Free Market Schizophrenia By David Henderson

Ted Levy, a physician friend of mine who has often commented on this blog, sent me the following. I thought it was good enough to post. It’s essentially a very sharp non-economist’s way of explaining what economists call “the theory of the second best.”

The Wall Street Journal recently (8/21/13) carried an op-ed by Jeff Singer, a well-known libertarian physician, subsequently picked up by Fox News and reported on the Rush Limbaugh radio show. Singer, a general surgeon, based on a personal experience he had with one of his patients, made the following points:

. Most people have pre-paid health plans, not real health insurance.

. The minority of people with actual health insurance–low-cost indemnity plans that pay out fixed amounts for specific diagnoses–could potentially save money by negotiating prices directly with doctors and hospitals.

His patient apparently saved $17,000 via such negotiations, getting an elective hernia repair for only $3,000 directly. Had he just accepted the payment his insurance company agreed to, he would have owed $20,000 out of pocket.

Yet, separately, on Facebook, several free-market supporting physicians, also have complained that Obamacare, by raising costs, is pushing employers to eliminate spousal healthcare benefits. They say that as if it’s a bad thing.

Some, like Mike Tanner at Cato, argue that this spousal benefit loss puts the lie to Obama’s 8/11/09 town hall meeting claim “If you like your health care plan, you can keep your health care plan.” And it’s always great to show Obama is lying, I guess. But in this case his lie amounts to: “If you like your current market-distorting subsidized health care plan, I’m lying when I say you can keep it. Some of you may be forced into considering less expensive, less market-distorting, indemnity policies that Dr. Singer of Phoenix says make you better off anyway.”

I fail to see the logic in both complaining that it is becoming harder to get “health insurance” and simultaneously arguing people can save money by not using their health insurance. If the WSJ op-ed’s free market model of direct negotiation is a good thing for patients with actual health insurance–if, to follow Singer’s logic, we would be better off with actual low-cost indemnity insurance plus negotiating directly with healthcare entities for care–shouldn’t we give at least one cheer to Obamacare for moving toward that result by pushing employers to eliminate spousal coverage, which is a form of the healthcare pre-payment system Singer opposed in the op-ed?

Let’s step back and ask the more fundamental question: Is the spousal healthcare employee benefit an unalloyed market phenomenon, or do spousal healthcare benefits distort the market? Consider A and B, two equally productive employees of firm X. Ceteris paribus, as economists say, we would expect the market to push their pay packages to be identical as well. And let’s say, on paper, they are identical. But of course if A is single while B is married, the spousal healthcare coverage benefit really isn’t equal. It may be that B is getting the greater benefit by getting his spouse’s coverage subsidized by the employer even while A gets nothing from this benefit. Or it may be that A is getting his healthcare subsidized by his employer while B is getting nothing because he’s being covered by his spouse’s spousal healthcare benefit. In either case, there is a market distortion. Either A or B would prefer a higher salary without the spousal coverage benefit.

Imagine if instead of implementing Obamacare, the federal government had changed the tax laws so that both employers and employees paid for healthcare using post-tax dollars, a neutral tax rule. That government decision is clearly a move toward a free market. It results in people feeling the actual cost of their healthcare decisions, facing proper market incentives. It is a move away from having some social groups subsidize others, eliminating the perverse incentives to over-buy healthcare coverage. But, at least initially, such a government decision would, like Obamacare, increase employer costs. If this led to some companies limiting benefits by eliminating spousal coverage, would that also elicit howls of protest from free market advocates? If not, why the anger over Obamacare for the same result?

Isn’t that strange? For years some free market supporters have complained that one of the main distortions in the healthcare market is patients not appreciating the true cost of healthcare. Why? Because tax regulations push their employers to over-purchase coverage and aim for low-deductible rather than high-deductible insurance. Yet some of these same people are now upset that a few companies are, in essence, saying: “We are no longer willing to distort the healthcare purchase incentives facing you and your spouse. Now we’re going to distort only the incentives facing you.” I say that’s a move in the right direction. Now at least some spouses will have incentives to purchase the same low-cost indemnity policies Dr. Singer said allowed his patient to save $17,000.

Bottom line: Obamacare is a huge burden on the economy and is having destructive effects throughout the healthcare industry. There is much to complain about, including, as Tanner notes, the lies. But it doesn’t follow that every complaint is valid, and for libertarians to unthinkingly complain about every consequence of Obamacare’s implementation is damaging. The free market schizophrenia going on here reminds one of the concluding reminiscences by Woody Allen in his movie Annie Hall. Two women are in a Catskill resort restaurant. One complains about the poor quality of the food. The other agrees and adds, “And the portions are so small.” If the high-deductible healthcare pre-payment schemes we currently get from employers are such a bad deal, so poor in quality, as Singer and others argue, we should not be terribly upset if Obamacare leads to us receiving smaller portions.