In a recent Op-Ed in the Wall Street Journal titled, “How I was wrong about Obamacare”, former special assistant to President Obama on health care and economic policy, Dr. Bob Kocher admitted that he was, well, wrong about a key element of Obamacare.
The key element Kocher referred to was the forced consolidation of the health industry. It was his, as well as the prevailing opinion amongst the political elite in the White House that the health industry needed to be organized into a system of a few large networks, as opposed to multiple competing entities. That the best, most efficient way to provide high-quality health care, while reducing overall costs, was to restrict market competition amongst physicians and hospitals, and instead create massive cartels.
And while Kocher notes that the system is working as designed, with 112 hospital mergers last year alone, the system is hardly working for the average consumer.
It wasn’t the first time the federal government devised a plan to consolidate industries in this manner, though. In 1933, President Franklin D. Roosevelt passed the National Industrial Recovery Act (NIRA) which placed massive regulatory controls on the economy as part of a series of federal government interventionist policies called the New Deal.
Through various price controls, regulatory restrictions and fascistic "Blue Eagle" symbolism, the newly formed National Recovery Administration (NRA) was tasked specifically with organizing companies into respective cartels for the sole purpose of keeping wage rates high as a means to hedge against deflation. Needless to say, it failed in its objective.
Efforts made to consolidate industries into the hands of a few large enterprises seems to be the common go-to for government these days. After all, that was precisely the plan they devised following the financial crisis.
Apparently, the federal government believed that the most effective way of dealing with ‘too big to fail’ banks, was to make a few of them bigger. So it isn’t necessarily unheard of that government would take this approach. But, the same guiding principles that failed FDR following the passage of the NIRA, is precisely why the banking industry has suffered so many bank closures nine years removed from the crash, and why the health industry is not improving.
The natural tendency of any industry is to expand over time, which is due in large part to mechanization and innovation. As new tools and machines become available, entrepreneurs find more effective and less costly ways to produce a good or service, which reduces natural barriers to entry, thereby increasing market competition.
When government intervenes in the industry by enforcing regulatory controls, it has a tendency to make it more difficult for entrepreneurs to start up and firms to continue competing. The impact of such policies has a consolidation effect on the market and makes it financially worthwhile for smaller firms to sell or merge with larger firms.
Now, the Obama administration, including Dr. Kocher at one time, were under the impression that purposefully consolidating the health industry into a few large firms, heavily controlled by the government and its regulatory agencies, would allow for these firms to emphasize on quality and efficiency, thereby improving the quality of care while reducing cost. But this is the opposite of the known effects of industry consolidation.
As industries consolidate, firms become more monopolistic in their approach. Because they lack sufficient competition, firms tend to emphasize less on quality and efficiency and more of profit maximization. Essentially, there is little need to meet the consumers' needs, only those needs obligated by law.
The impact of industry consolidation in the health industry Kocher notes has specifically had this effect. Kocher writes, “At every opportunity, organized medicine has asked to delay and lower threshold for tracking and reporting basic quality measures; yet they have no reason to delay.” But Kocher is wrong in his assertion.
These large health providers have every reason to delay these additional costs. Their market share is relatively guaranteed by the government thanks to the regulations that prevent meaningful competition.
What financial incentive do these firms have in undertaking endeavors to improve quality, which would come at a heavy cost, when there is little to assume any negative repercussions would come as a result?
Kocher ends his article by emphasizing how smaller firms have been far more effective in improving quality and efficiency in medicine. This too should not be shocking to anyone. Large firms in most industries are not on the cutting edge of quality. As firms grow, so too do them become more bureaucratic and thus costlier.
The added costs tend to prevent larger firms from emphasizing on quality and overall consumer satiafaction since much of their focus is generally on keeping prices down. Smaller firms, on the other hand, have less overhead. They can control costs more effectively, and emphasize more on consumer needs.
It is for this very reason that sufficient competition in any market is necessary. Insofar as there exists a viable competitor that the consumer can choose to do business with, larger firms will have to prioritize things like quality and efficiency, thereby improving quality standards across the board, and reducing consumer costs.
It is a shame that we must continuously learn this lesson over and over again. That lesson being the inability of governments to plan industries effectively. I know that many of us want to believe government can be an effective tool to aid the consumer, but time and time again it fails to deliver on its promises.
And this isn’t the fault of one or a few individuals in government, rather the sole fact that it was never supposed to be a function of government.
There are way too many moving parts within any industry for a government to centrally plan. As always, an industry that is controlled the least is the most productive. So many times we’ve taken the route of more government control, and so many times it has failed to achieve its desired results. It’s time we gave capitalism a chance.
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