Health Care Corporatism Arrives

Consumers will pay the price if government partners with the health care industry

In the past few months, Americans have seen their government essentially seize control of one sector of the economy after another. Federal authorities now tell the automobile, banking, credit card, and insurance industries what products and services to offer, all while hiring and firing industry executives in order to implement government orders.

Health care represents the latest frontier in this drive to centrally manage the American economy. Yesterday, the country's major health care producers, including insurance companies, hospital and physician organizations, pharmaceutical companies, and health care labor unions, promised President Barack Obama they would reduce the growth rate of their future incomes by 1.5 percent over the next ten years. If those cuts actually happened, it would mean that in 2019 health care costs (both government and patient) would be $700 billion lower than current projections, reducing health care spending by $2 trillion over the next ten years.

Why would the industry agree to this preemptive surrender? Because it means the end of competition. Under the proposed agreement, the government would guarantee a certain level of profit for each health care producer. From the industry's point of view, the goal is to get a seat at the table as politicians and government technocrats "reform" health care—which means it will decide who the winners and losers will be.

There's a word for when the government directs the production of goods and services and divides the economic pie: corporatism. The Concise Oxford Dictionary of Politics succinctly defines coporatism as "a system of interest intermediation linking producer interests and the state, in which explicitly recognized interest organizations are incorporated into the policy-making process, both in terms of the negotiation of policy and of securing compliance from their members with the agreed policy."

If the coporativist bargain works out as they plan, both insurers and hospitals expect to profit from the government mandating health insurance coverage for all Americans. Insurers look forward to millions of new customers who will have to buy insurance either individually, through their employers, or through government vouchers. In addition, since the government will set rates and benefits, health insurers won't have to bother with the vexing problem of competition. Of course, state and federal mandates and regulations have already taken us a ways down this road, but corporativist "health care reform" should eliminate any lingering vestiges of consumer choice. For their part, hospitals will have plenty of newly-insured patients to fill their wards and will no longer need to offer uncompensated care to the health care indigent.

As for the pharmaceutical companies, they have experienced rapidly increasing price controls over the years. For example, the Obama administration's 2010 budget lowers what Medicare will pay for drugs from 15 percent below average price to 22 percent below average. In agreeing to the corporativist bargain, those companies hope to get a better deal and to prevent the adoption of cost-benefit tests for the approval of new drugs.

Along similar lines, Medicare and Medicaid price controls have been squeezing doctors' fees for decades. As the federal government either converts private insurance companies into minutely regulated public utilities, creates a rival government health care payment system, or simply adopts a national single-payer (government entitlement) system, doctors rightfully worry that their fees will drop even further as government bureaucrats attempt to slash costs. But with a seat at the health care negotiating table, doctors hope to make the best out of a very bad situation. Interestingly, health care labor unions will probably emerge as the biggest winners in this corporatist arrangement, because they'll be able to extract higher than market wages from politicians dependent on union votes.

In his remarks welcoming the "historic" concessions by the health care industry, President Barack Obama noted that health care "costs are out of control." The goal of corporatist health care reform is to cut those costs. It's a noble aim. The only problem is that the one surefire way to cut costs is completely off the bargaining table: competition. Producers certainly won't reduce costs unless competitors force them to do so. And why would they? Reducing costs means reducing incomes.

Indeed, costs in our current health care system rise faster than the rate of inflation precisely because there is so little competition. The third party payment system, where employers or government agencies pay for insurance, gives consumers few incentives to shop around and bid down prices. On top of that, the federal and state governments have piled so many mandates on insurers that consumers are offered little more than one-size-fits-all policies with similar rates.

It's no secret the current health care system is rife with inefficiencies. But without effective competition, there will be no effective way to discover them and root them out. Competition incentivizes consumers and competitors to eliminate inefficiencies. The notion that wise government regulators can wring them out is beyond laughable.

Consider the recent announcement that a line-by-line review of the federal budget by the Obama administration found just $17 billion in savings from $3.6 trillion budget. That's far less than one half of 1 percent of the total budget. And the constituencies who benefit from that $17 billion are now mobilizing to oppose even those absurdly modest cuts. Just like producers who have no competition, federal agencies have no incentive to improve or to cut their budgets. History shows that the government agencies cut health care "costs" chiefly by imposing price controls on the private sector.

Corporatism represents an ugly deal between governments and producers. The hospitals, doctors, pharmaceutical companies, and health care labor unions hope that the corporativist bargain will guarantee future profits while eliminating competition. Perhaps it will, perhaps it won't. But there's absolutely no question that corporativist health care will increase inefficiencies, stifle innovation, and reduce consumer choice. That's a disastrous deal for the rest of us.

Ronald Bailey is Reason magazine's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.