing a conversation with Daniel Vassela, the chairman of Novartis, Zakaria writes:

“In America,” he said, “no one has incentives to make quality and cost-effective outcomes the goal. There are so many stakeholders and they each want to protect themselves. Someone needs to ask, ‘What are the critical elements to increase quality?’ That’s what we’re going to pay for, nothing else.”

And from this, Zakaria does not conclude that we need to rearrange the financial incentives in our health-care system so that, like in other parts of our economy, providers of services have a powerful incentive (called the profit motive) to make quality and cost-effectiveness their goal. Instead, he concludes that government must take over decisions about how to provide coverage and organize the system because presumably government is very good at making quality and cost-effectiveness its goals.

Right. The fact is that the incentives in our health-care system are all screwed up precisely because of government policies and programs. Medicare, the biggest player in our insurance system by far, is an arcane fee-for-service system that encourages volume over value and inflates (while shifting) costs. Medicaid, meanwhile, has a state-federal structure that makes cost-containment nearly impossible (by having state policymakers make spending decisions while the Feds pay at least half the cost in an open-ended way). And the tax exclusion for employer-provided coverage creates a huge incentive for high-premium insurance while shielding everyone involved from actual prices and costs. All the incentives point to cost inflation and away from outcome-based health economics, so we shouldn’t be surprised to have an inefficient system.

It is precisely conservative reformers who have proposed to change this, and it is precisely liberals who seek to avoid that change. Obamacare doubles down on all of these sources of inefficiency, and it does so on exactly Zakaria’s premise: that the chaos of the market would make things less efficient and only the centralized coordination of a benevolent bureaucracy can make the system work. It’s hard to believe we are still having this argument.



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