The Supreme Court’s recent ruling in National Federation of Independent Business vs. Sebelius; et al decided the constitutionality of the Patient Protection and Affordable Care Act, popularly known as ObamaCare. This is the most anxiously awaited ruling in generations and potentially the most momentous. The legislation will eventually produce a de facto takeover by the federal government of the U.S. health-care sector, amounting to over one-fifth of the U.S. economy. The central focus of the bill and the ruling was the power of the federal government to order the behavior of its citizens and the nature and existence of limits on that power.
As one would expect, economic logic constitutes the heart of that legal debate. It would not astound most people to find that the best treatment of this subject was written by an economist. But it would raise their eyebrows to learn that the economist in question died in 1992 – twenty years before the ObamaCare ruling was handed down – and wrote in 1960, decades before burgeoning health-care costs first grabbed the attention of the American public.
The Mandate to Purchase Health Insurance
The linchpin of ObamaCare is a mandate that uninsured Americans either purchase health insurance or be forced to pay a forfeit. Although the forfeit is denoted a penalty in the language of the bill and by the bill’s prominent supporters – including President Obama himself – the government’s counsel presented an alternative case for the bill as a tax.
Despite the brevity of this argument – it occupied only 21 lines in the brief – it was accepted by Chief Justice John Roberts in his majority opinion. Indeed, Justice Roberts’ obiter dicta rejected the government’s primary contention that the mandate was a penalty, levied under the federal government’s power to regulate interstate commerce.
A four-justice minority consisting of Judges Thomas, Kennedy, Scalia and Alito dissented scathingly. The minority not only rejected the alternative characterization of the mandate as a tax, but also denied the constitutionality of the bill in its entirety. Thus, the dichotomy is one of the sharpest in the history of the Court.
Obama administration supporters were quick to accuse the bill’s opponents of hypocrisy, pointing out that the right-leaning Heritage Foundation had submitted a comprehensive proposal for health-care reform in 1993 in which a purchase mandate had figured prominently. Obviously, Democrats maintained, conservative opposition to a mandate had to be purely political, originating with its submission by the Obama administration.
Not so. The right-wing health-care purchase mandate has an even longer lineage than the left wing contends. Tracing this genealogy to its roots should clarify the issues involved. Our search takes us back to seminal work by the patron saint of right-wing political philosophy, F. A. Hayek.
Hayek on the Purchase-Mandate Concept
In The Constitution of Liberty (1960), Hayek begins by noting that the provision for the future is a general problem faced by members of all societies. His words are so cogent and prescient as to demand direct quotation (all emphasis added by me):
In the Western world some provision for those threatened by the extremes of indigence or starvation due to circumstances beyond their control has long been accepted as a duty of the community…What we now know as public assistance or relief…is merely the old poor law adapted to modern conditions. The necessity of some such arrangement in an industrial society is unquestioned – be it only in the interest of those who require protection against acts of desperation on the part of the needy.
It is probably inevitable that this relief should not long be confined to …the “deserving poor,” as they used to be called, and that the amount of relief now given in a comparatively wealthy society should be more than it absolutely necessary to keep alive and in health. We must expect that the availability of this assistance will induce some to neglect such provision against emergencies as they would have been able to make on their own. It seems only logical, then, that those who will have a claim to assistance in circumstances for which they could have made provision should be required to make provision themselves. Once it becomes the recognized duty of the public to provide for the extreme needs of old age, unemployment, sickness, etc., irrespective of whether the individuals could and ought to have made provision themselves, and particularly once help is assured to such an extent that it is apt to reduce individuals’ efforts, it seems an obvious corollary to compel them to insure (or otherwise provide) against those common hazards of life. The justification in this case is not that people should be coerced to do what is in their individual interest but that, by neglecting to make provision, they would become a charge to the public. Similarly, we require motorists to insure against third-party risks…in the interest of others who might be harmed by their actions.
Finally, once the state requires everybody to make provisions of a kind which only some had made before, it seems reasonable enough that the state should also assist in the development of appropriate institutions…the cost of experimenting with and developing new institutions may be regarded as [analogous to] the cost of research or the dissemination of knowledge…The aid given out of the public purse for this purpose should be temporary in nature…intended only for a transitional period, terminating when the existing institution has grown and developed to meet the new demand.
Hayek is often cited approvingly by 20th-century liberals for his activist stance toward government welfare programs like social security and unemployment insurance. The above passages lend superficial support to this characterization. But Hayek goes on to make the crucial distinction between government interventions favorable to limited, constitutional government and those destructive to it.
It is only when the proponents of “social security” go a step further that the crucial issues arise. Even at the beginning stage of “social insurance” in German in the 1880s, individuals were not merely required to make provision against those risks which, if they did not, the state would have to provide for, but were compelled to obtain this protection through a unitary organization run by the government…”Social insurance” thus from the beginning meant not merely compulsory insurance but compulsory insurance in a unitary organization controlled by the state. The chief justification for this decision…was the presumed greater efficiency and administrative convenience (i.e., economy) of such a unitary organization. It was often claimed that this was the only way to assure sufficient provision at a single stroke for all those in need.
The Trojan Health-Care System
The appropriate icon for ObamaCare would be a Trojan, for the system parades as a prophylactic against the diseases afflicting health care but its effect on the system will be analogous to that of a computer virus, which burrows deep within it and wreaks progressively greater havoc over time.
The immediate provisions of ObamaCare do not technically require all Americans to buy health insurance. Rather, they demand that any adult who lacks health insurance at the end of the system’s first year of operations must pay a penalty on his or her income-tax return. The penalty is set low enough so as to seem attractive relative to the cost of an individual policy for those who currently lack health insurance. That is, the practical result of this provision will be to induce uninsured Americans to remain uninsured and pay the penalty rather than to buy health insurance.
Ordinarily, an uninsured adult will run certain risks. First, there is the possibility that the uninsured will acquire a condition that will substantially raise the cost of a policy or effectively foreclose the possibility of insurance. Second, there is the possibility that the uninsured will be visited by serious illness while uninsured, thus incurring a major financial setback.
ObamaCare forbids insurance companies from considering pre-existing medical conditions when evaluating the insurance risk of an applicant. The term for this policy is “guaranteed issue.” It also establishes government-run exchanges within which an uninsured will have the option of purchasing health insurance at any time, perhaps with a government subsidy.
The implications of these provisions for the health-insurance market are clear. First, the uninsured will have no incentive to purchase private insurance while in good health. Second, upon becoming sick, an uninsured will simply buy insurance at the government-run exchange. Ordinarily, it would be impractical to purchase insurance after contracting illness, since acquisition of a pre-existing condition would either make the applicant uninsurable or drive the insurance premium prohibitively high. But the provision in ObamaCare forbidding consideration of health status would preclude the former outcome, thus guaranteeing the latter.
The problem of “adverse selection” – only sick people wanting to buy insurance – is that it depletes the pool of premium-paying healthy insureds from which the insurance companies get the money to pay insurance claims. But that is just the beginning of the headaches created for private health insurance by ObamaCare. Its provisions impose a laundry list of mandated benefits insurance companies must pay – a mandate to pay out $.80-.85 worth of claimed benefits for every $1.00 in premiums collected, special benefits paid specifically to women, mandates to pay for various preventive services and more. The companies must keep the children of insured families on the family policy under the children reach age 26. The Secretary of Health and Human Services has the power to disallow premium increases greater than 10% for individual and small-group policies.
This combination of circumstances spells the end of the private market for health insurance. This is not merely the view of right-wing partisans. It is also the view of industry analysts. Secretary Sebelius, whose name is on the ObamaCare lawsuit heard by the Supreme Court, publicly declared before the outcome was known that the private health-insurance industry was “in a death spiral.” President Obama has long been publicly committed to creating a “single-payer,” e.g., government operated national health-care system. He fought doggedly to preserve a “public option” for government-provided health insurance in the ObamaCare legislation before reluctantly accepting the bill in its current form.
In other words, ObamaCare will rapidly produce the same situation created at its outset by Social Security legislation and described by Hayek above – one single, unitary organization operated by the government and subscribed by all. Rather than being reached at a stroke – the path taken by European welfare states – this outcome will be reached in a slower, more roundabout way. The direct route, a straightforward transition to single-payer, socialized medicine, was obviously viewed as politically infeasible. Indeed, ObamaCare itself passed both houses of Congress only thanks to a series of machinations unique in U.S. legislative history. Even now, the measure is wildly unpopular among the general public.
Over time, this sheltered monopoly will become more and more inefficient, less flexible and less tolerant of individual variation. It will become less receptive to innovation and suggestion from outside the ranks of government. In short, it will destroy the quality of health care it was ostensibly intended to save.
We can now appreciate the vital difference between a purchase mandate of the type advocated by Hayek and the Heritage Foundation and the one dictated by ObamaCare. The former allows Americans to choose among various types of insurance in a competitive market populated by different companies. The latter drives this competitive private market out of existence in order to force Americans to purchase the product of a single, unitary government insurance organization and would slowly, but surely degrade the quality of health care over time.
Hayek on Socialized Medicine
We have already seen that Hayek’s analysis of mandatory social insurance, directed at Social Security, accurately predicted the course taken thus far by ObamaCare. In fact, The Constitution of Liberty specifically addressed the issue of mandatory health insurance under a welfare state.
The provision against sickness presents not only most of the problems which we have already considered by peculiar ones of its own. They result from the fact that the problem of “need” cannot be treated as though it were the same for all who satisfy certain objective criteria, such as age; each case of need raises problems of urgency and importance which have to be balanced against the cost of meeting it, problems which must be decided either by the individual or for him by somebody else.
There is little doubt that the growth of health insurance is a desirable development. [Hayek was writing in 1960.] And perhaps there is also a case for making it compulsory since many who could thus provide for themselves might otherwise become a public charge. But there are strong arguments against a single scheme of state insurance; and there seems to be an overwhelming case against a free health service for all… [yet] political circumstances make it unlikely that they can ever be abandoned, now that they have been adopted. One of the strongest arguments against them is, indeed, that their introduction is the kind of politically irrevocable measure that will have to be continued, whether it proves a mistake or not.
The case for a free health service is usually based on two fundamental misconceptions. They are, first, the belief that medical needs are usually of an objectively ascertainable character and such that they can and ought to be fully met in every case without regard to economic considerations and, second, that this is economically possible because an improved medical service normally results in a restoration of economic effectiveness or earning power and so pays for itself. Both contentions mistake the nature of the problem involved…There is no objective standard for judging how much care and effort are required in a particular case; also, as medicine advances, it becomes more and more clear that there is no limit to the amount that might profitably be spent in order to do all that is objectively possible. Moreover, it is also not true that, in our individual valuation, all that might yet be done to secure health and life has an absolute priority over other needs. As in all other decisions in which we have to deal…with probabilities and chances, we constantly take risks and decide on the basis on economic considerations whether a particular precaution is worthwhile; i.e., by balancing the risk against other needs. Even the richest man will normally not do all that medical knowledge makes possible to preserve his health, perhaps because other concerns compete for his time and energy. Somebody must always decide whether an additional effort and additional outlay of resources are called for. The real issue is whether the individual concerned is to have a say and be able, by an additional sacrifice, to get more attention or whether this decision is to be made for him by somebody else. Though we all dislike the fact that we have to balance immaterial values like health and life against material advantages and wish that the choice were unnecessary, we all do have to make the choice because of facts we cannot alter.
Thus, a half-century before our time, Hayek anticipated the present-day debates over the standard of care and death panels. The left wing and their allies in the bureaucracy and medical establishment claim that a single standard of medical care can be objectively specified and quantified by self-anointed and appointed panels of experts. The government can then enforce this standard as a way of reducing health-care costs – denying forms of treatment that fall outside its boundaries and insisting on adherence to this administratively determined code of treatment. Towards the end of life – when we putatively spend “too much” on preserving life – these same panels of experts will decide how many resources to devote to preserving life and when to pull the plug on the terminally ill. To deny those directly affected the final say in this process is the ultimate triumph of totalitarianism. In his unique style, all the more powerful for its straightforward simplicity and calm, Hayek brings this home.
The problems raised by a free health service are made even more difficult by the fact that the progress of medicine tends to increase its efforts not mainly toward restoring working capacity but toward the alleviation of suffering and the prolongation of life; these, of course, cannot be justified on economic but only on humanitarian grounds …[This] presents a problem which can, under no conceivable condition, be solved by an unlimited provision of medical facilities and which, therefore, must continue to present a painful choice between competing aims. Under a system of state medicine this choice will have to be imposed by authority upon the individuals.
Hayek also realized that health care is an economic good like any other. Individual variations physical makeup and personal preference will cause different people to value life and health differently. The only way to cater to these differences is through the workings of the price system. Although Hayek’s personal experience was primarily with the British National Health Service, he nevertheless anticipated the disastrous American evolution toward third-party payment of health-care costs by insurance providers, which has insulated the beneficiaries and demanders of health care from its costs. Both the British system of “free” health care and the American system of first-dollar insurance coverage have artificially increased the nominal costs of health care by preventing price from exercising its true economic function of regulating demand. What Hayek calls “true insurance” protects against occasional catastrophe without deceiving health-care consumers into thinking that everyday health care can be free.
Hayek on the Physician Shortage
Another iceberg hazarding our passage to socialized medicine is a looming shortage of physicians. One recent estimate cited a figure of 83% as the number of doctors who would renounce the practice of medicine rather then endure the rigors of ObamaCare. It should hardly surprise that Hayek saw this coming as well.
There are so many serious problems raised by the nationalization of medicine that we cannot mention even all the more important ones. But there is one the gravity of which the public has scarcely yet perceived and which is likely to be of the greatest importance. This is the inevitably transformation of doctors, who have been members of a free profession primarily responsible to their patients, into paid servants of the state, officials who are necessarily subject to instruction by authority and who must be released from the duty of secrecy so far as authority is concerned. The most dangerous aspect of the new development may well prove to be that, at a time when the increase in medical knowledge tends to confer more and more power over the minds of men to those who possess it, they should be made dependent on a unified organization under single direction and be guided by the same reasons of state that generally govern policy. A system that gives the indispensable helper of the individual, who is at the same time an agent of the state, an insight into the other’s most intimate concerns and creates conditions in which he must reveal this knowledge to a superior and use it for the purposes determined by authority opens frightening prospects. The manner in which state medicine has been used in Russia as an instrument of industrial discipline gives us a foretaste of the uses to which such a system can be put.
Hayek lived to age 92, dying in 1992 despite enduring numerous heart attacks and other chronic health problems. He fled Nazi tyranny and was perhaps the world’s leading expert on the evolution of Germany from welfare state into Nazi fascism. The “medical” uses to which doctors like Josef Mengele put government power were undoubtedly in his mind when he wrote The Constitution of Liberty in 1960, so he was understating his case by picking Soviet Russia as his exemplar.
The last fifty years have evolved in certain directions that Hayek probably could not have foreseen. The disgust of many doctors today derives from their subordination to insurance companies in much the same manner as described by Hayek above. Having been forced by HMOs to submerge what they considered the interests of their patients to that of the insurance companies, they can easily foresee a far worse situation ahead – bigger and more intractable bureaucracy mobilized by the federal government and no escape in sight. After all, at least doctors and private individuals can change insurance companies, or the patient can eschew health insurance and pay cash directly for medical services. In contrast, ObamaCare portends a Sartrean environment from which there is, indeed, “no exit.”
Hayek on the Collapse of the Welfare State
Reading Hayek, it becomes clear that the problems raised by ObamaCare and health care are merely a subset of those associated with Social Security, Medicare, Medicaid and the welfare state generally. Long before the welfare state in Europe began to collapse of its own weight, Hayek explained the nature of the dilemma it faced:
The difficulties which social insurance systems are facing everywhere and which have become the cause of recurrent discussion of the “crisis of social security” are the consequences of the fact that an apparatus designed for the relief of poverty has been turned into an instrument for the redistribution of income, a redistribution supposedly based on some non-existing principle of social justice but in fact determined by ad hoc decisions. It is true, of course, that even the provision of a uniform minimum for all those who cannot provide for themselves involves some redistribution of income. But there is a great deal of difference between the provision of such a minimum…and a redistribution aiming at a “just” remuneration in all the more important occupations – between a redistribution wherein the great majority earning their living agree to give to those unable to do so, and a redistribution wherein a majority takes from a minority because the latter has more… the latter brings us nearer and nearer to a system under which people will have to be told by authority what to do. It seems to the fate of all unitary, politically directed schemes for the provision of such services to be turned rapidly into instruments for determining the relative incomes of the great majority and thus for controlling economic activity generally.
…It must seem doubtful, however, whether there exists such a distinct phase of evolution in which the net effects of those monopolistic institutions are likely to be beneficial, and still more whether, once they have been created, it will ever be politically possible again to get rid of them. In poor countries the burden of the ever growing machinery is likely to slow down considerably the growth of wealth… and thus to postpone indefinitely the time when it will prevent the evolution of alternative institutions that could take over some of its functions.
There perhaps exists no insuperable obstacle to a gradual transformation of the sickness and unemployment allowance systems into systems of true insurance under which the individuals pay for benefits offered by competing institutions [but] it is much more difficult to see how it will ever be possible to abandon a system of provision for the aged under which each generation, by paying for the needs of the preceding one, acquired a similar claim to support by the next. It would almost seem as if such a system, once introduced, would have to be continued in perpetuity or allowed to collapse entirely. The introduction of such a system therefore puts a straitjacket on evolution and places on society a steadily growing burden from which it will in all probability again and again attempt to extricate itself by inflation. Neither this outlet, however, nor a deliberate default on obligation already incurred can provide the basis for a decent society. Before we can hope to solve these problems sensibly, democracy will have to learn that it must pay for its own follies and that it cannot draw unlimited checks on the future to solve its present problems.
It has been well said that, while we used to suffer from social evils, we now suffer from the remedies for them. The difference is that, while in former times the social evils were gradually disappearing with the growth of wealth, the remedies we have introduced are beginning to threaten the continuance of that growth of wealth on which all future improvement depends.
Hayek clearly foresaw demands for redistribution and social justice, such as those by the Occupy Wall Street movement. He envisioned the dramatic drop in productivity in countries like Greece, Portugal and Spain and the political difficulties resulting from the decline in wealth to redistribute. Hayek also knew that the entitlement state rode a tiger: any attempt to cope would result in social disintegration. Passive acceptance of the inevitable decline in wealth would produce default and financial chaos; inflating away the value of the debt would bring everyday life to a grinding halt by dumping sand into the machinery of markets.
To a student of economics, this last passage has an effect similar to that produced on the devout by a reading of the Bible’s book of Revelations – a chilling sense of awe and inevitability.
F. A. Hayek, Health-Care Prophet
F. A. Hayek’s words prove that the right-wing stance opposing ObamaCare is not the product of politics but rather of political philosophy and economics. He predicted the essential form ObamaCare would take long before President Obama was even elected. He predicted the end of the private market for health insurance, a denouement that is now impending. He predicted the degradation of quality in health care now seen in countries like England and Canada, thanks to their nationalization of health care. The man who predicted the Great Depression and whose intellectual triumph over socialism won for the 20th century the title of the “Hayek Century” is still leaving his mark on mankind.