Authors: Adam Smith
Not all the deals were sealed with carrots, either. Threats of unionized opposition and reduced campaign funds from the central Democratic Party coffers in the upcoming 2010 election were among the sticks brandished against potential defectors (Strassel 2010). Even the method by which the Affordable Care Act was to be passed remained uncertain until a day before its enactment, as Speaker of the House Nancy Pelosi (D-CA) decided the use of procedural shortcuts to circumvent opposition would be too brazen for such an important bill. The legislative process itself became a Bootlegger/Baptist–influenced outcome, further denying that Obamacare was to be the result of a rational, centrally controlled process.
The many last-minute additions and corrections to the legislation should be no surprise given the importance ascribed to the measure by its proponents, not to mention pressure from eager Bootleggers. Unpopular political initiatives operate a bit like unpopular financial securities: greater yields are needed to entice investors. The difference is that in politics, these yields come in the form of pork. This last point is often ignored when the costs of new policies are tallied. When a firm calculates the cost of issuing a security, it includes not only the value of the principal asset but also the yield needed to secure funding. In politics, this basic financial premise is ignored. The cost of the bill is reckoned by adding up the expenditures needed to provide the services it explicitly includes—not any side deals struck to ensure its passage. And for a bill as massive and consequential as Obamacare, there were sure to be deals aplenty.
The magical day finally came on March 23, 2010: the president signed the Patient Protection and Affordable Care Act into law. Of course, as with TARP and Dodd-Frank financial reform, enactment is only the beginning. Implementation is where much of the action takes place. It is also where many of Obamacare’s supporters, such as
The Economist
, began to grow disillusioned by the ever-evolving bill they had championed.
The biggest letdown for supporters was that the law failed to deal with the rising costs of health care. Recall that although Americans were sympathetic to the aim of expanding coverage, their primary concern was with costs. Yet it is here that the law most conspicuously fell short of its supporters’ earlier, loftier rhetoric. In October 2011, long after Obamacare was passed, the administration announced it was cutting the Community Living Assistance Services and Supports (CLASS) component of the act from its overall health care program.
CLASS, which would have provided a voluntary, public, long-term care insurance option for employees, was unceremoniously expunged from the bill after it was passed. The official reason cited was that it would be unsustainable given the premiums beneficiaries would need to pay. Because only those who could find no assistance elsewhere would voluntarily sign up for the program, adverse selection effects would ensure that only those with the highest medical costs joined the risk pool, jeopardizing the project altogether.
Obamacare has, of course, thundered on without this dysfunctional component. The outcome is telling, however, because CLASS was one of the key components that the Obama administration used to justify health care reform to a cost-conscious audience. It had greatly alleviated the official budgetary impact of the overall bill ($70 billion by Congressional Budget Office estimates) because it would ostensibly reduce the expenditures of Medicaid, by transferring benefits to the overall Obamacare program. In addition, even if the program was unsustainable in the long run, premiums were projected to exceed benefits over its first decade (Wayne and Armstrong 2011). Though the administration was skeptical of CLASS all along, the illusion of cost savings it provided greatly enhanced Obamacare’s prospects for passage, making it too important to give up before the bill had been signed.
The story behind the CLASS component’s inclusion in Obamacare illustrates Hayek’s lesson that political outcomes are often a form of emergent cosmos, not planned taxis. Indeed, according to John McDonough’s book
Inside National Health Reform
(2011), the CLASS Act would likely have died in committee but for a curious last-minute development, orchestrated (ironically enough) by a one of the bill’s Republican opponents. As Ezra Klein (2011) of the
Washington Post
reported:
Sen. Judd Gregg, a Republican, proposed to weaken the program by replacing its premium with instructions for the Secretary of Health and Human Services to develop an “actuarially-sound premium” at a later date. Much to Gregg’s surprise—much to everyone’s surprise—Dodd accepted the amendment. Gregg’s attempt to underscore the financial weakness of the program led to its inclusion in the bill. After that point, removing it would have required 60 votes and a willingness to effectively betray Kennedy. CLASS was in.
Senator Gregg’s proposed amendment to the health reform bill had the unintended consequence, at least from his perspective, of moving it out of committee. The amendment insulated CLASS from opposition, even though the ultimate fate of CLASS after enactment was now in question. Only in politics can greater uncertainty serve as a guarantor of fiscal soundness, at least through the magic of Congressional Budget Office accounting.
The CLASS element only disguised some of the hidden costs of Obamacare. The story of the law’s passage is interwoven with future deals and trades made between its most vehement backers and their more reticent, moderate allies. These are a necessary part of the opportunity cost of passing the law, because they represent benefits that would not have been rendered if health care had failed to pass.
In addition, the law’s implementation depends upon a future Congress enacting (or at least not preventing) additional taxes on Medicare. That implicitly assumes a Congress more willing to deal with these tough decisions than the legislators who enacted the law. Obamacare assumes that Medicare costs will not continue to grow, which will require a future Congress to be aggressive in curtailing entitlement expenditures. Medicare’s own actuary has recognized the implausibility of this assumption: “It is doubtful that Medicare providers can take steps to keep their cost growth within the bounds imposed by these price limitations, year after year, indefinitely” (Shatto and Clemens 2011).
Government outlays are scarcely the only costs of Obamacare, of course: new costs are imposed upon businesses and insurance providers. Smaller businesses will likely pay the bulk of the health insurance fees levied on companies that do not provide their own health plans and must document all business-to-business transactions of $600 or more. Such new burdens upon small business are supposedly offset by a tax credit, but the process of applying for this credit is complex, and it only applies to a narrow subset of the businesses affected by the new provisions.
In part because of these burdens, the National Federation of Independent Business, along with 26 U.S. states, brought suit against the new health care law. In the spring of 2012, their landmark case was heard by the Supreme Court, which ultimately rejected their arguments. But the story did not end there. Because of growing small business outrage over Obamacare’s undefined complexities, unknown costs, and their effect on hiring decisions, the Obama administration unceremoniously delayed implementation of the business mandate, previously to take place in 2014, for another year (Kliff 2013).
What remains of Obamacare’s promise to tackle the rising health care costs that so worried the public? The law’s most economically rational feature may be a weak provision—deliberately diluted to ensure needed votes—that taxes expensive health care packages. These so-called Cadillac plans emerge as a result of the tax shelters afforded to companies that provide their employees with greater insurance benefits.
Payments to employees in the form of insurance benefits serve as a tax-free substitute for payments in income. Doctors in turn price their services in accordance with their patients’ plans, meaning prices are invariably driven up by the prevalence of these premium plans. Health care professionals have long understood the inflationary pressures that such tax shelters place on health care prices. If these insurance benefits were taxed at the same rate as any other payroll expenditure, then these price distortions would cease.
Unfortunately, this aspect of the law was watered down because of pressure from unions and their representatives in the House (Herszenhorn 2010). Organized labor won a big victory when it secured an exemption from the tax until 2018 (Campanile 2010). In total, the Joint Committee on Taxation estimated that only 14 percent of family health policies and 19 percent of individual policies would be affected by the time the legislation began to go into effect in 2013 (Beam 2009). That’s hardly enough to “bend the curve” of health care costs downward.
Indeed, once the costs of the future pork, new revenue streams, and continuing tax shelters needed to ensure the bill’s passage are added to the Congressional Budget Office’s estimated price tag of $940 billion, we are looking at a staggering bill even by Washington standards.
Final Thoughts
This is ultimately how Americans ended up with a “reform” package that seems highly unlikely to achieve its twin purposes: reducing health care costs while expanding health care coverage. Obamacare became too big to stop because its supporters were able to garner votes through logrolling, which itself was a consequence of congressional flexibility on the bill’s ultimate contents. This flexibility was enabled by a politically determined budget-scoring process that bears little resemblance to the cost-benefit analysis practiced by sound financial planners.
The resulting legislative Frankenstein’s monster demonstrates that political outcomes are more accurately viewed as the upshot of a chaotic spontaneous order than the controlled and deliberative design process familiar from civics class. What causes politics to proceed so erratically? We submit that the twin demands of winning Baptist sympathy while placating Bootlegger economic interests played a decisive role in determining the final shape of Obamacare.
If politics resembles an unpredictable and emergent cosmos more than a rationally planned taxis, then lawmakers simply cannot credibly commit to a particular political outcome before the fact. They can promise to try but not to deliver. Nor, perhaps, should they want to: the flexibility inherent to cosmos allows policy to evolve as needed to ensure passage when rigid adherence to a rationally predetermined plan might yield only failure. Such flexibility enables the wise politician to placate important Bootlegger interests (such as the pharmaceutical industry) who provide indispensable support for the lawmaker’s policy objectives—amorphous as these may prove to be.
In the case of Obamacare, attending to the emergent process of politics helps us explain just how a chaotic Congress ultimately ignored the cost considerations that 38 percent of the population believed to be the biggest problem with health care. Just as it is fruitless to insist that a debtor continue making mortgage payments he simply cannot afford, we cannot hold politicians to their stated policy goals: the political process does not operate predictably or rationally enough to make such promises credible. Of course, banks compensate for the risk of a debtor’s default by charging interest rates and insisting on collateral. What comparable provisions exist in the public sector?
The answer is not much, at least nothing comparable to what we find in the market. Politicians do not have to account for the indirect and unintended consequences of their initiatives. For large-scale changes, these effects are inherently unknowable at the time legislation is crafted and so difficult to debate in the public forum. At worst, our representatives face the prospect of losing future elections—a fate several Obamacare supporters encountered. But as the saga of health care reform shows, this is ultimately not enough of a deterrent to curb the excesses of a legislative agenda that has grown too big to fail.
8. What Have We Learned? When Will It End?
And now, dear reader, we bring to a close our tale of Bootleggers and Baptists, at least for now. It is a story that explains why so many government regulations exist of a peculiar kind that constrain productive economic activity. It is a story of how key elements of society can form winning coalitions to achieve or influence regulatory outcomes. It is a story about a political dynamic that, in increasingly complex ways, connects interest groups who, for very different reasons, are prepared to spend time and resources seeking government favors. At its very root, it is a story about the demand for and supply of politically provided pork.
In this concluding chapter, we first summarize what we have we learned about the whys and hows of regulation. We then examine the Bootlegger/Baptist dynamic: Is it here to stay? Has it been running faster or slower? What does the evidence tell us? We close with thoughts about the future prospects of Baptists and Bootleggers. But first, a brief summary of our project.
Bootlegger/Baptist Theory in a Nutshell
The scale and pace of Bootlegger/Baptist activity rises and falls with the scale and pace of regulations that offer the prospects for achieving the moral goals of Baptists and enhanced profits for the Bootleggers. This means that Bootlegger/Baptist theory offers more light for explaining the characteristics of social regulation than for economic regulatory activity, although on some occasions Bootleggers and Baptists interact in that sphere as well. Social regulation tends to attract public interest groups that can speak from the moral high ground when endorsing—if not originating—new rules and restrictions. Bootlegger/Baptist coalitions succeed by driving down the cost of pork production. Politicians shielded by Baptist cover when acting at the behest of Bootleggers are less likely to be challenged in the public forum. Because of this, successful politicians must send signals that demonstrate a regard for the public interest. Doing so lowers the cost of organizing delivery of legislative favors.
A Quick Review