Unmanageable Care

Peering into the future is always risky business, and health care is no exception to the general rule. But if one prediction can be ventured, it is that there will be greater government control over the provision of health-care services in this country 25 years from now than there is today. It is only with somewhat less confidence that we can predict that this expansion of government activity will be a failure—regardless of the particular path of reform chosen by the Clinton administration during the next four years or (another prediction) by its successor administration four years hence.

The prediction of failure does not rest on the expectation of specific blunders beyond our current comprehension. Instead, it rests on broad principles. The physical rules of universal gravitation, applicable today, will be applicable tomorrow, and these rules predict that top-heavy structures are unstable and likely to fall when pushed. The laws of economics are not quite so inexorable, but they constrain the organization of complex social structures in much the same way that the laws of mechanics constrain the field of architecture.

Alas, the sad truth is that even the most talked-about current proposal for universal and comprehensive healthcare coverage—"managed competition"—contains within it the seeds of its own destruction. It is not so much a coherent government plan as an oxymoron. It is possible either to have managed health care or to have open competition in health-care services. It is not possible to have both simultaneously. That conclusion is based not on particular insights about health care but on general propositions about the uses and limits of competitive markets.

Competition does not take place in a void; it rests on a well-articulated system of property rights. The essence of that system is unchanged from Roman times to the present, and we cannot bend or ignore its basic logic to accommodate the political whims of our frenetic times. The key feature of property rights is that each owner has the absolute right to the exclusive use of his resources and need part with them only through exchange on terms that are mutually advantageous to him and to his trading partner. Starting from that secure base of property rights, each exchange moves the parties to a higher level of welfare—for why else would they consent to the transaction? At the same time, strangers to the transaction profit as well because their opportunities to trade are generally enhanced by the increased wealth of their potential trading partners. But there is no duty of any owner to enter into any particular transaction for the transfer of goods or the provision of services based on the need of the other party.

Once the basic property rights are in place, there is no plan at the center—no government monopoly—that prescribes who shall trade with whom and on what terms. In open markets, when a trade takes place, both sides are winners. When a trade does not take place, there is no reason to panic and every reason to believe that the parties have found more profitable avenues of exchange—unless, of course, the state has thrown regulatory barriers in their way. As Robert Nozick wrote (before his regrettable communitarian conversion), a system of voluntary exchange is totally antithetical to the achievement of any "patterned" outcomes, desired by the society as a whole or any dominant political faction. What emerges from the interplay of independent actors is a just distribution of goods and services not because of what it is but because of how it came to be.

Judged by this standard, any system of managed competition is a contradiction in terms. The ordinary system of markets does not seek to ensure that all individuals purchase health-care insurance, or, if they purchase it, do so in any fixed quantity. Instead, health care is but another good; from the point of view of the legal system, it is neither more nor less important than a good pair of tickets to the Super Bowl. We know of the importance of health care not from any government mandate but because of the willingness of individual actors to acquire it through contract.

We also know that for some people health-care protection may not be as important as it appears to us, for they have chosen to go without it, preferring instead some other use for their resources, be it food, shelter, education, or amusement. Long ago Thomas Hobbes stated what modern planners too easily forget: "The value of all things contracted for, is measured by the appetite of the contractors; and therefore the just value, is that which they be contented to give."

Managed competition does not work in this fashion. There is no option for any individual to leave the system. All must obtain coverage whether they want to or not. But the question is what counts as coverage. If the system simply required parties to obtain some health-care coverage, the mandate to insure could be met by purchasing limited protection—say, against exotic tropical diseases only. Yet universal health coverage is supposed to be comprehensive as well. Managed competition thus faces two unique challenges: First, it must specify a class of mandatory purchasers; second, it must specify a class of minimum mandatory purchases. It can survive neither.

In a voluntary market, persons have a choice not only of whether to buy health care but of how much health care to buy. With managed health care, however, people must purchase enough health care to satisfy the demands of a central planner. Cheap coverage only for some rare tropical disease is now conclusive evidence of an intent to evade the requirements of the universal plan. No longer can we obey Hobbes's injunction and let private appetites determine the scope of contractual rights and duties. The central planner determines whether firms must supply alcohol rehabilitation, sex therapy, psychiatric care, or a spare set of dentures. Those people naive enough to want coverage simply for bodily injury and disease will not be permitted that option. The choice is all or nothing.

These regulatory edicts on scope of coverage will not be made by independent professionals acting in the best interests of their own patients. Rather, they will be made by bureaucrats unable to fend off the sex therapists and alcohol rehabilitation specialists, who insist that no one can have "decent" health-care service unless their own specialty is added to the mandatory list. The motley collection of required services will quickly swell to the point where it becomes unattractive to consumers.

Now many Americans will face an unhappy choice: purchase health coverage that offers less value per dollar than that which could be acquired in a voluntary market, or do without. (People have been choosing the latter in large numbers during the last 10 years, responding to minimum requirements for health-insurance coverage established by many states.) Knowing pundits will chalk up the decline in rates of coverage to market failure rather than the regulations that choked off the market's vitality.

What happens to the millions who cannot enter or must exit the regulated market? Given the aspiration of universal health care, someone else must provide for the newly dispossessed. Because of managed competition, it is no longer possible just to remove the minimum coverage requirements so that some portion of the uninsured could filter back into the voluntary market. In any case, while this cost-reduction strategy will increase the market penetration of health insurance, it cannot work miracles. The perfect voluntary and competitive market cannot and will not provide universal health care: No supplier will provide care that costs more than its recipient can pay—period. Just as an insistence on universal automobile insurance leads to assigned-risk pools, so too managed competition must take care of its non-market participants.

But how? Here the alternatives are very unappealing. One approach is to raise the additional funds for universal coverage through a tax imposed on the fees paid for health-care services in the private sector. But this tax system will have to chase its own tail. Any tax on the health system will increase customer costs without increasing customer benefits. Those purchasers who value the mandated coverage more than its cost, but less than its cost plus the special tax, will exit the regulated system.

Even at the first stage the stampede to the exit is likely to be large if the tax is substantial, especially if persons without coverage in the regulated market can obtain it for little or no cost from the government pool. After the exit, the tax base will be smaller, requiring a still heavier tax to fund the government-controlled segment of the market. And so on with each turn of the screw. It is not at all clear that a taxed market and a subsidized market can survive side by side. The latter is likely to drive out the former, or at least substantial portions of it. The predator will then die because its voracious appetite has extinguished its prey.

One attempt to discourage exit from the regulated market is the "play or pay" proposal. The idea here is a simple one: Those firms that do not supply the minimum mandated coverage are required to pay a tax to the common fund. But how should that tax be set? If it is set too low, the world will have lots of payers, no players, and insufficient revenue for the government pool. If the tax is set equal to the cost of covering the firm's workers in the government-run market, there is a built-in shortfall: No money can be set aside to provide for the huge membership of unemployed persons who depend on the fund for their coverage.

So even if firms decide to play, they will still have to pay, albeit somewhat less. And if they decide to pay, the cost could quickly escalate, encouraging other steps to avoid the tax. Companies could hire fewer employees to reduce the head tax; they might decide to scale down their business, or even leave the market altogether. The system of play or pay could turn into a system of play or pay, then fold. The problems of health-care coverage would remain unsolved, and wider economic markets would be disrupted. The costs would thereby be diffused but not eliminated.

Ultimately, some broad-based levy on earned income or all income (or perhaps a national sales tax or value-added tax) will be needed to fund universal coverage. These taxes will reduce the rates of investment, production, and profits otherwise attainable in the private sector, and they will generate fierce opposition from a public that knows it's already overtaxed. And the government will still have to figure out just who will provide health care for the people who are not placed in the regulated market. Successful insurers will probably be forced to provide coverage at a loss for those persons unable to secure protection in the regulated market. And when that system fails, the government will become the ultimate manager of competition; it will go into business itself, with the same success and imagination that it brings to the operation of the Post Office or the public schools.

To be sure, there are some gains that managed competition might achieve. Insurance firms might seek to make contracts to provide low-cost care for their customers. But those incentives to reduce costs all come from the competition side of the package. The addition of government-assigned business will invite cost-plus forms of accounting that will have exactly the opposite effect and will create massive disputes over which of the carrier's joint costs should be assigned to the private and which to the government portion of the plan. The managed side of the package will thus impede efficiency in the name of universal and comprehensive health-care coverage that we cannot afford to provide given our shrinking resource base.

We have to let go of the allure of universality, which is today treated as though it were an undeniable ethical imperative. In part the slack will be picked up by a resurgence of private charitable care, which hospitals could provide if freed of their regulatory burdens. And cities and states could again run a system of public hospitals to take care of some of the poor and emergency cases. This system consciously gives certain persons second-class health care at best and leaves the risk of no health care at all.

But it also offers hidden gains. Persons who know that their health care is at risk will have an incentive to take steps to reduce their need for it: There will be less drinking, less drug use, and less casual sex. Likewise there will be stronger incentives to tailor health plans to meet what people regard as their essential needs, not what regulation requires them to purchase.

There is, of course, a big cost: Some people will surely die for want of health care, as they have died in the past and as they continue to die today. But the issue is not whether there will be comprehensive universal health-care coverage funded out of public revenues. It is beyond our power to legislate that into existence. The issue is whether we can find ways to increase access by reducing costs. Unless we let go of the impossible dream of universal health coverage, we will engage in punitive regulatory measures that will not save those in need but may well bring down the entire health-care system in ruins.

Richard A. Epstein is James Parker Hall Distinguished Service Professor of Law at the Unversity of Chicago Law School.