More big-biz bailouts

Congress is likely to raise health subsidies

With the collapse of the GOP’s Obamacare replacement effort, talk has turned to a bipartisan salvage operation. Sen. Lamar Alexander has announced that the Senate health committee would endeavor to “stabilize and strengthen the individual health insurance market,” with a “small, bipartisan and balanced” package.

Beltway pundits applauded, as they think bipartisan compromise is inherently virtuous. But I am wary. Mr. Alexander is probably talking aboutan insurance-company bailout.

Obamacare delivers private health insurance, not health care, to average Americans. Like all private ventures, insurers will not participate in such transactions out of the kindness of their own hearts, but rather to make a profit (or at least not suffer a loss).

Obamacare can work only if insurers expect not to lose money on the individual insurance market. Right now, there is no such expectation among quite a few insurers, which is why many have abandoned it.

There are a variety of reasons for this problem, the biggest being that buying an Obamacare policy is simply not a very good deal if you are healthy. Insurers need healthy people in the market to, in effect, subsidize the sick. But not enough healthy people have joined, straining insurers’ bottomlines.

There are three basic ways the government could respond, short of directly providing insurance itself. First, it could deregulate the market, so competing insurers more likely would lower prices to attract healthier customers. Second, it could increase the penalties for not purchasing insurance (the individual mandate). Third, it could offer subsidies to insurers so they stay in the market.

Democrats will never go for the first option. Republicans will never go for the second. So that leaves an insurance bailout as the likely “bipartisan” solution.

Outrageous? Sure. But hardly novel. It is how much of our entitlement system works in practice.

The government essentially guarantees a minimum standard of living to every American — through food stamps, health care, disability insurance, Social Security, etc. However, only some programs, such as Social Security, are direct cash transfers to people. With other programs, the government contracts third parties to provide services. That’s how Obamacare, Medicare and Medicaid work, in part. The government pays doctors, hospitals, insurers and others to offer care.

This arrangement puts Washington, D.C., on the hook for the profitability of the medical services industry. Private providers are not going to take a loss, after all. So the government has to make sure it is in their interests to participate.

Health care is not the only case of an interlocking relationship between big industries and the state. Military procurement is similar. The government buys munitions and equipment from defense contractors, creating a linkage between the two.

One problem with this approach is that it is inflates costs, as the government is not very good at driving a hard bargain. Little wonder that these programs are so expensive.

Another problem is that it gives our republic a decidedly corporatist character. The Preamble to the Constitution begins, “We the people,” not “We the hospital lobby, doctors associations and aerospace industry.”

But when government subcontracts the public welfare to private industries, it becomes responsible to them, too. And those groups, not coincidentally, tend to donate generously to political campaigns and spend lavishly on lobbyists. They know who butters their bread.

If I had my druthers, our entitlement system would de-emphasize third-party subcontracting and increase the use of direct subsidies — via something like a negative income tax, which Nobel Prize-winning economist Milton Friedman once endorsed. Households earning below a certain income threshold would receive tax money rather than pay taxes. This would reduce costs to the government and cut down on the political power of industries like the health insurers.

Don’t hold your breath. There’s no political will in Washington for such reform. Instead, the government will keep relying on third parties, which means, in all likelihood, an insurer bail out is on the way.