I APOLOGISE to my colleague for not replying right away to the question in his post responding to my post about libertarianism and health-care reform, but I thought I would make fewer typos if I waited until my tears of frustration dried. He asks:

I suppose my question for my colleague is: if he doesn't think that liberals have steadily incorporated Hayekian concerns into their proposals for universal health insurance, what exactly does he think ObamaCare is, and how does he explain the difference between ObamaCare and HillaryCare, let alone Medicaid?

Hayek's most famous insight, about the indispensible informational function of the price mechanism, in his most famous paper, "The Use of Knowledge in Society", comes in the course of an argument to the effect that central economic planning boards are bound to fail. On it's face, it's hard to agree that the Affordable Care Act does much to incorporate the fundamental Hayekian lesson when one of its key provisions is the establishment of the Independent Payment Advisory Board, a sort of central price-setting committee thought by its advocates necessary to contain the runaway cost of the American health-care system. And why has American health-care spending exploded so? In large part because market prices for insurance and health services have been abolished and obscured. Had the ACA incorpated the Hayekian concern, it would have enlarged the role of freely-moving market prices in the provision of insurance and health care, but it does the opposite.

Actuarially-sound insurance policies are by and large illegal in America. That is to say, the price of a health plan is not allowed to communicate information to consumers about their individual risk. The ACA has doubled-down on the prohibition of risk-sensitive insurance by reducing in various ways the discretion of health-plan providers to take into account pre-existing conditions or changes in health.

The health plans individuals or empoyers are allowed to purchase (and, under the ACA will be forced to purchase) have functioned to insulate individuals from the cost of care, depriving the system of the efficiency and innovation enabled by price-responsive consumer behaviour. For the most part, in our system there is no such thing as the "price" of a health service or medical procedure. Reimbursement rates are generally unknown to consumers and often unknown to doctors. They are a far cry from the dynamically-adjusting posted prices Hayek proved so necessary for the efficient allocation of resources. And the ACA does less than nothing to restore to the system market pricing or price-responsiveness. Under the ACA there will be fewer co-payments and less payment of deductibles. The contribution limit on tax-exempt flexible spending accounts has been cut in half. New restrictions on FSAs and HSAs require consumers to visit a doctor and get a prescription before using these accounts to purchase non-prescription drugs.

Milton Friedman's 2001 summary of the pragmatic libertarian approach to health reform has a Hayekian appreciation for the indispensible informational role of prices in its DNA. See if it reminds you of Obamacare.

The high cost and inequitable character of our medical care system are the direct result of our steady movement toward reliance on third-party payment. A cure requires reversing course, reprivatizing medical care by eliminating most third-party payment, and restoring the role of insurance to providing protection against major medical catastrophes. The ideal way to do that would be to reverse past actions: repeal the tax exemption of employer-provided medical care; terminate Medicare and Medicaid; deregulate most insurance; and restrict the role of the government, preferably state and local rather than federal, to financing care for the hard cases. However, the vested interests that have grown up around the existing system, and the tyranny of the status quo, clearly make that solution not feasible politically. Yet it is worth stating the ideal as a guide to judging whether proposed incremental changes are in the right direction.

If we compare the Affordable Care Act to Friedman's ideal, it's clear that its changes are not in the "right direction". Now, I don't agree with all the details of Friedman's ideal, but I agree with most of it, and, more generally, I share his and Hayek's way of thinking about social insurance. First, set up dynamic free-market institutions and enjoy the blessings of their efficiency and innovation. High levels of growth and technical invention are the best social insurance, period. Then, use some portion of our enlarged national income to buy insurance for those who can't afford it and to buy care for those who are uninsurable. If a mandate to purchase insurance is really necessary, I don't mind. If some version of an IPAB is needed to decide how much of what care to provide to those who are houses afire, that's fine. But let there be competitive markets. Let there be prices.

One of my complaints about this debate is that the left has been committed to a fundamentally dirigiste vision of univeral health care for so long that it has difficulty even conceiving of a system that combines relatively laissez faire market institutions with generous social insurance. My colleague's insistence that Obamacare represents some kind of culmination of liberals' appreciation and incorporation of Hayekian concerns only reinforces my complaint and leaves me in despair.