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Economic Tinkering Has Unforeseeable Ripple Effect

The environmentalist left is always eager to talk about the fragility of natural ecosystems. Even slight alterations, they argue, can have huge ripple effects and unintended consequences. Thus, we’re forced to suffer through mosquito bites every summer instead of eradicating that godless species as we should have years ago. Still, the point about the interconnected nature of natural systems is not without merit, and there is such system that is routinely disrupted without adequate regard for the consequences. That system is the economy.

The folly of government planners is that they think they can change one variable in the economy without throwing the whole system out of whack. The desire to tinker with a law here, a regulation there, overlooks the fact that these changes create a different set of incentives, which consumers and producers respond to by altering their behavior. The results of this are often impossible to predict, and rarely desirable.

A good example comes from the health care sector. The Affordable Care Act sought to reduce prices and increase coverage by enacting specific regulations on insurance companies and mandates on consumers. The web of incentives it created is far too complex to go into fully, but by now it’s pretty clear that the law has not worked as intended. People aren’t complying with the mandates, the price of coverage has gone up, which in turn has driven insurance co-ops out of business, and caused some insurers to pull out of the exchanges.

Now, the government is running up against its own ripple effects, with the Federal Trade Commission (FTC) seeking to block several hospital mergers that are occurring as the result of the Affordable Care Act. The FTC argues that these hospital mergers reduce competition and increase prices for consumers, and that therefore the mergers should be blocked. It sounds reasonable. We all know that competition makes things cheaper and better. However, in this case things are not as simple as they appear.

ObamaCare is making medicine more expensive and harder to provide, as well as encouraging cooperation and integration of hospital systems. It has therefore become more difficult for smaller hospitals to survive on their own, and these mergers are a way to comply with the ACA’s mandates while allowing larger institutions to absorb some of the costs.

Are hospital mergers a good thing? Well, probably not, but given the current regulatory and legal framework, it may be the best of a series of bad options. What if the FTC succeeds in block mergers only to confront a wave of hospital closures? It’s hard to see how that would make consumers any better off. On the other hand, without ObamaCare’s mandates, it’s unlikely that such mergers would have been necessary in the first place.

When government intervenes in one part of the economy, it creates problems elsewhere; when it tries to address those problems, still more spring forth like so many heads on a hydra. In fact, the majority of these problems would solve themselves if government would simply stay out of the way, but I’m not holding my breath for them to learn this lesson any time soon.