What went wrong with the Obama administration’s health care reform? Dr. Laffer spoke on the cause of its failure and offered a solution.

 

Cho: In 2014, President Obama pushed for the Affordable Care Act, known as Obamacare, to reduce the percentage of people without health insurance in the U.S. and lower the cost of health care (*1). It is said that Obamacare did not penetrate public consciousness. What is your evaluation of Obamacare?

Dr. Laffer: To answer your question, let’s start with health care in general.

There is no way that we as a human society are going to allow older people or infirm people to die of a catastrophic disease on the streets saying, “I’m very sorry. You just have to die.” I say government needs to be involved in health care because of politics, but also for just being a human.

In general, there are three areas where I think government needs to be involved in health care when you consider how a human society should be.

 

Excluding Three Areas, Government Shouldn’t Be Involved in Health Care

Dr. Laffer: What we need is catastrophic insurance, which is to make sure that no person is left to suffer from some catastrophic, unaffordable event (*2). But it has to be strictly catastrophic.

It makes a lot of sense to me for the government to provide or mandate this catastrophic insurance. Government spending in this area will only make up for a small portion of health care spending, which takes up an enormous percentage of the federal budget.

The second area where government should be involved is truth and transparency in reporting. When there is any evidence within medical systems, it must be fully published and truthful. It must be the whole truth.

When you get a bottle of pills from the pharmacy, the ingredients of those pills should be available and honest, and they should include with it the evidence as to what those ingredients do to you and what they do for you, alright? They have to be truthful, and they have to be totally honest. If there are known side effects discovered in studies, you must be informed of those side effects as well.

Now, the truth in labeling is pretty good in the U.S. We know what the medicines are and the risks associated with those medicines. Where we are lacking is, we don’t know what the medicines in hospitals cost. We don’t know the actual records of the doctors. We don’t know any of the consequences of the prescriptions the doctors give in hospitals. That’s why I’m very much in favor of transparency in medicine in the U.S. It’s really important that we have transparency in what something costs before you get it and the risks associated with it. You should be aware of a doctor’s record. If you have your doctor whom you like very much, you need to know what that doctor’s record has been. How many patients has he or she treated? What were the results? Have they lived or died? We need to have full disclosure on all doctors and hospitals, as well as all prescriptions.

Let me explain in more detail.

If you’re sick in the U.S., you go to the hospital, they work on you and send you a bill a few weeks later. The bill is called surprise billing. It’s huge. My son, Justin, came back from Madrid in February 2020 and he was feeling sick. That was of course one of the first cases of Covid-19 in the U.S. He went to the emergency ward. He didn’t see a doctor. He saw four nurses, and he didn’t even spend the night. Three weeks later, he got a bill for 16,000 dollars (1,850,000 yen).

Cho: So that’s what happens when there is no transparency.

Dr. Laffer: Transparency is the key to everything. You need to know what you’re buying, what it does and how much it costs. Then, you can make a good decision as to whether you want to buy it.

You also want the price to be the same for you as it is for everyone else. Health care in hospitals, for the same operation, will charge very different prices depending upon your insurance company coverage, who you are and where in the country it occurs. There’s no reason as to why the prices are different. It’s just outrageous.

To address this point, President Trump signed three bills in September 2019 to improve the transparency of health insurance and the cost of medicines. He gave me credit for the executive order.

The last area where government is important, is with the poor. For those people who are really poor, you need provide them with a basic level of health care such as food banks (*3) and health clinics.

The government should provide catastrophic insurance, transparency and health care for those who really can’t afford any health care. Other than that, nothing should be done in health care. They shouldn’t subsidize drugs. They shouldn’t tax drugs.

Now, you look at Obamacare from these three perspectives. It is everything that is the opposite of that. It leads to the most inefficient medicine imaginable. It subsidizes people’s health care, but when the doctor prescribes something to you and you have 100% insurance, why should you care what it costs?

The whole reason economics works is because we do care about price. The more you subsidize people’s health care with the federal budget, the less transparency we see in the industry.

Additionally, if medical expenses are almost entirely covered by the government, it incentivizes people to make frequent doctor visits.

Of course, not many people would want to visit the hospital every day just because it is cheap, but there is certainly an effect on people’s behavior.

I go to my doctor’s office and there’s always two or three old ladies who are lonesome. They don’t have anything better to do, and they go just to chat with the doctor. It doesn’t cost them anything to go in saying, “Hello. I have pain in my elbow. How are you? I brought you this cookie that I made.” That’s not what you want. Doctors are a business. You want people to treat them like a business. You want to go to the doctor when you need the doctor and when you’re willing to pay for that service. Otherwise, you’ll over-consume health care, and the quality of that healthcare will decline. This is exactly what has happened. In that sense, Obamacare was a disaster.

 

‘Buffet Problem’ With Obamacare

Cho: I heard that the result of Obamacare was that only sick people joined, while healthy people did not.

Dr. Laffer: Yes. Obamacare did have some expense attached to it. Therefore, the only people who got the insurance were those who received far more benefits than they had costs. It’s called “adverse selection (*4)”. Only the sick people used Obamacare because they were the ones who received subsidies. The structure created a system where people who didn’t misuse health care were taxed.

Cho: Usually, health people don’t spend much on health care.

Dr. Laffer: If insurance was for healthly people, it would be very low-cost. But Obamacare was an insurance plan that was only attractive to very sick people. There was no benefit for healthy people to buy the insurance and cover the costs. This is why Obamacare was not low-cost.

It’s the same as a fixed-price buffet. When people go to a buffet and pay their fixed fee, they go right to the most expensive foods and eat as much as they can. They can eat more food than what they paid for.

Under the so-called “adverse selection”, people who will exploit the system are attracted to it. This adverse selection is exactly what happened with Obamacare.

The only difference between the buffet and Obamacare is that people who have the Obamacare insurance plan don’t have to pay the fixed price as they would at a buffet. The government pays that for you. As a result of total adverse selection of Obamacare, the costs added up to create a huge deficit.

To cover the deficit, Obama raised taxes on capital gains in his second term. He also reversed George Bush’s minor tax cuts.

Cho: What has been the impact of Obamacare on the U.S. health care system?

Dr. Laffer: Obamacare was extremely bureaucratic, which meant that the provision of health care services was made much less efficient. Health care spending in the U.S. is over 19 percent of GDP, which is drastically more than the next highest country. Regardless, our health care results are not better.

This is why the government should only be involved in providing health insurance for high-cost, catastrophic health care, transparency and a minimum level of health care for the poorest of society. Everything else should be free markets. Obamacare does all the reverse. That’s my take on Obamacare.

Cho: Government regulation expanded during the Obama administration. Why was the administration so nonchalant about increasing regulations?

Dr. Laffer: Under Obama, they put in more and more government regulations to what you must do. I could go through hundreds of areas where they put in massive amounts of regulations. And all of these regulations is one size fits all. The reason they do that is because it’s very easy then for the government to control it. It’s very hard to control a population when you look at each individual and try to figure out what should happen to each individual. So to make the bureaucrats’ jobs easy, everyone must wear a mask. That’s a typical regulation. In some cases, it’s probably the correct thing to do, but in many cases, it’s not.

For instance, in the U.S., we have racial and diversity regulations like affirmative action. You must have three members classified as minorities on the board of directors of every company. They don’t care if they’re good people or bad people. They had to be black, or they have to be female or Native American, etc.

It’s very sad, not because we don’t want a color-free or gender-free society, but because we want a merit-based society.

The problems with regulation are similar to taxation. Let’s imagine a person with low income all his life, but he owns a house. When he’s 64 years old, he sells his house for a big capital gain one year in his whole life. He has to pay a huge capital gains tax that year as if he was a very rich man. He has to pay the same tax rate that Warren Buffett pays.

The reason the government doesn’t consider individual cases is because when it intervenes in the economy, it’s tough to put in regulations that are person-responsive. It’s really difficult for the government to act as if it were a free market.

(*1) The U.S. has public health insurance programs known as Medicare, which provides health coverage for the elderly, and Medicaid, which covers health care costs for low-income individuals. While Japan provides universal healthcare, private health insurance is dominant in the U.S.

(*2) Japan also has High-Cost Medical Expense Benefit to cover expensive medical expenses.

(*3) Food banks safely collect food that would otherwise be wasted from companies and distribute it to people in need.

(*4) Adverse selection occurs when an insurance plan is only attractive to high-risk, sick individuals rather than low-risk, healthy individuals.

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Column for the Japanese readership

In Japan, one-third of the national income of 377 trillion yen in 2020 was used for social security benefits, and 30 percent of that amount, or 40 trillion yen, was used for medical expenses. Japan’s social security industry is a regulated industry with a high-cost structure. Furthermore, a universal health care system has been established in Japan. The investment of public funds has significantly lowered individual burden rates, so each citizen has lost his or her cost-consciousness. This has resulted in excessive medical demand. In this respect, Dr. Laffer’s explanation applies greatly to Japan.

Additionally, the redistribution ratio will increase with Japan’s aging population. The “big government structure” will accelerate, and economic growth will be further hindered.