December 04, 2009

[Harper's Magazine]
To reform a system, first capture it

Signing the Affordable Care Act, March 22, 2010

The idea that there is a competitive "private sector" in America is appealing, but generally false. No one hates competition more than the managers of corporations. Competition does not enhance shareholder value, and smart managers know they must forsake whatever personal beliefs they may hold about the redemptive power of creative destruction for the more immediate balm of government intervention. This wisdom is expressed most precisely in an underutilized phrase from economics: regulatory capture.

When Congress created the first U.S. regulatory agency, the Interstate Commerce Commission, in 1887, the railroad barons it was meant to subdue quickly recognized an opportunity. "It satisfies the popular clamor for a government supervision of railroads at the same time that that supervision is almost entirely nominal," observed the railroad lawyer Richard Olney. "Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things. It thus becomes a sort of barrier between the railroad corporations and the people and a sort of protection against hasty and crude legislation hostile to railroad interests." As if to underscore this claim, Olney soon after got himself appointed to run the U.S. Justice Department, where he spent his days busting railroad unions.

The story of capture is repeated again and again, in industry after industry, whether it is the agricultural combinations creating an impenetrable system of subsidies, or television and radio broadcasters monopolizing public airwaves for private profit, or the entire financial sector conjuring perilous fortunes from the legislative void. The real battle in Washington is seldom between conservatives and liberals or the right and the left or "red America" and "blue America." It is nearly always a more local contest, over which politicians will enjoy the privilege of representing the interests of the rich.

And so it is with health-care reform. The debate in Washington this fall ought to have been about why the United States has the worst healthcare system in the developed world, why Americans pay twice the Western average to maintain that system, and what fundamental changes are needed to make the system better serve us. But Democrats rendered those questions academic when they decided the first principle of reform would be, as Barack Obama has so often explained, that "nothing in our plan requires you to change what you have."

This claim reassured not just the people who like their current employment benefits but also the companies that receive some part of the more than $2 trillion Americans spend every year on health care and that can expect to continue receiving their share when the current round of legislation has come to an end. The health-care industry has captured the regulatory process, and it has used that capture to eliminate any real competition, whether from the government, in the form of a single-payer system, or from new and more efficient competitors in the private sector who might have the audacity to offer a better product at a better price.

The polite word for regulatory capture in Washington is "moderation." Normally we understand moderation to be a process whereby we balance the conservative-right-red preference for "free markets" with the liberal-left-blue preference for "big government." Determining the correct level of market intervention means splitting the difference. Some people (David Broder, members of the Concord Coalition) believe such an approach will lead to the wisest policies. Others (James Madison) see it only as the least undemocratic approach to resolving disputes between opposing interest groups. The contemporary form of moderation, however, simply assumes government growth (i.e., intervention), which occurs under both parties, and instead concerns itself with balancing the regulatory interests of various campaign contributors. The interests of the insurance companies are moderated by the interests of the drug manufacturers, which in turn are moderated by the interests of the trial lawyers and perhaps even by the interests, of organized labor, and in this way the locus of competition is transported from the marketplace to the legislature. The result is that mediocre trusts secure the blessing of government sanction even as they avoid any obligation to serve the public good. Prices stay high, producers fail to innovate, and social inequities remain in place.

No one today is more moderate than the Democrats. Indeed, the triangulating work that began two decades ago under Bill Clinton is reaching its apogee under the politically astute guidance of Barack Obama, "There are those on the left who believe that the only way to fix the system is through a single-payer system like Canada's," Obama noted (correctly) last September. "On the right, there are those who argue that we should end employer-based systems and leave individuals to buy health insurance on their own." The president, as is his habit, proposed that the appropriate solution lay somewhere in between. "There are arguments to be made for both these approaches. But either one would represent a radical shift that would disrupt the health care most people currently have. Since health care represents one-sixth of our economy, I believe it makes more sense to build on what works and fix what doesn't, rather than try to build an entirely new system from scratch."

With such soothing words, the Democrats have easily surpassed the Republicans in fund-raising from the health-care industry and are even pulling ahead in the overall insurance sector, where Republicans once had a two-to-one fund-raising advantage. The deal Obama presented last year, the deal he was elected on, and the deal that likely will pass in the end is a deal the insurance companies like, because it will save their industry from the scrap heap even as it satisfies the "popular clamor for a government supervision."

* * *

The private insurance industry, as currently constituted, would collapse if the government allowed real competition. The companies offer no real value and so instead must create a regulatory system that virtually mandates their existence and will soon actually do so.

A study by the McKinsey Global Institute found that health insurance cost the United States $145 billion in 2006, which was $91 billion more than what would be expected in a comparably wealthy country. This very large disparity may be explained by another study, by the American Medical Association, which shows that the vast majority of U.S. health-insurance markets are dominated by one or two health insurers. In California, the most competitive state, the top two insurance companies shared 58 percent of the market. In Hawaii, the top two companies shared the entire market. In some individual towns there was even less competition—Weilmark, for instance, owns 96 percent of the market in Decatur, Alabama. "Meanwhile, there has been year-to-year growth in the largest health insurers' profitability," the AMA reports, even as "consumers have been facing higher premiums, deductibles, copayments and coinsurance, effectively reducing the scope of their coverage." And yet no innovating entrepreneurs have emerged to compete with these profitable enterprises. The AMA suggests this is because various "regulatory requirements" provide "significant barriers to entry." Chief among those barriers, it should be noted, is an actual congressional exemption from antitrust laws, in the form of the McCarran-Ferguson Act of 1945.

Insurance companies aren't quite buggy-whip manufacturers. But they are close. In the past, one could have made an argument that in their bureaucratic capacities—particularly, assessing risk and apportioning payments—insurance companies did offer some expertise that was worth paying for. But all of the trends in politics and in information technology are against insurance companies offering even that level of value. Insurance is an information business, and as technology makes information-management cheaper, technological barriers to entry will fall, and competition will increase. (People who relied on the cost of printing presses to maintain a monopoly should be able to relate.)

At the same time, the very idea of assessing health risk is beginning to be understood as undemocratic, as was revealed by the overwhelming support for the 2008 Genetic Information Non-Discrimination Act, which bars insurers from assessing risk based on genetic information. Over time, more and more information will be off-limits to underwriters, so that insurance ultimately will be commoditized—every unit of insurance will cost about the same as every other unit of insurance. Managers know that one must never allow one's product to become a mere commodity. When every product is like every other product, brand loyalty disappears and prices plummet.

Which perhaps is one reason why the insurers themselves have always favored the central elements of the Democratic plan. As long ago as 1992, when Hillary Clinton was formulating her own approach to reform, the Health Insurance Association of America (now America's Health Insurance Plans, or AHIP) announced that insurers would agree to sell insurance to everyone, regardless of medical condition (guaranteed issue) if the government required every American to buy that insurance, and used tax dollars to subsidize those who could not afford to do so (universal mandate). Carl Schramm, the president of the association, said this was the "only way you preserve the private health-insurance industry. It's plain-out enlightened self-interest." The deal collapsed nonetheless, in part because Congress wanted to introduce a "community rating" system that would have put an end to underwriting by making insurers sell insurance to everybody in a given community for the same price. Insurers wanted to maintain the profitable ability to charge different prices to different people.

Last December, though, AHIP said it would support community rating as well, and since then the real negotiation has been all about details. The insurance companies would agree to sell their undifferentiated commodity to all people, no matter how sick, if the government agreed to require all people, no matter how healthy, to buy their undifferentiated commodity. Sick people who need insurance get insurance and healthy people who don't need insurance cover the cost. A universal mandate would include the 47 million uninsured—47 million new customers.

The Democratic plan looks to be a huge windfall for the insurance companies. How big is not known, but as BusinessWeek reported in August, "No matter what specifics emerge in the voluminous bill Congress may send to President Obama this fall, the insurance industry will emerge more profitable." The magazine quoted an unnamed aide to the Senate Finance Committee who said, "The bottom line is that health reform would lead to increased revenues and profits."

* * *

Democrats have crafted a plan full of ideas that almost certainly will help a lot of people who can't afford insurance now. It also happens to be the case that some of those ideas will significantly benefit the corporations that at one time or another have paid Democrats a lot of money.

The framework for reform, for instance, was authored not by Max Baucus, the Democratic senator who chairs the Finance Committee, but by his senior aide, Liz Fowler, who also directs the committee's health-care staff. She worked for Baucus from 2001 to 2005 but then left for the private sector. In 2008, reports the Washington gossip paper Politico, "sensing that a Democratic-controlled Congress would make progress on overhauling the health care system," she returned to Baucus's side. Where had she retreated to recover from her Washington labors? Politico does not say. In fact, she had become the vice president for public policy and external affairs at WellPoint, one of the nation's largest health-insurance corporations.

Pretty much everyone involved in health-care reform has been on the payroll of one health-care firm or another. Howard Dean, the former head of the Democratic National Committee and, heroically, a longtime proponent of a single-payer system, nonetheless recently joined McKenna Long & Aldrich, a lobbying firm with many clients in the industry. Nancy-Ann DeParle, the so-called health czar who is overseeing reform at the White House, is reported to have made as much as $6 million serving on the boards of several major medical firms. Tom Daschle, who was set to be Obama's secretary of health and human services until it emerged that he had failed to pay taxes on his limousine and driver, now earns a $2 million salary as a "special public policy advisor" for the lobbying firm of Alston & Bird, which represents, among many other clients, HealthSouth and Aetna. Asked to describe his current role, Daschle said, "1 am most comfortable with the word resource."

Most illustrative of the clever efficiency with which the Democrats have allowed themselves to be captured, though, is the strange journey of Billy Tauzin. He spent his first fifteen years in Congress as a "conservative" Democrat, struggling mightily to make his fellow party members more amenable to the needs of the healthcare industry. In 1994 he founded the "moderate" Blue Dog coalition, whose members continue to deliver the most reliably pro-business vote in the Democratic caucus. But the Blue Dogs of 1994 did not go far enough for Tauzin, so in 1995 he became a Republican, and by 2003 he finally had mastered the system to the degree that he could personally craft one of the largest corporate giveaways in American history: Medicare Part D. After that bill was made into law, he took the natural next step—he became president of the Pharmaceutical Research and Manufacturers of America, the lobbying arm of the drug industry.

Now the circle is complete. The Democratic president of the United States, the candidate of change, the leader of the party Billy Tauzin deserted so long ago for failing to meet the needs of business, must "negotiate" directly with this Republican lobbyist, and rather than repeat this entire tortured journey himself, all Obama has to do is agree to Tauzin's demands—which he has. The Democratic deal for the drug companies is, if anything, even sweeter than the Democratic deal for the insurance companies. After one of Tauzin's many visits to the White House, he told the Los Angeles Times that the president had decided Medicare Part D would not be touched. "The White House blessed it," Tauzin said, assuring his clients that billions of government dollars would continue to flow their way. Democrats, meanwhile, must have been almost equally assured by the subsequent headline in Ad Age: "Pharma Backs Obama Health Reform with $150 Million Campaign."

* * *

What can Republicans do against opponents like that? They are trying to win back their friends in industry, but the effort is a bit sad. In September, for instance, Senator Jim Bunning of Kentucky proposed an amendment that would, among other things, require a "cooling-off period" of seventy-two hours once the bill was completed. His colleague, Pat Roberts of Kansas, said such a pause would provide "the people that the providers have hired to keep up with all of the legislation that we pass around here" the opportunity to say, "Hey, wait a minute. Have you considered this?"

But of course "the people that the providers have hired"—having actually already written the legislation—are quite familiar with the details. The only hope for Republicans right now is if the insurers themselves decide they can get an even better deal by turning on the Democrats, which no doubt they eventually will. Just because competition has moved from the marketplace to the legislature does not mean it is any less intense. Even as various cartels and trusts compete for the favor of the parties, so too must the parties continue to compete for the favor of the cartels and the trusts. In October, for instance, the insurers appeared to turn against the Democrats when AHIP released a study that claimed the Democratic approach to reform would radically increase the cost of insurance. Obama, meanwhile, hit right back. In his weekly radio address, he said the study was "bogus," noted that the insurance companies had long resisted attempts at reform, and even called into question the validity of the industry's antitrust exemption. The New York Times reported that such attacks indicated a "sharp break between the White House and the insurance industry," but this was better understood as a negotiating gambit—perhaps insurers believed drug manufacturers were getting a better deal and saw an opening, or perhaps they simply wanted to revise a specific term of the bill, which at the time, according to the Wall Street Journal, would have increased their industry's tax burden by $6.7 billion a year.

As Democrats negotiate such impasses, the Republicans, no longer the favored party of corporate America, are left to represent nothing and no one but themselves. They are opposing reform not for ideological reasons but simply because no other play is available. They have lost the business vote, and even their call for "fiscal responsibility" is gestural at best. The "public plan" so hated by Republicans, for instance, would have reduced the cost of reform by as much as $250 billion over the next decade, yet the party universally opposed it because, as Senator Charles Grassley of Iowa explained, "Government is not a fair competitor. It's a predator."

Such non sequiturs have opened the way to the darker dream logic that of late has come to dominate G.O.P. rhetoric. Nothing remains but primordial emotion—the fear, rage, and jealousy that have always animated a significant minority of American voters—so Republican congressmen are left to take up concerns about "death panels" and "Soviet-style gulag health care" that will "absolutely kill seniors." Republicans, having lost their status as the party of business, have become the party of incoherent rage. It is difficult to imagine anything good coming from a system that moderates the will of corporations with the fantasies of hysterics. ■

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