Consumer Power Report #249

Published November 24, 2010

A year ago at Thanksgiving I said I was optimistic in spite of the challenges facing us. I wrote:

Call me Pollyanna, but I’m not worried. Yes, we will dither. The country will experiment with centralized planning and control. The Washington Elite will be telling you what to do, and how to do it. They will tell you that you are nothing more than a cog in the machine and your number one duty as a citizen is to obey their instructions. It will be ugly for a time.

But we’ve been there before and other countries have tried it on massive scales. It never works. Never. And it won’t work this time, either. Liberty is the inevitable answer, as the Founders knew. Each one of us is still endowed by our Creator with certain unalienable rights.”

Today I feel vindicated. The country got a taste of what President Barack Obama had in mind and resoundingly rejected it. It was rejected not on ideological grounds, but on practical ones. Americans have never been, and are not now, very ideological. We have always been practical, and the fact is simply that liberty works and socialism doesn’t.

This practicality goes back to the first colonists in Plymouth and Jamestown, as Ed Contoski reminds us at his American Liberty blog.

– Greg Scandlen



Speaking of practicality, before we get too much deeper into the weeds of Obamacare, I thought it might be a good idea to review what I call “the long, sad history of health care reform.”

We’ve done all this before and it never works out. One might think we would learn from history, but that is the problem with ideological versus practical approaches to solving problems. Ideologues keep beating the same drum, regardless of the consequences.

The politicians and social planners act like passing health reform is something new. They claim they have finally achieved something they have been trying to do since the days of Harry Truman. But they either have blinders on or are so poorly educated that they have no idea what has gone before.

In fact, over the past 50 years dozens of health reforms have been passed at both the state and national levels. Every one has failed, and so will this new one. Here is a very brief summary.

  • In 1965 Medicare and Medicaid were enacted, which pumped massive amounts of new money into the health care system, resulting in exploding demand for services but no increase in the supply. Naturally, prices went up dramatically. In fact, Stuart Altman reflected in 2001 about his time as head of HCFA and said:

When I was 32 years old, I became the chief regulator in this country for health care. At that point, we were spending about 7.5% of our GDP on health care. The prevailing wisdom was that we were spending too much, and that if we hit 8 percent, our system would collapse.

  • So, Richard Nixon enacted wage and price controls in 1971 for the entire economy, but he removed them after 18 months for everything but health care. In health care they lasted another 18 months and were finally removed in 1974. Price controls never work and they didn’t work this time, either. Costs kept rising.
  • In 1974 Congress decided that the problem was there were too many providers and that was why costs were growing, so it enacted the Health Planning Act, which created a bewildering number of agencies all intended to lower costs by reducing the supply of services. In a time of rising demand, the absolute worse thing you can do is reduce supply, so once again the law failed, and in fact made conditions worse and was soon repealed.
  • Next came a new attempt at controlling prices, but this time through state-based “all payer” hospital rate-setting systems. These began in Connecticut, Maryland, Massachusetts, New Jersey, New York, and Washington. These were six very high-cost, low-growth states. They had some small success in reducing the rate of increase in hospital costs, so the idea was sold to 24 other states, which enacted their own systems. Of course, these other states did not fit the high-cost, low-growth profile of the original six states, so the systems failed miserably and were soon repealed in all states but Maryland.
  • Frustrated with the failure to control costs, policymakers soon turned to a new “crisis” – the uninsured. Five states (Massachusetts, Minnesota, Oregon, Tennessee, and Vermont) enacted “universal” health care programs in the late 1980s, early 1990s. Each one was a little different, but they all failed and all were soon repealed.
  • Then the states turned their attention to “small group reforms,” which were intended to “stabilize” the insurance market by reducing the number of competitors and tightly regulating insurance premiums. Some states, like New York and New Jersey, required “community rating” and “guaranteed issue,” which economists of all political stripes predicted would destroy the insurance markets in those states. The economists were right. The markets in those states were destroyed and the markets in other states were severely damaged.
  • Then came managed care in the 1990s. It had actually been around for a very long time, but corporations were desperate to do something about their rising benefits costs so they were advised by the experts to switch their benefit plans to managed care organizations and it quickly dominated the market. Unlike other ideas, managed care did what it promised – lower costs. But it also created a backlash among patients who felt they were being deprived of needed services, so it was soon largely abandoned.

The problem with all these efforts was that they were based on understandings that amounted to little more than bumper sticker slogans. Stuart Altman’s quote above is one example – if health care spending reached 8 percent of GDP the system would collapse. We are now at 15 to 16 percent, and it hasn’t collapsed, so obviously that idea was simply not true. Where did it come from? Who knows, but it was universally believed at the time.

Another example is “Roemer’s Law,” which is taught to every person who has ever taken a course in health economics or health policy. First developed by UCLA professor Milton Roemer in 1959, the “law” can be summarized as, “A built bed is a filled bed,” and it is used as the rationale for curtailing the construction of new hospitals and new medical services in general. But it is patently untrue and illogical. If it were true, hospital occupancy rates would approach 100 percent at all times, but in fact occupancy rates vary widely over time and from place to place. It is illogical because people would prefer not to be in a hospital if they can avoid it. Hospitals are miserable places to spend time.

Yet another example that is very much alive even today is Dr. Jack Wennberg’s work in “small area variation.” Dr. Wennberg found in the 1980s that the rate of hysterectomies and tonsillectomies varies dramatically from place to place. This was attributed to a fee-for-service payment system that encourages excessive services. Except that can’t possibly be the cause since all of these areas are subject to the exact same payment system. But this idea is the core of the Dartmouth Health Atlas, which is still pushing to move away from fee-for-service medicine to a capitated payment system similar to the managed care approach that was rejected in the 1990s.

Today, a host of new panaceas are built into the Patient Protection and Affordable Care Act (Obamacare). These include:

  • Mandatory Health Information Technology (HIT), as dictated by Washington.
  • Comparative Effectiveness Research (CER), which will dictate to physicians what they may and may not do.
  • Pay-For-Performance (P4P) incentives, which will provide the enforcement for CER compliance.
  • Chronic Disease Management, to intervene with patients with chronic conditions.
  • And Accountable Care Organizations (ACOs), which will pull all of this together into a single organizational structure.

But all of these ideas already have been tried in pilot programs and demonstration projects, and the research findings are unmistakable – they do not work. They fail to lower costs and they fail to improve care.

So here we go again, spending many billions of dollars on programs that already have been shown to not work and in fact make conditions worse than they were before. In the process of failing yet again, many thousands of patients will suffer needlessly just to placate the social planners.

We seem to be incapable of learning.


And so it goes this time, too. This is the eight-month anniversary of the signing of Obamacare … and the wheels are already falling off the bus.

Congress appropriated $5 billion for each of two programs to ease the transition to 2014. The much-vaunted high-risk pool was expected to have enrolled 375,000 people by now, but it has enrolled a mere 8,011, according The Wall Street Journal. But the equally touted “reinsurance” program for employer-based retiree programs is far exceeding the expected take-up and is expected to run out of money next year, according to Business Insurance.

In both cases, one with too-few enrollees and the other with far too many, the programs are not working as expected. That is because Congress doesn’t know what the hell it is doing.

And writing in the Washington Examiner, Byron York includes a whole laundry list of how Obamacare is already failing. He quotes The New York Times as saying there is a “growing frenzy of mergers” in health care, and “Consumer advocates fear that the health care law could worsen some of the very problems it was meant to solve by reducing competition, driving up costs and creating incentives for doctors and hospitals to stint on care, in order to retain their cost-saving bonuses.”

He adds, “the government’s Center for Medicare & Medicaid Services has found that the new law will increase health care costs, rather than reduce them, in the coming decade.” And he concludes, “The key question of health care reform has always been how to make things better for the 16 percent while not messing things up for the 82 percent. Obama decided to blow up the system for everyone.”

SOURCE: Wall Street Journal (gated); “Lonely Conservative” blog with extensive quotes from WSJ article; “HHS Rolls Out New Application for Retiree Health Reimbursement,” by Jerry Geisel, Business Insurance, November 8, 2010, p. 33; Byron York’s article