http://www.harpers.org/archive/2009/12/0082740
Understanding Obamacare
By Luke Mitchell
Luke Mitchell is a senior editor of Harper’s Magazine.
The idea that there is a competitive “private sector” in America
is appealing, but generally false. No one hates competition more
than the managers of corporations. Competition does not enhance
shareholder value, and smart managers know they must forsake
whatever personal beliefs they may hold about the redemptive power
of creative destruction for the more immediate balm of government
intervention. This wisdom is expressed most precisely in an
underutilized phrase from economics: regulatory capture.
When Congress created the first U.S. regulatory agency, the
Interstate Commerce Commission, in 1887, the railroad barons it
was meant to subdue quickly recognized an opportunity. “It
satisfies the popular clamor for a government supervision of
railroads at the same time that that supervision is almost
entirely nominal,” observed the railroad lawyer Richard Olney.
“Further, the older such a commission gets to be, the more
inclined it will be found to take the business and railroad view
of things. It thus becomes a sort of barrier between the railroad
corporations and the people and a sort of protection against hasty
and crude legislation hostile to railroad interests.” As if to
underscore this claim, Olney soon after got himself appointed to
run the U.S. Justice Department, where he spent his days busting
railroad unions.
The story of capture is repeated again and again, in industry
after industry, whether it is the agricultural combinations
creating an impenetrable system of subsidies, or television and
radio broadcasters monopolizing public airwaves for private
profit, or the entire financial sector conjuring perilous fortunes
from the legislative void. The real battle in Washington is seldom
between conservatives and liberals or the right and the left or
“red America” and “blue America.” It is nearly always a more local
contest, over which politicians will enjoy the privilege of
representing the interests of the rich.
And so it is with health-care reform. The debate in Washington
this fall ought to have been about why the United States has the
worst health-care system in the developed world, why Americans pay
twice the Western average to maintain that system, and what
fundamental changes are needed to make the system better serve us.
But Democrats rendered those questions academic when they decided
the first principle of reform would be, as Barack Obama has so
often explained, that “nothing in our plan requires you to change
what you have.”
This claim reassured not just the people who like their current
employment benefits but also the companies that receive some part
of the more than $2 trillion Americans spend every year on health
care and that can expect to continue receiving their share when
the current round of legislation has come to an end. The
health-care industry has captured the regulatory process, and it
has used that capture to eliminate any real competition, whether
from the government, in the form of a single-payer system, or from
new and more efficient competitors in the private sector who might
have the audacity to offer a better product at a better price.
The polite word for regulatory capture in Washington is
“moderation.” Normally we understand moderation to be a process
whereby we balance the conservative-right-red preference for “free
markets” with the liberal-left-blue preference for “big
government.” Determining the correct level of market intervention
means splitting the difference. Some people (David Broder, members
of the Concord Coalition) believe such an approach will lead to
the wisest policies. Others (James Madison) see it only as the
least undemocratic approach to resolving disputes between opposing
interest groups. The contemporary form of moderation, however,
simply assumes government growth (i.e., intervention), which
occurs under both parties, and instead concerns itself with
balancing the regulatory interests of various campaign
contributors. The interests of the insurance companies are
moderated by the interests of the drug manufacturers, which in
turn are moderated by the interests of the trial lawyers and
perhaps even by the interests of organized labor, and in this way
the locus of competition is transported from the marketplace to
the legislature. The result is that mediocre trusts secure the
blessing of government sanction even as they avoid any obligation
to serve the public good. Prices stay high, producers fail to
innovate, and social inequities remain in place.
No one today is more moderate than the Democrats. Indeed, the
triangulating work that began two decades ago under Bill Clinton
is reaching its apogee under the politically astute guidance of
Barack Obama. “There are those on the left who believe that the
only way to fix the system is through a single-payer system like
Canada’s,” Obama noted (correctly) last September. “On the right,
there are those who argue that we should end employer-based
systems and leave individuals to buy health insurance on their
own.” The president, as is his habit, proposed that the
appropriate solution lay somewhere in between. “There are
arguments to be made for both these approaches. But either one
would represent a radical shift that would disrupt the health care
most people currently have. Since health care represents one-sixth
of our economy, I believe it makes more sense to build on what
works and fix what doesn’t, rather than try to build an entirely
new system from scratch.”
With such soothing words, the Democrats have easily surpassed the
Republicans in fund-raising from the health-care industry and are
even pulling ahead in the overall insurance sector, where
Republicans once had a two-to-one fund-raising advantage. The deal
Obama presented last year, the deal he was elected on, and the
deal that likely will pass in the end is a deal the insurance
companies like, because it will save their industry from the scrap
heap even as it satisfies the “popular clamor for a government
supervision.”
The private insurance industry, as currently constituted, would
collapse if the government allowed real competition. The companies
offer no real value and so instead must create a regulatory system
that virtually mandates their existence and will soon actually do so.
A study by the McKinsey Global Institute found that health
insurance cost the United States $145 billion in 2006, which was
$91 billion more than what would be expected in a comparably
wealthy country. This very large disparity may be explained by
another study, by the American Medical Association, which shows
that the vast majority of U.S. health-insurance markets are
dominated by one or two health insurers. In California, the most
competitive state, the top two insurance companies shared 58
percent of the market. In Hawaii, the top two companies shared the
entire market. In some individual towns there was even less
competition—Wellmark, for instance, owns 96 percent of the market
in Decatur, Alabama. “Meanwhile, there has been year-to-year
growth in the largest health insurers’ profitability,” the AMA
reports, even as “consumers have been facing higher premiums,
deductibles, copayments and coinsurance, effectively reducing the
scope of their coverage.” And yet no innovating entrepreneurs have
emerged to compete with these profitable enterprises. The AMA
suggests this is because various “regulatory requirements” provide
“significant barriers to entry.” Chief among those barriers, it
should be noted, is an actual congressional exemption from
antitrust laws, in the form of the McCarran–Ferguson Act of 1945.
Insurance companies aren’t quite buggy-whip manufacturers. But
they are close. In the past, one could have made an argument that
in their bureaucratic capacities—particularly, assessing risk and
apportioning payments—insurance companies did offer some expertise
that was worth paying for. But all of the trends in politics and
in information technology are against insurance companies’
offering even that level of value. Insurance is an information
business, and as technology makes information-management cheaper,
technological barriers to entry will fall, and competition will
increase. (People who relied on the cost of printing presses to
maintain a monopoly should be able to relate.)
At the same time, the very idea of assessing health risk is
beginning to be understood as undemocratic, as was revealed by the
overwhelming support for the 2008 Genetic Information
Non-Discrimination Act, which bars insurers from assessing risk
based on genetic information. Over time, more and more information
will be off-limits to underwriters, so that insurance ultimately
will be commoditized—every unit of insurance will cost about the
same as every other unit of insurance. Managers know that one must
never allow one’s product to become a mere commodity. When every
product is like every other product, brand loyalty disappears and
prices plummet.
Which perhaps is one reason why the insurers themselves have
always favored the central elements of the Democratic plan. As
long ago as 1992, when Hillary Clinton was formulating her own
approach to reform, the Health Insurance Association of America
(now America’s Health Insurance Plans, or AHIP) announced that
insurers would agree to sell insurance to everyone, regardless of
medical condition (guaranteed issue) if the government required
every American to buy that insurance, and used tax dollars to
subsidize those who could not afford to do so (universal mandate).
Carl Schramm, the president of the association, said this was the
“only way you preserve the private health-insurance industry. It’s
plain-out enlightened self–interest.” The deal collapsed
nonetheless, in part because Congress wanted to introduce a
“community rating” system that would have put an end to
underwriting by making insurers sell insurance to everybody in a
given community for the same price. Insurers wanted to maintain
the profitable ability to charge different prices to different people.
Last December, though, AHIP said it would support community rating
as well, and since then the real negotiation has been all about
details. The insurance companies would agree to sell their
undifferentiated commodity to all people, no matter how sick, if
the government agreed to require all people, no matter how
healthy, to buy their undifferentiated commodity. Sick people who
need insurance get insurance and healthy people who don’t need
insurance cover the cost. A universal mandate would include the 47
million uninsured—47 million new customers.
The Democratic plan looks to be a huge windfall for the insurance
companies. How big is not known, but as BusinessWeek reported in
August, “No matter what specifics emerge in the voluminous bill
Congress may send to President Obama this fall, the insurance
industry will emerge more profitable.” The magazine quoted an
unnamed aide to the Senate Finance Committee who said, “The bottom
line is that health reform would lead to increased revenues and
profits.”
Democrats have crafted a plan full of ideas that almost certainly
will help a lot of people who can’t afford insurance now. It also
happens to be the case that some of those ideas will significantly
benefit the corporations that at one time or another have paid
Democrats a lot of money.
The framework for reform, for instance, was authored not by Max
Baucus, the Democratic senator who chairs the Finance Committee,
but by his senior aide, Liz Fowler, who also directs the
committee’s health-care staff. She worked for Baucus from 2001 to
2005 but then left for the private sector. In 2008, reports the
Washington gossip paper Politico, “sensing that a
Democratic-controlled Congress would make progress on overhauling
the health care system,” she returned to Baucus’s side. Where had
she retreated to recover from her Washington labors? Politico does
not say. In fact, she had become the vice president for public
policy and external affairs at WellPoint, one of the nation’s
largest health-insurance corporations.
Pretty much everyone involved in health-care reform has been on
the payroll of one health-care firm or another. Howard Dean, the
former head of the Democratic National Committee and, heroically,
a longtime proponent of a single-payer system, nonetheless
recently joined McKenna Long & Aldrich, a lobbying firm with many
clients in the industry. Nancy-Ann DeParle, the so-called health
czar who is overseeing reform at the White House, is reported to
have made as much as $6 million serving on the boards of several
major medical firms. Tom Daschle, who was set to be Obama’s
secretary of health and human services until it emerged that he
had failed to pay taxes on his limousine and driver, now earns a
$2 million salary as a “special public policy advisor” for the
lobbying firm of Alston & Bird, which represents, among many other
clients, HealthSouth and Aetna. Asked to describe his current
role, Daschle said, “I am most comfortable with the word resource.”
Most illustrative of the clever efficiency with which the
Democrats have allowed themselves to be captured, though, is the
strange journey of Billy Tauzin. He spent his first fifteen years
in Congress as a “conservative” Democrat, struggling mightily to
make his fellow party members more amenable to the needs of the
health-care industry. In 1994 he founded the “moderate” Blue Dog
coalition, whose members continue to deliver the most reliably
pro–business vote in the Democratic caucus. But the Blue Dogs of
1994 did not go far enough for Tauzin, so in 1995 he became a
Republican, and by 2003 he finally had mastered the system to the
degree that he could personally craft one of the largest corporate
giveaways in American history: Medicare Part D. After that bill
was made into law, he took the natural next step—he became
president of the Pharmaceutical Research and Manufacturers of
America, the lobbying arm of the drug industry.
Now the circle is complete. The Democratic president of the United
States, the candidate of change, the leader of the party Billy
Tauzin deserted so long ago for failing to meet the needs of
business, must “negotiate” directly with this Republican lobbyist,
and rather than repeat this entire tortured journey himself, all
Obama has to do is agree to Tauzin’s demands—which he has. The
Democratic deal for the drug companies is, if anything, even
sweeter than the Democratic deal for the insurance companies.
After one of Tauzin’s many visits to the White House, he told the
Los Angeles Times that the president had decided Medicare Part D
would not be touched. “The White House blessed it,” Tauzin said,
assuring his clients that billions of government dollars would
continue to flow their way. Democrats, meanwhile, must have been
almost equally assured by the subsequent headline in Ad Age:
“Pharma Backs Obama Health Reform with $150 Million Campaign.”
What can Republicans do against opponents like that? They are
trying to win back their friends in industry, but the effort is a
bit sad. In September, for instance, Senator Jim Bunning of
Kentucky proposed an amendment that would, among other things,
require a “cooling-off period” of seventy-two hours once the bill
was completed. His colleague, Pat Roberts of Kansas, said such a
pause would provide “the people that the providers have hired to
keep up with all of the legislation that we pass around here” the
opportunity to say, “‘Hey, wait a minute. Have you considered this?’”
But of course “the people that the providers have hired”—having
actually already written the legislation—are quite familiar with
the details. The only hope for Republicans right now is if the
insurers themselves decide they can get an even better deal by
turning on the Democrats, which no doubt they eventually will.
Just because competition has moved from the marketplace to the
legislature does not mean it is any less intense. Even as various
cartels and trusts compete for the favor of the parties, so too
must the parties continue to compete for the favor of the cartels
and the trusts. In October, for instance, the insurers appeared to
turn against the Democrats when AHIP released a study that claimed
the Democratic approach to reform would radically increase the
cost of insurance. Obama, meanwhile, hit right back. In his weekly
radio address, he said the study was “bogus,” noted that the
insurance companies had long resisted attempts at reform, and even
called into question the validity of the industry’s antitrust
exemption. The New York Times reported that such attacks indicated
a “sharp break between the White House and the insurance
industry,” but this was better understood as a negotiating
gambit—perhaps insurers believed drug manufacturers were getting a
better deal and saw an opening, or perhaps they simply wanted to
revise a specific term of the bill, which at the time, according
to the Wall Street Journal, would have increased their industry’s
tax burden by $6.7 billion a year.
As Democrats negotiate such impasses, the Republicans, no longer
the favored party of corporate America, are left to represent
nothing and no one but themselves. They are opposing reform not
for ideological reasons but simply because no other play is
available. They have lost the business vote, and even their call
for “fiscal responsibility” is gestural at best. The “public plan”
so hated by Republicans, for instance, would have reduced the cost
of reform by as much as $250 billion over the next decade, yet the
party universally opposed it because, as Senator Charles Grassley
of Iowa explained, “Government is not a fair competitor. It’s a
predator.”
Such non sequiturs have opened the way to the darker dream logic
that of late has come to dominate G.O.P. rhetoric. Nothing remains
but primordial emotion—the fear, rage, and jealousy that have
always animated a significant minority of American voters—so
Republican congressmen are left to take up concerns about “death
panels” and “Soviet-style gulag health care” that will “absolutely
kill seniors.” Republicans, having lost their status as the party
of business, have become the party of incoherent rage. It is
difficult to imagine anything good coming from a system that
moderates the will of corporations with the fantasies of hysterics.
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