How Obamacare will instantly destroy the private health care industry and lead to socialized medicine
In the entry, “Welcome to Obamaville,” we
considered a provision in the health care bill which would automatically force primary care physicians to stop sending their patients to specialists, thus reducing medical care for everyone and putting specialists out of work. In this entry, Kristor provides an overview, both panoramic and concise, of how the bill will automatically kill the private health care industry and force everyone into the arms of the government. To summarize his argument, the bill would (1) instantly put all private insurers out of business, leading to (2) their replacement by an expanded Medicare system for everyone in America, leading to (3) reduced payments to self employed doctors and private health care enterprises, leading them (4) to go out of business, leading doctors (5) to go to work for HMOs. Meanwhile, (6) medical research and education would also be forced out of business, leading to government monopoly in those fields as well. And there’s yet more. This may be the clearest exposition I’ve seen of how the bill would work and what its effects would be.
(Note: in his initial comment, Kristor uses an illustration in which insurance premiums are $5,001 per year and the fine for not buying insurance is $5,000, and therefore people would prefer to pay the fine as it costs one dollar less than the insurance. In fact, as is discussed further on in the thread, the fine would be only $750, thousands of dollars less than the expected heavy premiums under the bill, which makes Kristor’s case much stronger.)
Kristor writes:
Nancy Pelosi is not being delusional when she describes the health care bill in terms that make it sound like all-out socialized medicine. She is being inadvertently frank about what Obamacare really means. It is marketed as a way to force everyone to be insured by private carriers, and to make coverage guaranteed-issue, so that no one would need to worry about pre-existing conditions. But in fact it would almost immediately usher in a complete Federal takeover of medical insurance, and thus quickly precipitate the utopia of socialized medicine.
It would do this by destroying private health insurers. Rush discussed this last week. He pointed out quite correctly that the economic incentives that Obamacare would present to virtually everyone would prompt them to stop paying premiums. If I had a choice between paying premiums of $5,001 for a year of medical insurance and an annual fine of $5,000 for not buying medical insurance, and if I knew that the minute I got sick the insurance companies would have to accept me for coverage, I would be nuts to opt to pay premiums. It would make more sense for me to pay the fine, right up to the day I got really sick. So if Obamacare passes it is likely that many tens of millions of people will stop paying premiums. Only those who are already sick will keep paying premiums. The healthy people will drop their coverage, and the insurers will lose all the premium flow from healthy people. They’ll be left with nothing but unhealthy customers. This of course will ruin health insurers almost overnight, and all of them will exit the business forthwith—they aren’t stupid. They will let their medical insurance subsidiaries go bankrupt, leaving the state insurance pools to pick up the pieces. Those state insurance pools will also run out of money almost overnight. Then everyone in the country (who is not already covered by the government) will be uninsured, and with no way for a private company to make any money in the health insurance business, the only option will be to extend Medicare to the entire population.
Once the private insurers are out of the way, and everyone is covered by Medicare, the Feds would have total control of the healthcare economy. No one would be allowed to negotiate directly with medical providers except the Feds (this is already the way it works for our elders who are covered by Medicare; they have no right to bargain with providers). Medicare would be the only agent on the buy side of every transaction in the healthcare business. So the Feds would have a complete monopsony, which means one buyer, many sellers. As the sole bidder on the buy side, they would have all the bargaining power in the healthcare economy. With perfect monopsony power, they would be able to dictate prices for every procedure, and the providers would have no choice but to accept Medicare’s price or leave the business. In practical terms, Medicare is already an almost perfect monopsony; once Medicare dictates what it will pay for procedure x or drug y, the private insurers fall into line behind it.
Using their pricing power, the Feds would eliminate profits for doctors, hospitals, medical equipment companies, and pharmaceutical companies. These private enterprises would fold up shop. This is already happening; young doctors are spurning unprofitable private practice, instead opting to work as employees of HMOs and big hospital groups; retiring doctors are finding that the market prices of the practices they had planned to sell to finance their retirement are plummeting, as the number of new doctors interested in bidding for those practices dwindles.
Faced with the threat of a massive collapse of supply on the sell side of the medical economy, the Feds might relent on pricing, enough that private enterprises in the medical industry could eke out a living. But with profits in that business mostly eliminated, private investment in new technologies, drugs, and medical education for doctors, nurses and scientists would wither. The Feds would then have total power over medical research and education, because they would be the only source of funds to support them. Medical research and education would become even more politicized than they already are.
This is why the Democrats were happy to surrender the public option in order to get Obamacare to pass. They know the public option doesn’t need to be in the bill, because socialized medicine is the inevitable consequence of Obamacare, as sure as night follows day.
NB also that under Obamacare, everyone who is healthy will be paying fines to the Feds in lieu of premiums. In effect, the Feds will capture the lion’s share of the revenues of all the health insurance companies in the country, almost overnight. The increase in Federal revenues will be staggering. right now, Federal revenues are about 23 percent of GDP, and total healthcare spending is about 17 percent of GDP. Say that half of current healthcare spending is already flowing through Medicare and Medicaid, and is paid for by existing Federal revenues. You’re still looking at a delta of Federal revenues from about 23 percent of GDP to about 31 percent of GDP, an increase of about 25 percent—and all without a change to the tax code! It’s a genius move for the Democrats, so long as the Federal mandates to buy medical insurance survive Supreme Court challenge.
* * *
You also asked me to explain how libertarian columnist Jacob Sullum is incorrect in arguing that insurers will make a boatload of money under Obamacare. Sullum is right, provided that people fail to realize what I said above, namely that so long as they stay healthy, they are better off paying the Federal fine than insurance premiums. In that case, yes, insurers will enjoy a big bump in premium flow.
But I don’t think people are that dumb. Americans may be as intelligent as sheep when they enter the voting booth, but when it comes to saving a dime on insurance premiums, they are geniuses. People hate spending money on insurance, and will avoid it if they can, provided they perceive their risk of ill health to be low. So everyone who is healthy will opt for the fine instead, unless the fine is set higher than premiums. But if the fine is set that high it will provoke howls of protest from the left (who, naturally, want the fine low enough that poor people can afford to pay it). So the fine is likely to be lower than premiums for most people over the age of 25 or so—i.e., for the population of people who are now generally already covered by insurance (both because they need it more than college kids, and because they can afford it), and from whom the insurers are already earning premiums. It’s the healthy population over 25 who will drop coverage. And those are the people whose premiums have been paying for medical services to the unhealthy people in their age cohort.
- end of initial entry -
James N. (who is an MD) writes:
Kristor is exactly right. The Obama coup (it isn’t a bill, there is no proper bill yet and there may never be one) is a masterwork of Leninist destruction. It kills the insurance companies right away (and sets them up to be blamed for their own destruction). Hospitals and medical practices will follow in short order. There’s no hospital in the country which can survive even a 60-day interruption in cash flow. Most medical practices are absurdly undercapitalized, and many are running on loans extended on a fictional “sale value” which is about to become zero. Just as Obama’s true mentor would say, “The worse, the better.” That the Congress would cooperate in the havoc that is sure to follow this incredible act of irresponsibility is shocking.
Ray B. writes:
One gets the feeling, after looking deep into the actual fiscal health of our federal government, that Obamacare is ALL about money, not health care. Our federal tax receipt gap is widening—to the tune of a $100 billion per month shortfall between outlays and income—and the Chinese have already hinted that they are growing fearful of purchasing more of our debt atop the trillion dollars in treasury bonds they already own. In addition, the bond ratings agencies are looking at our AAA credit rating and are considering lowering it. The Federal government is hiding just how desperate they are to cover this shortfall from their out of control spending. Thus, Obamacare to the rescue—it takes in a huge tax stream for over three years before any healthcare is doled out. Wonder why??
We are in deep do-do.
Mel R. writes:
This will not end well or perhaps it will if we are not all Eloi.
Paul Mulshine writes:
I disagree strongly with Kristor’s analysis. His post offers yet another reason never to cite anyone who takes Limbaugh seriously.
This guy picked that $5,000 figure out of thin air. The real figure for the fine is $750 according to the CBO:
At that point, of course, there would be massive noncompliance. But no one would stop paying premiums to avoid that small a fine.
The bill is awful for a lot reasons but this analysis is the sort of nonsense you hear on radio shows. The politicians don’t have the never to raise the fine to anywhere near $5,000. And they certainly don’t want to put private medicine out of business for the simple reason that Medicare and Medicaid are parasitical on it. The private insurers pay full freight and the public gets to ride along at 80 percent and below.
When it comes to this sort of thing Michael Cannon and Michael Tanner at Cato offer some real insights.
A line like this “In effect, the Feds will capture the lion’s share of the revenues of all the health insurance companies in the country, almost overnight.” is just nonsense.
Kristor writes:
Paul Mulshine’s analysis of the economic incentives to customers of insurers under Obamacare is immaculately bass-ackward. He makes my argument in even stronger terms than I did. If the fine is a measly $750, no healthy sane person who is not a total blithering idiot will decide to pay a premium rather than the fine. $750 per year is $62.50 per month. Anyone out there paying $62.50/month for medical insurance?
Let me put this as clearly and simply as I can. You have a choice between two deals. Under one deal, you pay about $350/month to insure your family of four. You have a deductible of say $500/year per person, or $2,000 for the family. For simplicity, leave out co-insurance, stop losses, etc. Your total outlay for healthcare under this deal is anywhere from $4,200 (if everyone is perfectly healthy) to $6,200 (if you have a bad year, health-wise).
Under the other deal, you pay $750 a year in fines, and if you get sick, you go to the ER and the government picks up the tab. Period.
Which deal do you choose? Duh!
Rick U. writes:
Kristor wrote:
NB also that under Obamacare, everyone who is healthy will be paying fines to the Feds in lieu of premiums. In effect, the Feds will capture the lion’s share of the revenues of all the health insurance companies in the country, almost overnight. The increase in Federal revenues will be staggering. right now, Federal revenues are about 23 percent of GDP, and total healthcare spending is about 17 percent of GDP. Say that half of current healthcare spending is already flowing through Medicare and Medicaid, and is paid for by existing Federal revenues. You’re still looking at a delta of Federal revenues from about 23 percent of GDP to about 31 percent of GDP, an increase of about 25 percent—and all without a change to the tax code! It’s a genius move for the Democrats, so long as the Federal mandates to buy medical insurance survive Supreme Court challenge.
This would seem to be the answer to the question: Why would the Democrats commit political suicide by voting yes on health care? All of this “new” revenue will, in the short term, provide the political capital (cover) to assert that they have improved the budget deficit, that health care reform “worked,” and further that their plans have “restored” fiscal discipline in Washington. I can hear it now. It will be the Clinton budget surplus rhetoric on steroids. So, after massively expanding the federal budget this revenue will give the Dems a chance to pivot on the message (propaganda) of fiscal restraint just in time for Obama’s re-election bid. All this explains why the Dems have gone Kamikaze to pass this monster by any means possible. Aside from the power grab, the revenue makes the health care bill a practical political move as well.
Ferg writes:
As an adult over sixty five all this is rather frightening to me.
When I had heart bypass surgery I was embarassed by how little the surgeon was paid. I tried to make up the difference myself and was surprised to find that is not allowed. Every time I see the amount my Doctor is paid for my visits I am embarassed now. I believe Doctors will quit. It will cease being worth their time.
No wonder health care costs go up for most people. Those of us on Medicare, even with supplemental insurance, are not paying our way.
Others are bearing the burden. For the record, I tried to stay on private insurance when I turned sixty five. However, I was dropped by my insurer the moment I was eligible for Medicare.
Posted by Lawrence Auster at March 16, 2010 06:44 AM | Send