The Corner

ObamaCare Driven Supply Side problems

A lot of the focus of the news media and pundits when talking about Obamacare has had to do with the demand-side consequences of the law: the failed rollout that’s preventing people for buying insurance, people’s premiums going up, people being forced to buy “better” policies when they were happy with what they had, policies being cancelled, etc.

But there are also many supply-side consequences: For instance, we know many insurance companies refused to participate in the exchanges and opted out of that market, meaning less competition there and likely higher premiums. And in order to keep insurance premiums relatively low (often under pressure) while still meeting Obamacare’s regulations, insurance companies will offer narrower network of doctors and hospitals. That means fewer doctors to choose from, and probably longer lines or shorter visits with the ones who are still in the network. According to analysis by Watchdog.orghospitals that charge the most for their services (the top hospitals in the country as ranked by U.S. News & World Report) will most likely to be dropped by insurance companies, and may end up only accepting insurance from just one or two companies. Many people will stop having access to these hospitals. In addition, I have to assume that the number of doctors accepting insurance with drop, so they don’t have to deal with the administrative nightmare that of insurance. 

Another disconcerting supply-side aspect of the law is one outlined by Scott Gottlieb a few days ago in the Wall Street Journal. As he notes, “big government likes big providers,” so we should accept that with the law in place there will be fewer and fewer local, small doctor-owned medical practices; in the future, all of us will get our medical treatments through hourly wage-earner physicians employed by hospital chains. The irony, he writes is that “in the name of lowering costs, ObamaCare will almost certainly make the practice of medicine more expensive. It turns out that when doctors become salaried hospital employees, their overall productivity falls. Another thing that gets lost in the process is the drive to create, innovate and be better at one’s trade.

All these consequences were to be expected, of course, because no matter how well-intentioned lawmakers are or how powerful the regulations, you can’t repeal the laws of economics. The supply curve slopes upward: When you keep the price of things artificially low, you get shortages. When you force doctors into a system where they will make less money, they will work less and provide lower quality care. Call it immoral or what you will, but this is the way it works. Think about it: If your boss comes and tells you that from now on your salary will be cut by 30 percent, would you keep on working as much as you did before? I doubt it.

Beyond the buying and selling of insurance is an even larger set of supply-side issues. Who gets which medical goods and services? What obstacles stand in the way of medical innovation? What restrictions exist on the ways in which we organize medical organizations and deliver care? Excessive constraints in these areas have been limiting medical innovation long before Obamacare. We’ve focused for at least half a century on demand-side medical issues and ignored the supply side. This is part of why we’ve seen tremendous cost-cutting innovation in manufacturing, transportation, communication, computing, and agriculture, but not in health care.

In a recent paper called “The American Health Care System: Principles for Successful Reforms,” my colleague Robert Graboyes makes many suggestions for providing “better health to more people at lower cost on a continuous basis.” In particular, he focuses a lot of attention to supply side. Here are some of the principles he highlights:

  • Cost-cutting innovation is achievable. In recent times, health-care technology’s miraculous leaps have been accompanied by dramatic cost increases. But this pattern is established by current laws, regulations, and institutions. Nothing intrinsic to health care dooms us to perpetually rising costs or, eventually, to centrally planned rationing.
  • Consumers (patients) are paramount. The health-care system often protects established providers to the detriment of consumers. Federal and state laws should enable competitors to challenge established providers, thus making the interests of consumers paramount. 
  • Providers need autonomy. Physicians, hospitals, and other providers face rigid government controls and red tape. Innovation cannot flourish in a system focused on stabilizing the status and livelihoods of well-established producers. Providers must have sufficient autonomy to focus on consumers’ wishes. 
  • Innovators need rewards. Current health-care laws and regulations discourage or prohibit cost-cutting, quality-improving innovation. Markets must reward innovators who provide services that consumers value, and these innovators must not face arbitrary punishment for taking reasonable risks. 
  • Health insurance does not equal health care. And health care is only one determinant of health. Ultimately, we must evaluate success on how healthy people are, not on how many procedures we do on them.

There are more principles for reforms here. In practice that means doing things such as eliminating state laws protecting established providers against competition, passing tort reform so malpractice laws punish those who are guilty of malpractice and don’t punish those who are innocent, allowing consumers and producers to tap foreign innovation, ending the fragmentation of the insurance market and/or remove the tax bias that favors employer-based coverage over individual coverage, moving Medicaid enrollees into the private health-insurance market, allowing standard insurance to accommodate people with preexisting conditions, create a legal environment conducive to long-term health-insurance contracts, separating health-insurance decisions from employment decisions, and ending the financing of health insurance via intergenerational wealth transfers.

In other words, we know what we need to do.


Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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