Outline for a critique of HillaryCare II

The Clinton Campaign unveiled their health care plan this week. It features a mixed bag of carrots and sticks that are to end the cost spiral and give universal coverage for all Americans (see note 1 below for summary). HillaryCareII will be financed by increasing taxes for the rich and reinvesting the savings from running a more efficient system. Efficiencies will be gained by promoting the adoption of information technology to cut costs, research and promotion of best practices for providers and paying for prevention rather than acute care.

HillaryCareII features the “Principles of Shared Responsibility”:
1. Drug companies should offer fair prices
2. Insurance companies should cover everyone regardless of pre-existing conditions, expectations of illness
3. Providers should collaborate to provide quality care
4. Employers should contribute to health coverage, large firms required to provide insurance; small business should take advantage of tax credits
5. Government will make insurance affordable through tax credits, provide a safety net so that insurance is not a financial burden, and will end cost spiral.
6. Individuals required to buy insurance

It is easy to see that while HillaryCare II may reach universal coverage for all Americans, it will not solve the problems of the current health system, including the cost spiral. This is because HillaryCareII does nothing to question the paradigm under which the current system rests: that government can rationally design the reimbursement mechanisms and set payment rates for provider services, the same governmental comand and control tactics that have failed int he past.

Democratic and Republican reform initiatives leave untouched Medicare’s command system of setting prices for health services based on costs of production. The prices of healthcare services (or any consumer good for that matter) are NOT based on the costs of labor, supplies, rent, capital, etc. Medicare administrators and their supporters in academia and government have the cause and effect relationship between prices and costs exactly backwards! Costs of production do not cause prices. Prices are set by the subjective judgments and valuations of individual producers and consumers exchanging goods in a free market, irrespective of production costs. In response to these prices and expected profits, entrepreneurs and business managers bid up the prices of factors of production like labor and supplies. That in the long run or that in perfectly competitive markets prices equal costs of production plus the interest rate is irrelevant. What determines the price of a service here and now is the short run adjustment mechanisms that allow producers to bid for factors of production to meet a consumer need and make a profit.

When Medicare tells providers what they will get paid for a heath service, it sends a signal to providers to bid up the prices of labor, supplies and equipment to meet the new price level. The result is a feedback loop between Medicare and providers, out of control costs, distortions in labor markets for physicians and nurses and a capital structure for health services ready to break down. The solution to the government induced mess in healthcare is as simple as it is politically incorrect: get the government out of the healthcare financing business, privatize Medicare and let the free market rationally allocate capital, labor and other resources based on consumer preferences.


Theoretical problems with HillaryCare II from an economic perspective:

The problem of the imputation of value
The problem of calculation
The problem of dissemination of knowledge Hayek
The problem of entrepreneurship P 698 Human Action
The problem of disruptive technology p. 706-707
The problem of the allocation of capital . p 704
The problem of allocation of the factors of production without prices
The problem the computation of profit and loss without prices in P 701
The problem of changes in consumer tastes p. 706


Note 1: Key carrots (+) and sticks (-) of HillaryCareII are:

For Individuals:
+Individuals can keep their current health plan.
+The congressional private health plan menu is expanded to the general population
+Medicare expanded to the general population as an additional choice.
-Limit tax free employer provided insurance to the average government menu, tax the excess benefits.
+Expand Medicaid to all low income individuals
+Expand health plan menu to fill the gap for early retirees before qualifying for Medicare
-Repeal Bush tax cuts and redirect revenue to fund program.
+Limit premium payments to a % of income yet maintain consumer price consciousness in choosing plan

For Insurance Companies:
-Medicare overpayments to HMO’s phased out.
-Guaranteed issue, automatic renewal
-No rating based on age, gender, occupation…
-No excessive profits or marketing costs
-Cannot deny coverage or renewal, unfair prices, excessive premiums
-Cover preventive care
-Cover chronic illness care management
-Promote prevention

For pharmaceutical companies:
-Pharmaceutical companies regulated to control their relationship with providers, cut prescription drug ads, prohibit direct to consumer ads.
-Medicare is allowed to negotiate directly with pharmaceutical companies to cut prescription drug costs

For providers:
-Disproportionate Share payments phased out.
+Apply technology and clinical best practices to improve quality, reduce errors, eliminate waste via technology, care coordination, best practices
-Align Medicare payment with performance, reduce geographic variation in care, information to consumers,
-Expand pay for performance based on outcomes

For employers:
+Tax credits for small businesses
+Employers expected to provide health insurance to their employees
-Limit tax free employer provided insurance to the average government menu, tax the excess benefits.

For more details on HillaryCareII go to http://www.hillaryclinton.com/feature/healthcareplan/