Health Care Cronyism

As the government intervenes more and more in our healthcare industry, the normal business model less frequently marks the path to success. Instead, connections are becoming more important than competence.

On June 28th when the U.S. Supreme Court ruled the Affordable Care Act (ACA) constitutional, something interesting happened on Wall Street. As a whole, the stock market went down. But a few specific areas actually enjoyed a bump. Analysts at the Becker Friedman Institute discovered that while stocks of private insurers dropped, other sectors such as pharmaceutical companies and hospital firms made significant gains.

Why? Perhaps it isn’t coincidence that the shares that rose were owned by the very same industries that lobbied aggressively in favor of the legislation back when Congress was first debating it in 2009. The pharmaceutical industryspent $40 million in three months alone as part of a $150 million quid pro quoin which the industry agreed to spend heavily to lobby for the pending health bill in exchange for a deal that the law would not allow price controls or allow for reimportation of drugs—both of which could have cost the industry tens of billions of dollars. And the American Hospital Association spent $18 million that year.[1]

Normally the success of a company hinges on its ability to provide valuable products or services to consumers. If it doesn’t, it goes out of business. As the government intervenes more and more in our healthcare industry, the normal business model less frequently marks the path to success. Instead, connections are becoming more important than competence. (The following “I Want To Be A Crony” video provides insight into what a future based on those values may entail.)

Imagine trying to explain this to your child: “Son, you don’t worry about making something people value. Instead, make sure that you know the right people, or at the very least, plan on greasing a few palms.” If a company’s success or failure now hinges on its proximity to lawmakers rather than its value to consumers, what are children learning about the path to success?

To be sure, corporate cronyism does not always work out well for those who engage in it. The pharmaceutical industry itself nearly got double-crossed during the health debate when it looked like Rep. Henry Waxman, then chair of the House Energy and Commerce Committee, would ignore the deal cut with the White House by adding a reimportation provision to the legislation anyway. Likewise, in theory, the law’s cuts in hospital payment rates by Medicare were supposed to more than offset by the new revenues flowing in from previously uninsured patients. However, the hospital industry’s backroom deal with the White House looks far less swell in light of Medicare’s own actuary subsequently pointing out that these aggressive Medicare payment reductions will leave 15 percent of Part A facilities (predominantly hospitals) in the red within the first decade, 25 percent in the red by 2030 and 40 percent by 2050.[2]

Stock prices for health insurers declined in the aftermath of the Supreme Court ruling because by giving states more flexibility regarding the Medicaid expansion, three million more people than originally projected will be covered by private insurers in the exchanges. These low income additions to the exchange pools are likely to be sicker-than-average; yet, ACA prevents insurers from charging them higher rates.

The American Medical Association, likewise, got taken for a ride. The AMAtraded an agreement not to oppose the law in exchange for a permanent “doc fix” aimed at averting a sizable reduction in physician payments required under current law. But due to the sizable cost of the fix (more than $300 billion over 10 years), lawmakers cut it from the final bill. Consequently, the AMA is right back where it started, begging every year for a temporary reprieve from a cut in payment rates that will exceed 31 percent next January unless Congress steps in (as it has regularly for the past decade) to give it a reprieve.

Of course, consumers may count their blessings that AMA influence is as limited as it is. The AMA favors restrictions on retail clinics even though such clinics may represent the most realistic hope of redressing the looming shortage of physicians that will be aggravated by ACA.

Labor unions also got their share of goodies from ACA. Even though union members make up only 13 percent of the labor force, they constituted roughly half of those who benefited from waivers handed out by Health and Human Services Secretary Kathleen Sebelius. Think this was a coincidence? Anyone who  believes that might want to read Mallory Factor’s new book,Shadowbosses—which reveal that the SEIU plans to use ACA as a vehicle to add 21 million new members to its roles.

The less influence government has on our healthcare industry, the less influence special interests can have in creating policies that benefit them at the expense of everyone else. If we want to restore the relationship between patients and those giving them care, we need to stop this healthcare cronyism.

One of the worst features of the law is that it greatly expands the role of the federal government in healthcare, which predictably will massively increase the lobbying efforts/expenditures by every part of the health system to try and protect every disparate interest. We can be absolutely sure that aggregate lobbying expenses/campaign contributions related to healthcare will rise dramatically—indeed one might cynically view passage of ACA as designed to achieve exactly this result. Whether all this special interest jockeying for an insider advantage will improve the health of Americans or lower its health spending is surely debatable.


[1] The price controls would have entailed roughly $90 billion in mandatory “rebates” through the Medicare prescription drug benefit similar to those that are imposed in Medicaid. Let me be clear; I believe these rebates would have been a singularly bad idea. In a study of health services regulation, I found that every dollar saved by Medicaid through its rebate program essentially was shifted to private payers, so the savings were entirely illusory. Likewise, any short-term consumer benefits of lower prices due to reimporting lower-priced drugs from other countries and selling them here would be more than made up by its devastating long-term consequences for pharmaceutical innovation and new drug discoveries. On balance, the reductions in R&D resulting from allowing reimportation would result in the loss of 79 million life years—equivalent to roughly 1 million lives—or $7.9 trillion in value. Thus, we are assuredly better off by not having either rebates or reimportation included in the final bill that was enacted. However, if we accept the conclusion that some have reached that “ObamaCare might never have passed without the drug companies,” it is certainly reasonable to question whether Americans are better off as a result of this odious deal.

[2] In recent testimony before the House Budget Committee, the Medicare actuary reported:

The provision of most health services tends to be very labor-intensive. Economy-wide productivity gains reflect relatively modest improvements in the service sector together with much larger improvements in manufacturing. Except in the case of physician services, I am not aware of any empirical evidence demonstrating the medical community’s ability to achieve productivity improvements equal to those of the overall economy. The Office of the Actuary’s most recent analysis of hospital productivity highlights the difficulties in measurement but suggests that such productivity has been small or negligible during 1981 to 2005.

(See CMS’s “Hospital Multifactor Productivity: A Presentation and Analysis of Two Methodologies” as well as footnote one on page seven of Richard Foster’s testimony.)

In short, the ACA will cut hospital payment rates by 1.1 percent a year on the presumption that hospitals can make up this shortfall through productivity improvements despite clear evidence that hospital productivity improvements over a quarter century have been “small or negligible!” This is a clear instance of wishful thinking over actual experience.