Many liberals rejoiced to hear the news of the Senate’s passing of Reid’s health reform bill last week. Many more progressives, however, began to speak out against the bill. Unfortunately, their main concerns are not that the legislation harms the market and restricts individual choice, but that it doesn’t do enough of those things.
One of the main problems that progressives cite with the bill is that it leaves out the repeal of the longstanding antitrust exemption for insurers. Some feel that this exemption from antitrust enforcement is allowing an unfair advantage to the insurance industry at the expense of consumers. While early versions of legislation included the repeal of McCarran-Ferguson, Senator Ben Nelson, a former insurance commissioner, argued successfully for its removal from the current bill.
Nelson realized that insurers are only exempt from federal antitrust oversight to the extent that state governments regulate them, so they still must comply with state antitrust laws. The only significant difference in the exemption is that state regulators have historically permitted certain cooperative practices that are generally forbidden under federal antitrust laws, but which help small insurers compete with their larger counterparts and promote insurer solvency. Both primarily help consumers, not the insurance industry.
Still, there have been claims that more oversight and enforcement are needed to “[dismantle] the health insurance monopolies.” These concerns might be overblown as Gregory Conko and I explain in our recent study:
Most mergers in any industry receive only cursory review. But, from 1993 to 2008, the DOJ conducted in-depth investigations of 34 health plan mergers28 and concluded that most of them would not raise serious competitiveness problems, and that many would increase efficiencies that could lead to lower premiums. Indeed, as Boston University health economist Austin Frakt and attorney Ian Crosby have noted, larger insurers with greater market shares appear to be better able to offset the substantial market power held by health care providers. According to Frakt and Crosby, economic research “supports the notion that recent increased market power of insurers does not lead toward monopolistic pricing, but rather it provides a counter-balance to the power held by hospitals and provider groups.”
Ensuring healthy competition in the health care market is an important step toward making health care affordable for all Americans. Repealing the McCarran-Ferguson Act, however, is more likely to reduce competition in the health insurance industry than enhance it. Improving competitiveness in the insurance market will require removing burdensome regulation and oversight, not adding to it.
Last Sunday the Washington Post ran an op-ed by Senators Patrick Leahy and Sheldon Whitehouse on healthcare reform. The senators wisely state in their piece that making health insurance more affordable will require more competition in the marketplace. Unfortunately, their proposal to revoke the federal antitrust exemption from insurers will do nothing to increase competition and may actually harm it.
Leahy and Whitehouse claim “[t]he exemption, enacted nearly 65 years ago, has served the financial interests of the insurance industry at the expense of consumers for far too long.” This, however, is far from the truth.
As Gregory Conko and I point out in our recent study, health insurers are only exempt from federal antitrust oversight to the extent that there exist state enforcers. In other words, if an insurer wasn’t controlled by state antitrust laws then federal regulators would be able to step in. The main difference between state and federal antitrust regulators is that the states have found it beneficial to allow certain cooperative practices that are not allowed under federal law. These cooperative practices, like joint- rate setting boards and actuarial information sharing allow insurers to reduce premiums for consumers, help smaller insurers compete, and promote insurer solvency. So the primary benefits of the exemption go to consumers rather than just insurers.
The Senators’ goal of creating a fair and competitive healthcare market is an admirable one. However, the means with which they want to attempt to achieve that end will not succeed. Truly increasing competitiveness in the healthcare industry will require reductions in burdensome regulation, not adding to them.
A politician wasting taxpayers’ money is generally not surprising. A congressman spending nearly $13,000 on a telephone town hall meeting, though, certainly is.
Last week Representative Ron Klein (D-Fla.) spent $12,964 of federal money to hold a town hall meeting on health care reform by way of a conference call. The Palm Beach Post reported that the call lasted approximately 70 minutes and had 6,350 listeners. Some have suggested that one of the reasons that Klein held the meeting over the phone was to avoid anti-socialized health care crashers.
This isn’t the first time Klein’s wasteful spending has graced the pages of CEI. Rep. Klein is famous for his co-sponsoring of the Homeowners’ Defense Act, a bill that would promise federal money for state-run insurers in the event of catastrophes like hurricanes. CEI’s Center for Risk, Regulation, and Markets refers to the bill as the Beach House Bailout bill, saying that the legislation would make the whole country pay to subsidize the insurance of those living in riskier areas like Florida.
Yesterday in a press release from CEI’s Center for Risk, Regulation, and Markets, the Center raised many questions that should be brought to Florida Insurance Commissioner Kevin McCarty’s attention. The questions mainly surrounded doubt over whether or not Florida has enough capital to pay out insurance claims in the event of a catastrophic hurricane.
As Christian Cámara, director of CEI’s Florida Insurance Project, said in the release, “There are a lot of very serious unanswered questions.”
There was one question that was unfortunately left out of the release. Since this is indeed hurricane season and of course a timely issue, the RRM team would like to pose the question here:
Gov. Crist recently claimed that divine intervention has kept hurricanes away from Florida. If this is the case, is the State of Florida taking proper action to appease the various storm gods? What types of sacrifices are being offered to these deities? Are OIR high priests following proper sacrificial rites? What types of objects or animals are being used and what is the cost of these sacrifices to Florida taxpayers? Would you be amenable to privatizing these sacrificial rites?
These are important questions that need to be answered for the sake of the safety of Floridians. These issues may actually be important to those who aren’t Florida homeowners, though, as the horses of Florida may in fact be in danger due to possible sacrifices to the storm gods. Could there be a connection between the recent horse poaching in Florida and these offerings to the storm deities? Could privatization of the insurance market and legalization of the sale of horse meat solve both of these issues?
The Center for Risk, Regulation, and Markets and all those concerned about the citizens and horses of Florida are waiting for your answer, Mr. McCarty.
As reported in Business Week’s BTW section, the U.S. Chamber of Commerce recently studied the word associations people have with various free-market terms.
The results were not surprising; some terms that generally mean the same thing bring starkly different associations. The piece quotes Rich Thau, who ran the testing, as saying:
“There were those who associated ‘capitalism’ with greed and with the powerful dominating the vulnerable.” But those negatives, he says, didn’t apply at all to “free enterprise.”
Call it capitalism or free enterprise; to me it doesn’t matter as long as it’s free. But indeed, for full impact in convincing those on the fence, it probably does matter how you say it.
HT to Claire S. Forman at the Mackinac Center for Public Policy.
We’ve all heard it before: “Oh, capitalism may be better than some alternatives, but it is still a bad way to go.” This is a commonly held view by many people around the world, that although better than socialism, capitalism is not the best way to promote economic growth.
For advocates of the free market, this can be one of the most annoying things to hear. How could capitalism, the system of free enterprise that has created massive quantities of wealth and brought billions out of illness and poverty, be undesirable? It certainly wasn’t socialism or central planning that devised the Industrial Revolutions.
How then does one respond to those who are unwilling to fully accept that capitalism is the best economic system?
Thankfully, Dr. Peter Leeson, an associate professor at George Mason University, has come up with a great answer in his new paper entitled “Two Cheers for Capitalism”. In the paper Leeson argues that capitalism, as a path toward development, deserves three cheers (not the two that most people reluctantly give it). Professor Leeson, author of the new book The Invisible Hook: The Hidden Economics of Pirates, that capitalism is the best possible path for development for both economic growth and quality of life reasons.
Here is a key quote from the paper:
“My findings are straightforward. The two cheers for capitalism view is wrong. Although
many relationships in the social sciences are unclear, capitalism’s relationship to development
isn’t one of them. Unless one is ashamed of unprecedented increases in income, rising life
expectancy, greater education, and more political freedom, there’s no reason to be a milquetoast
defender of capitalism. This is what sprawling free markets have meant for countries that became
more capitalist over the last quarter century. On the other side, there’s no evidence that countries
that eschewed the global trend toward freer markets and embraced substantially greater state
control performed better on any of these indicators. On the contrary, they performed
demonstrably worse. I also find that the two cheers for capitalism variant that desires markets,
but “within reason,” is wrong. There is no evidence for a Lorenz curve-type relationship between
capitalism and development. Rather, this relationship is linear. Maximal capitalism begets
maximal development.”
While some of the data used isn’t perfect, the arguments put forth by Leeson all strongly suggest that capitalism does indeed deserve three full rousing cheers. Leeson too deserves three cheers as well, both for his highly readable and relevant paper, as well for the fact that today is his birthday. I was lucky enough to take a class of Leeson’s during my time at GMU and I can attest that he is both a gentleman and a scholar. So three cheers for both capitalism and Peter Leeson!
There are many reasons for free-market advocates to be unhappy about current affairs. With numerous pieces of legislation being proposed to put shackles on our economy, it can be quite easy to take a pessimistic outlook on the present state of free markets. But sometimes to be optimistic you just need to look for the silver lining on otherwise dark clouds. Today’s dark cloud: news sources are reporting that a widespread outbreak of blight, the mold responsible for the Irish Potato Famine, is hitting the East Coast hard right now. The silver lining: because of entrepreneurial innovations and trade made possible through the open market, what would have been a major crisis 100 years ago is now a minor inconvenience to home gardeners.
Due to cooler than average temperatures and rainy conditions, the mold known as late-blight has taken hold and spread across the Northeast. The mold spreads spores that kill infected plants, generally those of the nightshade variety like tomatoes and potatoes. In the 1840s, late-blight struck Ireland’s main source of food –potatoes- and caused millions to starve and millions more to emigrate. So why not be afraid of the same thing happening here today in the U.S.? Why aren’t major news stations running this story 24/7 and interviewing experts on how to solve this crisis?
Mainly there is little to worry about because free markets work. While food markets have been regulated, they still have been free enough to encourage innovation in food technology and trade with other nations. Due to the profit motive driving entrepreneurial activity there have been many advances in biotechnology that have helped develop crops that can withstand diseases like blight. Genetically-engineered foods that are resistant to viruses, fungi, and disease are now available on the market.
Furthermore, despite some barriers, international trade still exists for food. The international food market is diverse and allows for different foods to come from many different sources. It is nothing short of amazing that – because of free trade- you can buy fresh produce like strawberries year round even if they are out of season in your hemisphere. If we were totally independent nationally for our sources of food, an outbreak of blight like this could very well be a huge crisis. If, as some environmentalists propose, we were all only able to purchase locally-grown produce then blight could be regionally devastating. Luckily, we are not restricted to only buying food from our home regions and can trade with other nations. If blight were somehow to cripple East Coast food production, while highly inconvenient and costly, food could be imported from other regions or countries.
Although many home gardeners will have problems with their tomato plants this summer, the average American will not notice any differences in everyday life. While there are many problems facing advocates of free markets, worrying about blight-induced famine should not be one of them. It can be easy to get caught up in defending open markets and to forget the unseen benefits that they constantly provide. So this summer, be sure to thank the process of free exchange as you eat non-blighted potatoes and tomatoes.
Insurance regulation is one of the most complicated areas of legislation, and following the pros and cons of different bills is often a difficult task. Some regulations can actually benefit the free market, while others obviously hinder it. But as often as is the case with legislation, political support for otherwise complex laws can be explained with simple economics.
Generally speaking, most politicians try to support legislation that brings the most money to their districts while spreading the tax costs across the unknowing public. In formal terms this is referred to as the principle of concentrated benefits and dispersed costs. This explains the political support for most programs, legislation, and pork spending, and insurance legislation is no exception.
Case in point: The Homeowner’s Defense Act proposed by Representative Ron Klein (D-Fla.). The bill proposed by Rep. Klein would, among other things, set up a large “catastrophe” fund for state insurers in the Gulf, particularly for Florida. The fund would be a pre-funded bailout of state run insurers in the event of a hurricane disaster. The special fund would allow state insurers to continue charging below-market rates for the risks being taken without having to collect enough assets to stay solvent in the event of a large disaster. The benefits of the fund would come specifically to those living along the coastlines of the Gulf, yet the costs would be spread out across the entire U.S. It should come as no big shock then that the act’s main supporters are a congressman from Florida and Florida Governor Charlie Crist.
Given that one group is getting all the benefits of the bill, it should also be no surprise that many groups would stand up against it, including some very unlikely partners. As reported in a piece in Politico last week, both environmentalist and free market groups are uniting to oppose the legislation. Free market groups like CEI are against the legislation on the basis that it intervenes in the market process and spreads the burden of risk on undeserving parties. Furthermore, the subsidizing of insurance rates for these Gulf States incentivizes building homes in areas at higher risk during hurricane disasters, as well as the construction of less safe homes. Environmentalist groups, despite their different mission, are opposed to the bill on the grounds that it would incentivize building homes in environmentally sensitive habitats, like those where sea turtles lay their eggs.
While these may seem like unlikely partners for just this one occasion, perhaps it needn’t be so. Since so often the legislation free market advocates oppose involve dispersed costs on everyone, maybe we should look more often for support in unlikely places. You just never know when the sea turtles might want to join your cause.
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