Health Care Reform; S. Horwitz and R. Horwitz

Eventually a reform package is passed creating regional quasi-governmental insti tutions designed to supplement what mar kets already provide. These are overseen by a weak national board located in Washing ton whose job is mainly to coordinate the activities of the regional entities. Imagine the reformers claim this new system will capture what's good about both competitive markets and government intervention while avoiding the problems of centralized bu reaucracies. If you guessed this imaginary scenario refers to health-care reform, give yourself only half credit. In fact, this scenario was The authors are Eggleston Assistant Professor of Economics at St. Lawrence University in Can ton, New York, and Professor of Finance at Oakland University in Rochester, Michigan. played out over 80 years ago when the United States reformed its banking industry and created the Federal Reserve System.

The Fed, much like the regional alliances in the original Clinton health reform plan, was initially designed as a decentralized system of regional reserve banks that would sup plement market-driven institutions, but evolved into a centralized regulatory bu reaucracy that replaced the systems it was intended to supplement. The lessons of that history are instructive as Congress contin ues its debate over health-care reform. Both the Fed and the Clinton plan grew out of legitimateconcerns over the way each industry was operating. In both cases, the commonly accepted view was that the mar ket had failed and government help was needed. However, in both cases govern ment interventions were the contributing causes of many of those failures. Prior to the enactment of the Federal Reserve Act, the banking industry had reg ulations which included prohibitions on in terstate banking that prevented sophisti cated interbank relationships, stiff reserve requirements that put New York City banks at the base of an inverted pyramid of bank reserves, and requirements that banks pur chase government bonds to serve as collat eral for the currency they issued, leading to seasonal currency shortages. Very few voices pointed out that these regulations, and not inherent market forces, might have 698 caused the banking industry problems that were leading to the calls for reform.

Analogously, as critics of the Clinton plan have noted, many of today's health-care problems are themselves the result of exist ing government intervention. For example, a disproportionate amount of increasing health-care costs are due to government-run Medicare and Medicaid. From 1989to 1991, the absolute level of personal health-care spending from those two programs rose at an average of 15 percent per year, while private sector spending grew at 9 percent. Further, the differential tax treatment of fringe benefits has led to employer-provided health insurance. Because employees can purchase health insurance through employ ers using pre-tax dollars, obtaining it outside the workplace has become prohibitively expensive. This partially explains why those who are between jobs and those who are employed but are either part-timers or re cent hires tend not to have health insurance. In addition, licensing laws that prevent more doctors from entering the market and re strict the sorts of services that qualified nurses and other physician-substitutes can perform limit the supply of health care and prevent effective price competition.

Like the Clinton health-care plan, the Federal Reserve Act shied away from com plete nationalization as a solution. Instead the Act created twelve ostensibly autono mous reserve banks, each responsible for a specific geographic region and all overseen by a Federal Reserve Board in Washington, whose function was limited to coordinating the policies of the district banks. The sys tem's main task was to end seasonal cur rency shortages by more efficiently manag ing reserves and supplying currency. If the term had been in the vernacular in those days, such a scheme might have been tagged "managed competition." More Centralization, More Power Despite these intentions, the Fed quickly evolved into a more centralized institution, with increased power in the Federal Reserve 699 Board (later the Board of Governors and the Federal Open Market Committee) in Wash ington. There are two explanations for this shift and increase in power. First, if the regional banks could not cooperate and generate consistent policies, the Board's job was to adjudicate such disputes and thus, de facto, create policy. It was only a matter of time before the Board itself gained de jure policymaking power by creating "appro priate" policies in the first place and forcing the district banks to fall into line.

Second, Federal Reserve Board appoin tees were, as they are today, political. The members of the Board then, and the Board of Governors today, owe their positions to the political process and, as much research indicates, are likely to conduct policies that benefit that process. The Fed's acquisition of the power to deal in the open market (as part of the Banking Act of 1935) was an inevitable result of the Federal Reserve Board's assuming powers that went beyond mere adjudication; once it tried to centrally direct policy, it needed the tools to do so. However, this new power brought further problems, such as instability in the money supply (and prices and output), leading in turn to more crises and more cries for increased and centralized power. So, what was originally supposed to assist a competitive market that didn't work well, eventually wound up replacing large sec tions of the market. This is instructive as we contemplate the possible long-run results of health-care reform.

Rather than a Canadian-style single payer or a British-style nationalized system, the Clinton plan (like the original Fed) was based on regional health alliances that were intended to lower costs by acting as group buyers of health insurance. Either through employers or through the alliances directly, all Americans would have had health insur ance that included a standard package of minimum benefits. Overseeing all of this was to have been a National Health Board (politically appointed) which would have been responsible for restraining costs across the alliances and ensuring that the system as a whole did not exceed a national health700 THE FREEMAN • DECEMBER 1994 care spending limit. Supporters of the plan claim it was not a centralized bureaucracy, while critics claimed it was. The system was not intended to be cen trally run. However, the issue is not inten tions, but the likely unintended conse quences of adopting such a reform plan. As with the Fed, the creators' intentions are likely to be markedly different from what eventually emerges in practice. With the power to set premiums and determine ben efit packages, a National Health Board would likely be the focal point of disagree ment and debate among major health-care players, including the various alliances. As was the case with the original Federal Re serve Board, attempting to coordinate these diverse demands is likely to quickly turn into pre-emptory policymaking with the other players following the National Health Board's lead.

It is also likely that any national health board will become highly politicized, espe cially with statutory limits on total expen ditures. Imagine the opportunities for polit ical dealing if the FOMC had strict limits on how much base money it could create, yet had discretionary control over which bond dealers it would buy from. The only thing worse than rationing is politicized rationing and, given the historical evidence for the eventual centralization of power in a polit ical board and limits on spending, that seems a probable outcome. Despite claims to the contrary, the Clinton health-care reform plan, if enacted as first presented, would have likely become another centralized and politicized bureau cracy. Like the Fed, we could have ex pected recurring "crises" leading to further calls for the National Health Board to have more power, and hence even more crises and a further centralization of power. Some thing close to nationalization could eventu ally result. One need only compare the Fed's powers today with those stipulated in the original Act for a perfect historical parallel.

Although the disappearance of purchas ing alliances in more recent proposals is an encouraging development, most of the bills under consideration as Congress adjourned included a provision for setting health plan standards at the national level and called for a National Health Board to determine the scope and duration of services and cost sharing details. Even if the stipulated pow ers of such a board are weak, as was the case in the early years of the Fed, it would not be surprising ifit acquired greater powers in the chaotic environment that would follow its creation. As a result, Congress would stillbe wise to remember the experiences of the Federal Reserve System. As history demonstrates, the banking cri ses before so-called reforms pale in com parison to those that followed it: the bank failures of the Great Depression, the infla tion of the 1970s and '80s, and the savings and-loan crisis and commercial bank fail ures of the mid and late '80s. All of these can in some way be attributed to those very "reforms" and the increased government intervention they entailed. The evidence suggests strongly that (to borrow an ap propriate metaphor) an interventionist cure is often worse than the disease. We had best heed the lessons of history if we are to avoid an uncomfortable feeling of deja vu after "reforming" the health-care delivery system. D THEFREEMAN IDEASON UBERTY Origins of Federal Control Over Education by Charlotte Twight E xtensive federal control over elemen tary, secondary, and post-secondary education has long been a reality in the United States. The key federal statutes that gave rise to that control were the National Defense Education Act of 1958 (NDEA) and the Elementary and Secondary Educa tion Act of 1965 (ESEA). Although these two statutes form the bedrock of federal education control, their passage involved extensive misrepresentation of the bills' sub stance and the politico-economic circum stances ostensibly justifying the measures.