By Jeffrey Tucker
You want to know why the “freedom caucus” has balked at passing the Trump-backed Ryancare health care proposal?
Because the package does not address the core problem of the existing system. They are leaning – correctly – on a brilliant insight from F.A. Hayek.
Let’s think this through.
What was the most fundamental problem with Obamacare? It attempted to set up an artificial market that lacked the most salient feature of markets: genuine competition. Real competition. I don’t mean teams struggling for control. I mean an institutional setting in which producers can innovate. They face free entry and exit. Their well-being depends on serving the consumer.
Obamacare has flopped because it disabled what remained of the competitive system with defined benefits packages, mandates that everyone be covered, requirements that everyone must purchase, and geographic limits on service provision. All these together took health care out of the realm of markets and made it a form of central planning.
And so: Obamacare resulted in soaring premiums, soaring deductibles, shoddy access, and ever-increasing bureaucracy. It became untenable. Objecting to it doesn’t have to be a matter of ideology. The contraption just didn’t work.
The core insight of the “freedom caucus” comes from Hayek and his fascinating piece “The Meaning of Competition”:
It is only through competition that we can assume that these possible savings of cost will be achieved. Even if in each instance prices were only just low enough to keep out producers which do not enjoy these or other equivalent advantages, so that each commodity were produced as cheaply as possible, though many may be sold at prices considerably above costs, this would probably be a result which could not be achieved by any other method than that of letting competition operate …
Yet the current tendency in discussion is to be intolerant about the imperfections and to be silent about the prevention of competition. We can probably still learn more about the real significance of competition by studying the results which regularly occur where competition is deliberately suppressed than by concentrating on the shortcomings of actual competition compared with an ideal which is irrelevant for the given facts.
I say advisedly “where competition is deliberately suppressed” and not merely “where it is absent,” because its main effects are usually operating, even if more slowly, so long as it is not outright suppressed with the assistance or the tolerance of the state.
The evils which experience has shown to be the regular consequence of a suppression of competition are on a different plane from those which the imperfections of competition may cause. Much more serious than the fact that prices may not correspond to marginal cost is the fact that, with an entrenched monopoly, costs are likely to be much higher than is necessary …
Competition is essentially a process of the formation of opinion: by spreading information, it creates that unity and coherence of the economic system which we presuppose when we think of it as one market. It creates the views people have about what is best and cheapest, and it is because of it that people know at least as much about possibilities and opportunities as they in fact do. It is thus a process which involves a continuous change in the data and whose significance must therefore be completely missed by any theory which treats these data as constant.
Let me paraphrase and apply: no, there will not be a perfect world. Total freedom is not a political option right now. So what’s the priority for any reform? The most crucial institutions in any society are the signaling systems of prices that reflect existing knowledge and possibilities.
When those are malfunctioning, nothing else works. Costs go up, quality goes down, innovation stops, and the sector starts to atrophy.
Competition Restoration Means Health Care Restoration
The first priority is that competition must be restored through some measure of deregulation. The mandates must go. The pre-set benefits packages must die. Insurers must gain control over their business affairs and customers have to be able to shop and choose.
We must regain flexibility to inspire innovation and achieve profitability. This must happen or else premiums will keep going up. This is a requirement. Obamacare failed because it disabled the market. Any reform must restore that market. This is more important than any other feature of reform.
Trumpcare or Ryancare or whatever you want to call it does not do that. It replaces a mandate to buy with a tax incentive to buy. Otherwise it leaves the problem of the absence of genuine competition in place. True, the alternative doesn’t do anything about the transfer of payments, but, if you follow Hayek, you know that these are less important to eliminate than are the barriers to competition.
The restoration of competition will discover for us things we do not know about service provision: treatments, plans, new institutional arrangements, new forms of insurance, new methods for serving the public. Competition will grow the market and make profitability the test of success or failure.
If that does not happen, premiums will keep increasing, quality will go down, access will continue to shrink, and public anger will grow as a result.
Now is the time. Again, it is not about ideology. It is about a system of health care insurance that actually works to serve the common good.