Timing Error

Politicians just can't keep up with health care markets.


"Without reform, spending on health care will reach 19 percent of GDP by the year 2000," the White House warned ominously in an October 1993 press release. "If we do nothing, almost one in every five dollars spent by Americans will go to health care by the end of the decade, robbing workers of wages, straining state budgets and adding tens of billions of dollars to the national debt."

Well, we did nothing, at least nothing resembling the proposed ClintonCare system that promised to push every American into a government-managed health alliance. The decade is nearly ended, and American workers are again getting raises, state budgets are in the black and the central question facing Washington's budget writers is what to do with the purported surplus.

So what went right? Americans said "No" to ClintonCare and left the medical marketplace relatively free to evolve. In fact, by the time Hillary Clinton's task force got around to unveiling its notoriously bureaucratic solution, the central problem it aimed to solve–double-digit health inflation–was already a thing of the past. In 1993, total health spending increased 8.6 percent. By 1994, the private sector health market was deflating, with insurance premiums dropping 1.1 percent, according to the well-respected Mercer/Foster Higgins National Survey of Employer Sponsored Health Plans. Total health care spending as a share of GDP has held constant at 13.6 percent since 1993.

America's move to managed care put the lid on health costs. But there was a trade-off: Patients, doctors, and nurses, long accustomed to blank-check insurance, suddenly found themselves dealing with firms that limited choice. Patients found their choice of doctors restricted; doctors found their choice of medical procedures questioned by the companies paying for those procedures. This situation led today's health care problem: the "crisis" in managed care.

Just as Washington wanted to solve the cost crisis in 1993 and 1994, it now wants to deploy its regulatory wisdom to remake managed care. Sen. Thomas Daschle (D-S.D.) and Rep. John Dingell (D-Mich.) are sponsoring the Patient Bill of Rights to implement the recommendations of the President's Advisory Commission on Health Care. On the other side of the aisle, Sen. Alfonse D'Amato (R-N.Y.) and Rep. Charles Norwood (R-Ga.) are sponsoring the Patients Access to Responsible Care Act (PARCA). (See "Clinton Care Lite," February.)

These bills differ in degree, but not in their heavy-handedness. And, just as the Clintons' bureaucratizing solution to health care inflation arrived as the problem was being resolved, the current crop of health care reformers are tackling issues that health care companies, in their need to keep customers happy, are already addressing.

Central to both the Democratic and Republican bills is a mandate on health insurers to provide a point-of-service option, which is health care jargon for being allowed to use a doctor who is not a member of the patient's insurance company's network. According to D'Amato, among the rights our federal government should secure is the "right to choose [our] own doctor."

But Americans already enjoy this right. What D'Amato really means is that government must dictate the contracts which private companies make with their customers. In this case, that means using the full force of the federal government to secure a patient's "option to see doctors outside their HMO for an additional fee."

This provision addresses Americans' main gripe with managed care: the restrictions HMOs place on choice. But that preference is already being addressed by firms in the marketplace; after all, those companies can only prosper if they offer their customers what they want.

The American Association of Health Plans, which represents more than 1,000 managed-care companies, reports that just under 92 percent of Americans with employment-based health insurance have the choice of at least one plan that allows patients to use doctors who are not part of a company's network. Mercer/Foster Higgins data also show that the trend in health care is clearly to more open networks. From 1992 to 1997, seven in 10 Americans who left traditional indemnity plans went to preferred provider plans or point-of-service plans, which are less restrictive than traditional HMOs.

And lest they lose out competitively, HMOs now let customers go out of network. This trend started in 1996, reports California Medicine, when Blue Shield offered its Access+ HMO plan. To stay competitive, other firms, including Kaiser Permanente–the quintessential staff-model HMO–now offer POS options.

Even one of Washington's top HMO-bashers noted the trend, although he did so in support of his bill that would saddle HMOs with more regulations. "The health plans themselves are running ads touting the fact that they are different from the bad HMOs that don't allow their subscribers their choice of doctors, or who interfere with their doctors practicing good medicine," Rep. Greg Ganske (R-Iowa) stated on March 31.

For most people, this would be a sign that HMOs are responding to customer feedback and the market is working. But for Ganske, "This goes to prove that even HMOs know that there are more than a few rotten apples in the barrel." His assumption, of course, is that it is up to Washington's policy makers, not consumers, to sort the fruit.

Washington's best and brightest have a consistent blind spot when it comes to market processes. In October 1993, Laura D'Andrea Tyson, who then chaired the Council of Economic Advisors, claimed "market failures" were driving what was still thought to be America's health care inflation. "There is a lack of price competition in the market for insurance," Tyson wrote in a document released by the White House, "because many individuals do not have a choice of health plans."

Today's would-be reformers charge just the opposite: that individuals are deprived of a choice because intense price competition relegates them to restrictive HMOs. These criticisms are not only at odds with each other, they are at odds with reality, too.

At the very time Tyson was developing her inaccurate explanation for health care costs, intense price competition was bringing health costs down. Employers simply wouldn't continue to suffer double-digit increases in health costs, nor would their employees, who preferred such things as salary increases to gold-plated health insurance.

Similarly, as upwards of 80 percent of Americans find themselves in some sort of managed care, that industry is developing products to meet a diversity of needs. Just because Americans don't purchase their own health insurance directly doesn't mean there's "market failure." And just because employers are cost-conscious doesn't mean they have an incentive to cut corners on their health plan. They must ultimately keep their employees happy.

Washington's lawmaking process is cumbersome. By the time laws and regulations are shaped, the information to which they are meant to respond has become outdated. But if government can't keep up with rapidly evolving markets that are experimenting with new ways to deliver products, that doesn't mean policy makers should make the work of markets more difficult.

The health care debate is a striking example of what F.A. Hayek called the "fatal conceit": that statist ideas of rational planning can improve on the collective knowledge of thousands, as expressed through the marketplace. Perhaps health-obsessed lawmakers should study the Hippocratic Oath, which has long enjoined doctors to, "First, do no harm."