Obamacare and Cronyism

A free-for-all of special interests is having catastrophic results

By  James V. DeLong

Once upon a time, there was a theory of government called “interest-group liberalism,” which held that a workable American democracy could be based on an infinite number of special interests’ elbowing each other in their battle to get to the government trough or to grab control of some regulatory apparatus.

Once upon a time — which is to say, now.

Sometimes this theory analogizes the political jostling of interest groups to the rough-and-tumble of the free market, but in fact it represents a dark parody. In a market, people promote their self-interest by providing goods and services that other people value and buy voluntarily. In interest-group liberalism, players make shifting power alliances so as to loot other players, or more often to loot those not in on the deal, which is usually the public.

The accurate Washington aphorism is, “If you are not at the table, you are on the menu,” and if this seems cynical, remember the words of comedian Lily Tomlin: “No matter how cynical you get, it is impossible to keep up.”

With luck, Obamacare will represent both the acme and the beginning of the end of the delusion that government by special-interest collision and collusion is a viable political system, and will trigger a return to the appreciation of limited and prudent government working within the framework of the free market and laws of general applicability.

After passage of Obamacare in 2010, Senate grandee Max Baucus recounted the history of the law. He lauded his staff, particularly the chief health counsel, who, he said, put together the white paper that became “the blueprint from which almost all health-care measures in all bills on both sides of the aisle came.”

Baucus’s staffer certainly did know the health industry. She had worked for Baucus earlier in the decade, but moved over to insurance giant WellPoint, where she became chief lobbyist. She returned to the Senate to work on the Obamacare legislation, moved on to HHS to help craft the implementation process, and, in December 2012, left government to work for health and drug company Johnson & Johnson. J&J is also part of the crony health cabal; it is a member of the PhRMA industry group, which supported the passage of Obamacare with a $150 million advertising campaign.

Baucus runs a famous revolving door. As the Huffington Post noted: “According to congressional staff records, 34 former Baucus staffers are currently registered to lobby Congress, and almost a third of them work on health-care issues, including [three] former Baucus chiefs of staff . . . [and a] former legislative director.”

For those unfamiliar with Washington, the way such arrangements usually work is that it becomes generally known that the way to reach Senator X, and the only way, is through one of his former staffers who is now on K Street. It is also known that there will be a price, in terms of campaign contributions and high fees. What happens to all those fees is something the sensible client does not want to know. Whether this description applies to the Baucus machine, I cannot say, but in Washington it is safest to apply a presumption of guilt.

It would be a mistake to think that the insurers alone wrote the bill, because the health industry has many other powerful players, and you can be sure that every one of them got a chance to grab the pen — big pharma; hospitals and other care providers; AARP, unions, feminists, and other lobbyists for selected beneficiaries; device makers; software companies. Obamacare is largely the product of the cronyism (the “Corrupt Bastards Club,” or CBC, in Sarah Palin’s phrase) that has become routine in Washington.

And routine not only in Washington, but in the states. Palin coined the term “CBC” for Alaska, and my state senator in Montana says that he deals with 63 lobbyists for the health industry and each of them is devoted to one cause: badgering the legislators for more dollars from the state.

While conservatives have been fretting over the impending tsunami of Obamacare, one group has been doing very well: investors in health companies. Over the past year, the stock prices of the Big Five insurers have all gone up by between 30 percent and 60 percent, versus about 20 percent for the S&P 500. (See the chart at AgainstCronyCapitalism.org). Other health stocks have done as well: The Vanguard health exchange-traded fund (ETF) is up 60 percent over two years, which is half again the general rise in the S&P 500, and pharmaceutical ETFs are up almost 100 percent in the same time frame. Even the medical-device makers, who complain bitterly about a special tax levied on their gross receipts, have prospered on the stock market.

But the crony capitalists did not act alone, because of course the Democratic party’s ideologues, academics, and clients were well represented, enacting their pet theories and special favors into law (or into regulation, as much of the heavy work was done at HHS after the bill passed).

This cooperation of capitalists and ideologues has also become routine; most everything in government these days is the product of what economist Bruce Yandle termed a “Bootleggers and Baptists” coalition.

Yandle created the term in reference to county-level laws forbidding liquor sales, which are maintained by an alliance of Baptists, who oppose liquor, and Bootleggers, who profit from supplying illicit liquor. Look at any major public-policy issue, and one will find a B&B coalition.

Frequently, a third B should be added: Bureaucrats. Public employees have become a powerful interest group in their own right, usually on the ideological left, but mostly interested in expanding governments’ scope and power. Agencies promote the interests of the industry they oversee, as well as the interests of their ideological and other clients; at the same time, all these various clients protect their agency’s authority and budget in Congress and the corridors of the Executive Office Building.

So it is with health care. One can be sure that the final product was negotiated out between industry and beneficiary Bootleggers, a variety of ideological Baptists, and the great health-care baronies of the state and federal government bureaucracies. One would like to see a version of the bill and the regulations that was run through Microsoft Word’s Track Changes feature, identifying the history and the authors of every line, together with comments.

The possibility is zero that such a process, with dozens of self-centered players protecting particularistic interests by slipping in pet clauses, words, and paragraphs, could produce a coherent product, especially when the bill and its regulations are thousands of pages long, filled with cross-references, and totally opaque.

The result is a carnival of contradictions. The bill forces the young and healthy to subsidize the old and sick (thank you, AARP!) but then requires that young people be allowed to stay on their parents’ policies until age 26 (gotta get the youth vote!). Medical-device makers, but no one else, are subject to a special tax on gross receipts. (They either left the room at the wrong time or failed to make the right campaign contributions.) There is a puzzling difference in treatment of state versus federal exchanges. Feminists did very well at getting their favored treatments mandated, so coverages are based on political clout rather than medical or economic rationality, and these costs are passed on to the community, a tradeoff not to the benefit of the working poor. Unions are exempted from rules that govern everyone else, and so are particular states whose senators demanded favors as the price of a “yes” vote on the bill.

A good example of the incoherence created by special-interest jockeying appeared last summer. The law and HHS regulations require a grace period of three months before a health-insurance policy can be canceled for non-payment. (See the hand of the advocates for the poor.) But the insurers objected, and got a regulatory provision that they must cover charges incurred only during the first month of this grace period: The providers can be stiffed for the second and third months, even though the patient was apparently covered by insurance when they gave the service. Now the providers have noticed this, and they are begging for relief, not by shortening the grace period but by sticking it to the insurers. The three-month grace would remain, but insurers would have to pay for care given during the whole period, not just the first month.

A sidelight is that the grace-period rule became final in March 2012, and the providers did not protest it until August 2013. One would think this is a fairly serious issue for them, so the explanation for the delay is that there is so much going on that the players are missing important issues. Heaven knows how many other booby traps, large and small, are buried in the verbiage.

My instinct as a former regulator (in consumer protection with the Federal Trade Commission) is that the confusions and contradictions are going to become steadily worse. Agencies issue regulations and assume that the public reads them. If there is no reaction, the agency staff thinks things are okay. But the public, including those who should be quite interested, does not pay attention until the point of implementation. Only then does the matter transcend the closed world of Washington lobbyists and command the focus of those who must actually apply a rule, and only when this happens does the agency staff get feedback on the real problems.

That the industry was in the drafting room might prevent some of this, but far from all, because the company operating units are a long way from the Washington reps. Also, when lobbyists draft provisions they are shameless about shafting others, especially those not present, so the number of booby traps increases with the number of players.

An example of how agency staff gets lulled to sleep: HHS said in 2010 that it was writing regulations that would scrap over half of all employer plans and require better ones (this was the work of the ideologues, the insurers, and many special-interest providers).

This did not go unnoticed; Senate Republicans introduced a resolution to negate the rule. But the issue got no public traction, and the resolution went down on a party-line vote.

Now, in the wake of the disaster of the website implementation and the destruction of individual plans, this unpleasant bit of news has been dug up. People are astounded, and HHS is astounded that they are astounded. But it is too late to retreat, even if the administration were so inclined. The rules are final, and the insurance companies’ cancellation notices are already printing out. In any case, it would be impossible to get all the special interests to agree to any retreat, so the current revolutionary upheaval in the health-care market will proceed.

The bottom line is that there is no such thing as “Obamacare.” Followers of the economist Friedrich Hayek oppose government by central administrative fiat on the ground that no one person or group can possibly possess knowledge adequate to the task. They are correct, but the situation here is even worse. Obamacare, and other recent initiatives such as Dodd-Frank, contain thousands of pages of laws and regulations written by different people with varying and often conflicting interests and motives. There is no guiding intelligence, no central planner(s) even trying to create a good system even if in reality they lack knowledge to make it real.

It is government by feeding frenzy, with different economic interests promoting themselves, and different ideological interests promoting their pet causes to whatever degree that opportunity present itself. Why anyone would think that this process could produce anything approaching rationality is a mystery.

Baucus himself is now dithering over Obamacare. Last April, he expressed concern about a “train wreck.” Last week, he likened the law to Humpty Dumpty, but remained opposed to delays until we can see “how much Humpty Dumpty can be fixed, in the next month.”

This seems an unfortunate analogy, what with Humpty Dumpty being an egg, and the folk wisdom about the impossibility of unscrambling eggs.

The analogy is unfortunate at a deeper level, because the Humpty Dumpty may be the whole health-care system. It is quite conceivable that this law is so inconsistent, incoherent, and contradictory that it will shove health care off the wall, leaving people uninsured, providers unpaid, and everything in chaos. We still do not know what is really in it or how it is going to work or fail.

Throughout the whole controversy over Obamacare, the health-care industry has been silent, happy to count its stock-market winnings. However, the glitches of the past few weeks have alarmed them, and also cut into the prices of their stocks. They are swarming Washington, torn between assuring the public that the A-Team is now on the field, and figuring out how to blame everyone else.

Government by feeding frenzy is turning cannibalistic. So conservatives must be alert to opportunity. It is incumbent on all good patriots to keep throwing chum in the water, and to ensure that the health-care industry gets its share of the blame for enabling this travesty.

Whatever the health-care system was before, not all the king’s horses and all the king’s men can put it back as it was. So, in Rahm Emanuel’s words, never let a crisis go to waste: Seize the opportunity to create a new and better market-based system. Perhaps the health-care industry can be so panicked that it will actually endorse free markets and deregulation. That would indeed be making lemonade out of the sour lemon of Obamacare.