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Friday, July 18, 2008

Fannie Mae/Freddie Mac and the Case Against Universal Health Care

If you want to make an argument against universal health care, the best place to start is a thorough understanding of Fannie Mae/Freddie Mac and the systemic problems they have on the mortgage market. In fact, for the most part, the reasons why someone is in favor of universal health care is also the reason that Fannie and Freddie are in crisis. Ever since the failure of Hillary's health care plan in 1993, proponents of universal health care have touted a qausi public quasi private universal health care plan. In fact, as you will see, this quasi public quasi private structure is exactly what lead to the downfall of these two and by the same token will lead to the downfall of health care as well.

The most poignant argument for universal health care is that health care is too important to allow the free market to control and thus government needs to control it. Yet, that's the reason that Fannie and Freddie were created. Housing is so important that we needed the government to create Fannie and Freddie so that the government would create enough liquidity in mortgages to maximize borrowing. Both are for profit publicly traded companies but they are also Government Sponsored Entities and thus an extension of the government. Their structure is exactly the way universal health care itself would be structured.

The unintended consequence was to socialize the market so that we have two companies that control it and are also too big to fail. The structure of both is full of moral hazards and conflicts of interest. As for profit companies, their ultimate goal is to maximize profits. As extensions of the government, their goal is supposed to be to facilitate borrowing to a maximum number of people. This duel and divergent goals has much to do with their failure. By turning health care into universal health care, the government would create the exact same divergent goals in the entire industry. Furthermore, by having these two companies control the market, all choice and competition was removed. Ultimately, all loans are decided by these two and thus the borrowers really only have the choice of a Freddie or Fannie Mae. Once the government takes over health care, you will see the same sort of uniformity as well.

Now, imagine a system in which our health care system is socialized but also maintains for profit companies. Proponents of such a system will tell you it is the best of both worlds. It isn't. Any company or system that is both private and public will merely be private when it suits them and vice versa. As I said earlier, when they want to make money they will be private, and when they need money they will be public.

Much of the risky behavior of both came about because both were an extension of the government. This risky behavior had a huge payoff, and if it blew up, the two knew the government was always there to bail them out. Instead of merely having a few companies in a position of moral hazard, you would now have an entire industry in the same position. Look at what Barack Obama is proposing.

Guaranteed eligibility. No American will be turned away from any insurance plan because of illness or pre-existing conditions.

Comprehensive benefits. The benefit package will be similar to that offered through Federal Employees Health Benefits Program (FEHBP), the plan members of Congress have. The plan will cover all essential medical services, including preventive, maternity and mental health care. Affordable premiums, co-pays and deductibles.

Subsidies. Individuals and families who do not qualify for Medicaid or SCHIP but still need financial assistance will receive an income-related federal subsidy to buy into the new public plan or purchase a private health care plan.

Because everything is now going to be guaranteed, it will also mean the government will ultimately be in a position of bailing out an entity that fails in trying the meet the guarantees. There is a reason that folks with pre existing conditions don't usually get insurance. They are too much of a risk to be financially viable. Now, the government will insist that those folks be covered as well even though they carry risks that would make insurance companies stay away in a free market. Any company that covers them would then be protected by the government if their protection lead to their own failure. By creating a system that guarantees health care the government also guarantees every company in it. The same moral hazards that Fannie and Freddie have will now be applied to the entire health care system.

Second, by making Fannie and Freddie an extension of the government, it also created an environment where Fannie and Freddie were more dependent on government for special favors. The rise of special interests, not coincidentally, occurred when the size of government expanded. Once government got involved in more business regulations business needed to carry as much influence as possible. A couple days ago, Poltico reported that Fannie and Freddie spent $200 million on lobbying in the last ten years. That's because these two pseudo private companies were by nature tied too closely to the government. The government provided them regulations, credit lines, and other perks. As such, it became even more imperative for these two to make sure the government provided oversight that was favorable to them. Keep in mind that while they are extensions of the government, they are still for profit. As such, whatever the government did, Fannie and Freddie wanted to make sure it helped their own bottom line.

By making the entire health care system quasi socialist, that creates an entire industry even more dependent on the government. If you think the insurance companies, hospitals, and drug companies spend a lot of money on lobbying now, just imagine what they will spend when health care is universal. With government making all the rules, each will make sure the rules benefit their own bottom lines. We all bemoan the influence of special interests, and yet, making health care quasi socialist will only increase the influence of special interest. By making both Fannie and Freddie quasi socialist, this lead directly to both corrupting the market with lobbying money.
What do you think will happen to the health care industry if it is structured in the same manner?

1 comment:

Anonymous said...

Extremely interesting analogy. And scary too. Insightful.