Central Planning Won't Fix Health Care

What the United States can learn from Venezuela's political and economic failures

The New York Times recently ran a devastating indictment of health-care reform and Washington's approach to it. The article didn't put it that way, naturally. In fact, it didn't even mention the Patient Protection and Affordable Care Act. But the story, as they say, resonated.

The piece concerned shortages of essential goods in Venezuela, and the causes behind them. "President Hugo Chavez's … government … imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor," the article reported. But those "are often the very products that are the hardest to find." The front-pager went on to quote Venezuelans venting their frustration as they stood in line for basics such as milk and toilet paper.

"Venezuela was long one of the most prosperous countries in the region, with sophisticated manufacturing, vibrant agriculture and strong businesses," the story continued. "But amid the prosperity, the gap between rich and poor was extreme, a problem that Mr. Chávez and his ministers say they are trying to eliminate."

Sound familiar?

"They blame unfettered capitalism for the country's economic ills." Does that sound like any other administrations you know of? Maybe ones that start with O and rhyme with llama?

"They say companies cause shortages on purpose, holding products off the market to push up prices." Gosh, where have we heard that before? Oh, yes—in this October CNN report, "Obama Tackles Drug Shortages, Prices": "The Justice Department will be tasked with examining whether specific drug shortages are tied to an intentional stockpiling of medications designed to raise prices."

In fact, some of those drug shortages are caused at least in part by (you guessed it) price controls. We have this on the authority of none other than Ezekiel Emanuel—former Obama adviser, brother of Rahm, and alleged (but not actual) supporter of "death panels." As Emanuel explains, a 2003 prescription-drug law has had an "unintended consequence …?. [A] drug's price should be able to increase … to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug."

That description sounds just like the Times report from Venezuela, where "prices are set so low, [economists] say, that companies and producers cannot make a profit. So farmers grow less food, manufacturers cut back production and retailers stock less inventory."

What does this have to do with health-care reform? Well, among its manifold other provisions, the law imposes price controls—albeit indirectly.

First, it sets a "medical loss ratio" (MLR) for insurance companies. That's a fancy way of saying insurers must spend at least 85 percent of their revenue paying claims (or 80 percent for smaller companies). Profits, sales commissions, and administrative costs cannot exceed 15 (or 20) percent. If an insurance company exceeds the acceptable loss ratio, then it must rebate the overage to consumers. Insurance brokers are taking a hit on commissions and, Investor's Business Daily reports, "some health insurers are dropping out of the individual market completely, while others are cutting back." The newspaper also notes that while paying fraudulent claims would count toward an insurer's MLR, anti-fraud software would go on the administrative-cost side of the ledger.

Second, health insurers are not allowed to raise premiums by more than 10 percent without government permission. Ostensibly, states do the reviewing—but HHS looks over their shoulder and takes control if the feds think the states aren't doing the job well. If an insurer raises rates beyond what HHS considers "reasonable"—whatever that means—it could be banned from the state exchanges. This, says Forbes, creates "a de facto environment of federal authority over rate increases."

Now step back from the trees to look at the forest. Health-care reform forbids insurers to turn anyone down because of a pre-existing condition, and—if it survives Supreme Court review—will add millions to the rolls. It also imposes a series of expensive mandates that will drive up costs. At the same time, it seeks to keep insurers from adjusting to the new realities by raising prices too much. Where will all that lead?

The historical evidence is not encouraging. In addition to Venezuela, one could cite New York City, where rent control has created a permanent housing shortage; or Zimbabwe ("Zimbabwe is facing serious food shortages due to price controls imposed earlier this month by the government," BBC) or Russia ("Price Controls on Gasoline in Russia Causing Shortages," Economic Policy Journal), or dozens of other examples.

To be fair, the effects of health-care reform will not be nearly so drastic as the effect of the price controls imposed by Hugo Chavez or Robert Mugabe. But how big a selling point is that? "America—Still Not as Bad Off as Venezuela!"

Not the most inspiring slogan, is it?

A. Barton Hinkle is a columnist at the Richmond Times-Dispatch, where this article originally appeared.