Why Obamacare Failed

It's time to stop pretending that it's healthy

Why Obamacare Failed

Obamacare failed. I’m sorry to be the one to tell you, but as a solution to the country’s healthcare woes, it fell short in practically every area. It failed in its primary goal of bringing down the cost of medical care and insurance coverage, with even those opting to obtain their coverage through the “exchanges” grumbling about the monthly premiums. Instead, it led to increased underlying costs, double-digit annual increases in policy prices, a reduction in the number of insurance providers, limits on lower-cost alternatives to the standard marketplace, and a greater expansion of the healthcare-industrial complex.

Of course, it wasn’t all bad news. The Affordable Care Act (ACA) did extend medical insurance coverage to more Americans, but it did so with mediocre coverage, access limits to actual healthcare providers, sky-high deductibles and premiums, and pretend price structures that require taxpayers to bear a portion of the cost for both individuals and providers. Obamacare also enabled those with pre-existing conditions to acquire coverage, but as with most government programs, it did this on the backs of poor and middle-class Americans, since they must now bear the costs associated with expensive procedures not previously covered.

Any large government program will help some people, and there are legitimate stories of individuals who benefited from the program. But anecdotes are never a valid means of assessing public policy. Some residents of Pyongyang live relatively stable and secure lives, but no honest observer would claim that such anecdotes were indicative of most North Korean citizens, or represented an appropriate assessment of national policy.

Obamacare failed for three key reasons, all having to do with government intrusion into the healthcare marketplace: (1) the ACA greatly expanded the existing regulatory systems that were already perturbing the driving forces of supply and demand in a setting of scarce medical resources; (2) the goals of Obamacare were political rather than fiscal in nature, attempting to right supposed societal wrongs through the force of government mandate; and (3) the law entrenched a bureaucratic, centrally controlled, healthcare monopoly that encouraged oligarchy and big business, discouraged competition, innovation, and common sense, and made any exit from that system both painful and complicated.

Regulation versus Supply and Demand

Obamacare failed in part because it was designed to work against the very processes that tend to lower prices and increase access by ordinary consumers. The key factor in the pricing of any good or service is supply and demand. Where there is an oversupply of, say, crude oil and not a lot of demand for gasoline or other petroleum-based products, prices for oil go down. If OPEC limits oil production, as they did back in September, prices rise, even if demand remains steady.

The same is true for any other exchange of goods or services, including medical care. If you increase demand for a service, or reduce the supply of that service, prices will increase. Obamacare accomplished both. By forcing insurers to cover a wider range of services on every policy type, and by providing tax subsidies (read: welfare) to a large number of Americans that artificially lowered the cost of insurance premiums, the ACA increased the demand for services by those who previously would have postponed or gone without such services. Likewise, despite a temporary increase in Medicaid payouts to physicians in 2013 and 2014, the law lowered physician reimbursements for those on the lowest-level plans. Since doctors are not required to accept patients from any specific plan, many opted to forgo patients with those lower-paying policies, thereby reducing the supply of services for those patients. Higher demand, lower supply; this combination tells any ECON 101 student that prices will rise. (To be fair, some provisions of Obamacare do attempt to increase the supply of providers. But implementation is on the order of years and decades, so the short-term benefits are limited.)

The use of insurance for routine services also tends to drive up prices, since guaranteed coverage ensures that a limitless pool of funds will chase after a limited supply of general practitioners. If your auto insurance provided unlimited refills of your gas tank, you would drive more, since there would be no financial disincentive to travel as far or as often as you desired.

Government regulations covering the availability and quality of coverage, the licensing and educational requirements for providers, and the specifics of medical insurance policies all impact the cost, and ultimately the fees, associated with medical services. As the costs of implementing those regulatory requirements increase for typical doctors, more and more providers opt to provide services through large hospitals and provider groups, which can better distribute those costs across the organization. This also decreases both supply and competition, and tends to make medical care an assembly line of rudimentary, impersonal service offerings.

The Politics of Medicine

As with any attempt at government-mandated price controls, the announced goals are always laudable: helping the sick and the poor. But as we have experienced, beyond the specific anecdotes analyzed above, the sick and the poor, not to mention the healthy and the rich, have not fared better under Obamacare. That’s because the goals were political. President Obama’s promises to bring “more security and stability” to the healthcare market notwithstanding, the law has actually brought confusion and instability in part because the stated goals differed from the actual goals.

If the purpose of the law was to make healthcare more affordable, it would have increased supply or decreased demand, or both, leading to lower prices. But the goal was to require businesses—those employing insurable people as well as insurance companies—to provide new or increased services at new and increased costs. Those requirements came with penalties for those who did not comply, and therefore represented a political, and not a fiscal, process.

One of those political goals was to provide benefits for lower-income Americans, paid for by the rich who presumably were not already “paying their fair share.” While the costs of basic medical care have gone up well beyond the average inflation rate in recent decades, most other products and services have not seen such increases. Consider, for example, cell phones. Back in the early 1980s, the TV series Hart to Hart showed the typical daily trappings of a fabulously wealthy California business tycoon: a butler named Max, regular involvement in murder investigations, and a Mercedes 450 SL convertible with a tethered cell phone. The ability to make phone calls while driving was the purview of the rich and powerful. Back in 1984, the Motorola DynaTAC cost around $4,000—equivalent to about $9,200 today. Monthly service fees ranged from $100 to $200 (today’s dollars) plus per-minute charges, assuming that your city had cell towers.

Today, a cell phone with a super-computer attached can be obtained for free, when bundled with a two-year plan at much less than $100 per month. Thirty years ago, only Jonathan and Jennifer Hart could afford a portable phone. These days, the typical middle-class family has a phone for every member of the household. This cost decrease has taken place despite high infrastructure costs, enormous increases in phone technology, and rising worldwide demand for phones.

This story can be repeated for all kinds of advances: automobiles, air conditioners, indoor plumbing, and so on. Even luxury services are now available to lower-income members of our society. Long ago, only a millionaire could afford a chauffeur. Today, a few touches on your Uber app brings a driver into your presence within minutes, or within seconds if you live in a large city.

Laws like the ACA attempt to punish the rich, to bring them down to the same level as everyone else in a futile drive toward a more perfect utopian society. Such policies are misguided, and distort the reality that the rich help drive the lowering of costs for any new product or service. Cell phones are cheap today in part because Jonathan Hart and his real-world counterparts were willing to pay $9,000 for one phone. Flat-screen plasma displays and basic desktop computers both used to cost around $15,000. Today, you can walk out of a Best Buy with something even better for under $300, thanks in part to those who were willing to pay $15,000 for the latest technology.

Bureaucracy and Power

One of the worst abuses of laws like the ACA is that they purport to be for the common American, but the biggest beneficiaries are large businesses and entrenched politicians. Policies like Obamacare enable “too big to fail” companies because the regulatory requirements are too costly or time-consuming for sole proprietors. I know this from first-hand experience, as one company I work with had to spend hundreds of hours trying to comply with the reporting requirements of the law, to say nothing of the implementation demands. When confronted with such burdens, some smaller businesses simply give up, or pay high fees to third-party compliance companies, fees that are passed on to customers.

Because large companies are more often driven by issues of efficiency and uniform product offerings, the innovation benefits that come from a highly competitive marketplace dissipate. Politicians love such narrowing within industries because it makes legislation of those markets easier to manage, and provides better opportunities for lobbying interactions. A lone doctor in Wyoming will seldom waste time petitioning the government for redress of grievances. A New York-based HMO with 50,000 providers in its network can petition all day long.

The correct way to lower healthcare costs is to enact limited, sensible regulations that increase the supply of medical services, and allow demand for those services to progress normally based, in part, on what Americans at different income levels can afford. The following regulatory and cultural changes would result in significantly lower healthcare costs for the average American.

  • Charge consumers directly for medical services and insurance coverage instead of masking those prices through non-catastrophic insurance policies, employer-provided bulk coverage, and tax kickbacks.
  • Allow insurers to provide national-level policies with a wide range of coverage benefits, and at price points that match those benefits.
  • Allow medical insurance policies to work like other insurance products: reducing the risk associated with high-cost events instead covering mundane, routine expenses.
  • Reduce the overall number of regulations to a level that allows an individual provider to offer safe, affordable services while still making a profit.
  • Modify licensing requirements to permit providers at lower training and education levels to offer lower-cost basic services.
  • Stop confusing low-price with low-cost by ending the practice of tax rebates, physician reimbursements, and “cost correcting” payments to insurers.
  • Require providers to make their prices public, including the underlying “chargemaster” rate schedules from which billings derive.
  • Reduce the cost of a medical education by expanding the number of schools with training programs, and stop trying to force every high school graduate into college, which only serves to bombard the supply of schools with over-demand, and dilutes the educational offerings. (NOTE: Obamacare does attempt to expand provider training, one of its positive aspects.)
  • Enact meaningful tort reform so that quality providers are not taken out of the market by one angry patient.

In short, stop pretending that medicine is different from any other industry, a magical realm where the normal incentives of business should somehow not apply. These suggestions are broad, and would likely take a decade or more to implement. There would also be some pain in the short-term, as the current generation’s dependence on work-provided unlimited coverage would come to an end. But if we are truly serious about reducing the price of healthcare, we need to start seeing it for what it is: just one more ordinary industry that should not be singled out for government control just because it sounds important.

[Image Credits: White House]


  1. Hi, Tim. As usual, a well-written and thought-provoking piece. I’m sure you won’t be surprised if we disagree on some points. First, I’d like to define “Obamacare”, then “failed”, and wrap up with a few comments about your three reasons.

    It’s interesting that when you look at polling results, the public is pretty evenly divided on whether they’re in favor of Obamacare (46% opposed). But if you ask them about the Affordable Care Act, more people are in favor of it (only 37% opposed). And when you ask about individual provisions, such as preexisting conditions or young people staying on their parents’ plan, the approval goes up again. So I’m going to talk about the ACA to focus on the healthcare law, not the healthcare law that was proposed by a black man.

    Next, let’s discuss the word “failed”. Did the ACA fail to live up to its design goals, its vision? No argument there. The fact that a large part of that failure was due to Republican statehouses and governors not implementing one key provision that extended Medicaid to many more people is beside the point.

    But to quote the Rolling Stones, “You can’t always get what you want, but if you try sometimes, you might find, you get what you need.” The ACA was always a compromise, a “best we could get” solution. It was a solution that originated with conservatives in Massachusetts, and was adopted by Democrats as an attempt at compromise when their preferred plan — a single payer system called Public Option — proved to have insufficient support. I suspect as many liberals were disappointed in the ACA as conservatives. But to me, the word “failed” can also be defined as, are we better off with the ACA than we were before it? And there is clear evidence that we are. Millions of people who did not have an affordable healthcare option before the ACA now have healthcare. Although deductibles are high on most ACA exchange plans, the plans include a variety of preventive care with no cost sharing, so even people on high deductible plans are better off than having no healthcare coverage at all. In an economy where many young adults are forced to live with their parents, being able to be on their insurance plan until age 26 was a godsend. And lives have been saved as people can get treatment for major conditions they otherwise would be unable to address. So, it “failed” to be everything we hoped, but it moved us forward a little bit. That’s not a failure. That’s the nature of political compromise.

    Your three reasons are (1) regulation vs supply and demand, (2) politics of medicine, and (3) bureaucracy and power.

    1. Supply and Demand. If the operation of supply and demand produced humane results, we wouldn’t need regulation. When insurers were left to themselves, they refused to cover many people, charged exorbitant prices to others (individual plans), and created policies with so many exclusions that they didn’t cover much at all. The ACA was designed to counterbalance abuses that were side effects of the profit motive, to address a real human need. Governments aren’t about supply and demand. They’re about correcting the results of supply and demand.

    2. Politics and medicine. Speaking of supply and demand, the much maligned individual mandate in the law is there for a reason. If you have a political goal to ensure coverage for all and you choose to use the wrong mechanism (insurance) to provide it, you have to increase the risk pool to make it work. The current Republican rhetoric about keeping parts of the ACA that people want, such as no pre-existing conditions, and throwing away the parts they don’t, like the mandate, simply will not work. In this section, you argue that the goal of full coverage is part of the problem. I suggest that it was the execution that was wrong, not the political goal.

    3. Bureaucracy and power. I agree with you on many of your points here. The ACA was a poor design because it tried to protect the insurance companies instead of finding an alternative to them for basic healthcare. I’m not talking a full nationalized healthcare system with government doctors here. Just adopting a single payer plan would have streamlined processes, cut costs, and achieved the goal of 100% coverage. But we didn’t go that route, and now we’re living with the results. Insurance policies should not be used for routine healthcare; it’s not what they were designed to do. Transparency of costs is badly needed. A hip replacement in the U.S. can cost thousands of dollars; in Europe the cost is much less. But we don’t have the data to understand why. And tort reform is also badly needed.

    You concluded, “In short, stop pretending that medicine is different from any other industry, a magical realm where the normal incentives of business should somehow not apply. ” I couldn’t disagree more. Some things are too important to be merely commercial transactions. I’m more than willing to let the market do those things it does well; when it proves over decades that it is unwilling or unable to meet the need, we ask another mechanism — government — to intervene.

  2. Thank you for taking time to provide such an in-depth response. But let’s jump right into it. Part of the problem in discussing healthcare reform is that irrelevant things are treated as important. You mentioned a few: the quibble over “Obamacare” versus “ACA”; that similar legislation was sponsored by conservatives in Massachusetts; anecdotes of specific individuals being helped; whether supply and demand produces “humane” results. These things are irrelevant to whether the ACA as a policy was an overall benefit or an overall failure. Also, the implication that I object to the law because of the president’s skin color is offensive and without merit, especially given that the article only mentioned President Obama once, and in a positive light.

    In your responses to the “supply and demand” and “politics and medicine” sections, you included (perhaps without noticing it) a big part of the problem. You put the focus on the costs insurance coverage, instead of on the underlying costs of healthcare itself. Insurers charged “exorbitant prices” (before and after the ACA) not because insurers are heartless and corrupt (though they may be), but because the underlying healthcare costs increased. And although it is counterintuitive to think so, the insurance coverage itself was part of the cause of those underlying increases. A single-payer plan would produce identical results, with prices increasing. To offset those increases, government plans in other countries must offset those prices in other ways, such as limiting covered procedures, or rationing care, or mandating price controls on supplies and services that push providers who don’t want to starve out of the market. In Cuba—yes, that Cuba—the offset came through a reduction in the standard of living, and a tiered healthcare system that gave the worst benefits to those most in need.

    Prices are an indication of how scarce resources are being used by consumers. If some procedure has a high price, it’s not just from technology costs, which will come down over time. It’s the demand, mixed with a lack of supply (doctors) to meet demand. When the government, via insurers, mandates a maximum payout for doctors looking to provide such procedures, it causes doctors to consider other options, cementing in the lack of supply. In this case, it’s not supply and demand that are heartless, it’s the policy that makes doctors choose between helping people and feeding their families. In your response, you opted to look at only one group that needed help through healthcare reform: those with limited coverage. That ignores all other groups that are part of a nationwide relationship on healthcare.

    You said, “I’m more than willing to let the market do those things it does well; when it proves over decades that it is unwilling or unable to meet the need, we ask another mechanism — government — to intervene.” We have not had a true open market for healthcare since WWII, when FDR intervened with a wage freeze that forced businesses to look at health insurance and other non-salary benefits as inducements. In this, government interrupted the normal operation of supply and demand, a system that successfully transformed the US from a poor, agrarian third-world country into a place with the world’s highest standard of living across all classes of its citizens. “Some things are too important to be merely commercial transactions.” I say that some things are too important to let government bureaucratize it to the point of failure.

  3. It’s your blog, Tim, so I’ll let you have the last word. But I did want to respond to your comment that I was implying you personally objected to the ACA because President Obama is black. I certainly meant no such thing; I know you are a compassionate, honorable man and you wouldn’t have such an opinion. My comment was aimed at those who coined the term Obamacare as a perjorative, and who object to it just because it’s his signature program, not because of the facts of the program itself. I was explaining why *I* choose to use the term ACA instead of Obamacare. I apologize that my wording gave you the wrong impression.

  4. Thanks for the follow-up. I actually prefer “ACA” myself (while secretly laughing at the “Affordable” part of the name), but alternately use “Obamacare” since that’s what most people are familiar with. I knew you weren’t accusing me personally. I just wanted to make it clear that a reasonable person can object to an Obama-endorsed policy without being personally opposed to Barack Obama.


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