Regulating Banking, Regulating Healthcare

The Federal Reserve System seems to be regaining a measure of its former prestige, despite (or perhaps thanks to) continued sniping, left and right. Next year will be the hundredth anniversary of its creation. There is a growing recognition that, while the Fed failed in its supervision of bank lending, spectacularly and instructively,  it has performed admirably its other two tasks: panic control and, in the years since 1979,  price stability and full employment.

Therefore I want to return to a point made here before. The regulation of health care in the United States is following, by fits and starts, the same pattern as did the regulation of the banking industry a century ago – and for many of the same reasons.  Competition among the various industries that make up the sector – they add up to as much as a quarter of the economy – has become destructive.

Eventually, health care providers – physicians, hospitals, pharmaceutical companies, medical device makers and insurers – can be expected to quietly caucus with their Congressional overseers and design a broadly acceptable arrangement, much as bankers did in the years leading up to the creation of the Fed. They’ll follow the outlines of an approach sketched by former Sen. Tom Daschle, chief advocate of the legislative restructuring strategy that President Barack Obama adopted in 2009.

One big difference between the banking industry and the health care complex is the presence in the latter of the private insurance industry.  This is an accident of history, a consequence of the adoption of a private, employer-based system during World War II.

For a time after the war, Blue Cross and Blue Shield organizations covered all comers at a single price .But private insurance companies soon entered the market and, offering lower premiums to younger, healthier people, commenced the cream-skimming process that continues to the present day.

There will always be demand for private insurance. But much basic medical care can be provided more efficiently through a single-payer system, just as a certain minimum standard of retirement security is efficiently provided today through the Social Security System.

The other big difference between banking and medicine is the presence of the physician at the center of the system of health care: a bank is just a bank but everybody needs a doctor.  Much of the difference in medical care cost in the US as a percentage of gross domestic product, compared to other nations, is the higher compensation of doctors, especially specialists.

For all its complexity, the Affordable Care Act of 2010 was only half the battle, raising revenues and bringing everyone into the system. The second part is much more complicated.  The Independent Payment Advisory Board that is at the center of the ACA’s plan to control costs must be built out until the 15-member board of experts becomes, in effect, a health care Fed.

By the time the task is done, the Health Care Fed probably will resemble the Federal Reserve – a board of governors, appointed by the president, presiding over a decentralized system of regional authorities, each governed locally, advisory boards of all sorts, and, naturally, plenty of Congressional oversight.  A certain degree of independence must be involved:  The Federal Reserve is self-funding, through its open market operations; some similar mechanism will have to be devised for the Health Fed.

Medicine makes banking look like child’s play, of course.  For a lucid look at what’s entailed in mediating among the myriad conflicts, see Bending the Health Cost Curve: The Promise and Peril of the independent Payment Advisory Board, by Ann Marie Marciarille and J. Bradford DeLong.  Hard to think about; hard even to read about on Sunday morning: changing and shaping the practice of medicine in the US will be the work of many decades.

This plausible story about the direction that American history is taking – it is nothing more than that – came to mind while reading the speech that Mitt Romney made last week after he had won five more primaries and wrapped up the Republican Party’s presidential nomination.

We know that this election is about the kind of America we will live in and the kind of America we will leave to future generations.  When it comes to the character of America, President Obama and I have very different visions.

Government is at the center of his vision. It dispenses the benefits, borrows what it cannot take, and consumes a greater and greater share of the economy. With Obamacare fully installed, government will come to control half the economy, and we will have effectively ceased to be a free enterprise society.

This President is putting us on a path where our lives will be ruled by bureaucrats and boards, commissions and czars.  He’s asking us to accept that Washington knows best – and can provide all.

We’ve already seen where this path leads.  It erodes freedom.  It deadens the entrepreneurial spirit.  And it hurts the very people it’s supposed to help.  Those who promise to spread the wealth around only ever succeed in spreading poverty.  Other nations have chosen that path. It leads to chronic high unemployment, crushing debt, and stagnant wages.

I have a very different vision for America, and of our future. It is an America driven by freedom, where free people, pursuing happiness in their own unique ways, create free enterprises that employ more and more Americans. Because there are so many enterprises that are succeeding, the competition for hard-working, educated and skilled employees is intense, and so wages and salaries rise.

It seems to me that it probably doesn’t really matter what the Supreme Court decides about the insurance mandate – that Obama will win the election in the fall and, if necessary, find a slightly different way to write the law if the approach he took is thwarted, and campaign until he again had a House and Senate that would pass it. The health care industry is destined to come under federal supervision, just as banking was “socialized” after 1913 – with no more dire consequences and with plenty to be gained. That this is intuitively obvious explains the desperation with which the Republicans resist:  they understand that after another four years there will be no turning back.

But that does not mean the United States is becoming “more like Europe,” any more than the assignment of responsibility for conducting monetary policy to the Fed meant the end of a vigorous and competitive banking industry. It was an American solution to a universal problem.  Once every hundred years doesn’t seem too often to expect that some new apparatus for rule-making and supervision will be required for an economy whose complexity continues to grow in new and surprising directions.

.                                     xxx

Amy Finkelstein, of the Massachusetts Institute of Technology, won the John Bates Clark Medal.  The prize goes annually to an economist under forty judged to have made a signal contribution to the field.

Finkelstein is a health economist noted for her work on insurance markets.  She is the first former newspaperperson to earn the medal, having edited The Independent as Harvard College undergraduate.

Runner-up, according to Neil Shah, of The Wall Street Journal (subscription required), was Senhil Mullainathan, 39, of Harvard, a behavioral economist who has been chosen to run the research office of the Consumer Financial Protection Bureau.

Others under consideration, Shah wrote earlier, were Ulrike Malmendier, of the University of California at Berkeley;  Nicholas Bloom, of Stanford; Matthew Gentzkow, of the  University of Chicago;  and Roland Fryer, of Harvard.

Among past winners are Martin Feldstein, Joseph Stiglitz, Paul Krugman, Lawrence Summers, Steven Levitt, Daron Acemoglu, Susan Athey, and Emmanuel Saez.

5 responses to “Regulating Banking, Regulating Healthcare”

  1. I won’t need my healthcare if my bank steals me blind. Andy Ronney had it right – journalism today does a lousy job of covering business. Most ecnonomists missed the financial bubble and for that reason, I don’t expect them to be any better at predicting healthcare.
    Just like the rise in higher ed tuition, any time the gov’t gets involved, prices go up.

  2. So it is a single payer monopoly you seek. It works well on paper, but can you point to a monopoly that increases innovation and decreases cost? Plus this monopoly will be under political control, which will ultimately be used to buy votes. Single payer systems like medicare may have low administrative costs, but fraud costs about 20% of expenditures.
    Profits are a reward for efficiency, not a additive cost, or no business would ever fail. Eliminating consumer choice never benefits the consumer.
    Your prescribed system requires both omniscience and benevolence, which are not present in D.C.

  3. In response to the commenters. Note the article in NYT by David Brooks on Peter Thiel, founder of PayPal.Monopolies (beneficial and not predators) are more valuable in creating a new market and dominate it. Competitors can be less creative (and mostly are) in established
    sectors while surviving on cost cutting.
    Government is not going away. Thatcher and Reagan promised smaller govt and did the opposite.

Leave a Reply

Your email address will not be published. Required fields are marked *