Tuesday, September 29, 2009

Nothing is Necessarily What It Appears to Be

Today the Senate Finance Committee rejected the Public Option. It appears as if the Democrats on the extreme left still are holding fast but one is now led to ask what is the true meaning of their actions. To understand this better we must see what seems to be already agreed to.

The Plan as it seems to be evolving has the following characteristics:

1. The providers of insurance will be any and all existing insurance providers. There generally will be no limitation.

2. The offerings will be regulated by the Government in terms of what is covered and what price ranges can be charged.

3. There most likely will be a Government regulator akin to say the FCC, or in the old days the ICC which regulated trucking, the CAB which regulated airlines or the FERC which regulated energy prices.

Thus one could envision a health insurance infrastructure regulated like common carriers were regulated for years. They have to meet certain standards, they have to have cost justifications or even caps, they have to be open to all comers, thus the common carriage model, and they will cross state lines thus being regulated via a commerce clause set of rules.

To understand the dynamics of this one need but read the classic by Alfred Kahn, The Economics of Regulation, which was the seminal work which led to the elimination of regulation on airlines and trucking. Namely we could envision the recreation of a CAB or ICC for health insurance with such things as rate caps and regulatory rules akin to what we had in those industries.

Yet one should remember that when we had a CAB, airlines were costly but they ran on schedule and they were actually enjoyable. Now with unregulated airlines we have cattle cars and experiences that drive people to walk. Thus perhaps regulation is better than no regulation.

Thus one could expect a new Government Agency, akin to the FCC, a creature of Congress not of the Executive with some balance in representation, creating rules, managing costs and reducing everything to some common denominator. Is this good or bad? Clearly the FCC has had its downs and really downs, not very many if any ups, but the ICC and CAB actually made life better, air travel was better and moving furniture was less risky and one knew the costs. Thus the correct regulatory environment has merits. On the other hand look at the SEC, it has done a poor job at best. Thus it appears as if we are entering a new regulatory environment.

On the positive sides this may allow transparency, cost control, openness akin to a common carriage domain, and yet a political animal. As log as this new agency does not pick winners or losers, namely selecting treatments based upon some wisdom of a Government regulator, it may actually be a great benefit.

But one must remember that things do not remain static. The industry will then consolidate and seek regulatory relief and find ways to circumvent the restrictions. One need only read Steve Coll's book the Deal of the Century to see the end game. The dynamics of a regulated regime will play out. Namely we will see a dynamic as follows:

1. Initial compliance by all insurance companies.

2. The loss of small ones who cannot compete.

3. The consolidation into massive insurance providers as we see in telephony, ultimately being a mere handful if not one.

4. The control of regulation slips from regulator to the regulated as happened in AT&T.

5. Congressional action to break up the giant.

6. Re-institution of deregulation.

And the process continues. In a strange sense it is a material dialectic, pure Marxism carried out in thesis, antithesis and synthesis. Then it starts again.

If this is what is most likely to happen then why are the extreme left wing Democrats pursuing so much for a public option. Is it that the want competition or is it something else. "Thou dost protest too much..." is most likely the case. This natural evolution to a nationally regulated system delivers what we all seek, at least those seeking universal coverage. The public option is really the camel's nose in the tent for a Government operated health care system. So why are they not honest, because very few want that solution. We never nationalized AT&T.