Race to the Bottom?

From David Henderson of Econlog:

Throughout the discussion about the bill, various proponents said that the law would immediately prevent insurance companies from denying coverage to children based on pre-existing conditions. And it does. What, apparently, it doesn't do is require insurance companies to cover children. At least that's what some insurance companies are reputed to be saying. Having heard this, Obama appointee Kathleen Sebelius wrote a threatening letter to the health insurance companies' trade association.

Interestingly, various Democratic Congressmen expressed outrage at the insurance companies for reading the law carefully and trying to figure out what they are and are not required to do. There's no report that the Congressmen are angry at themselves for their carelessness.

This is an isolated issue, so I don't want to make too much of a big deal over it. But I do think this story illustrates a couple of key points about regulation in general.

My thoughts circle around Hayek's Knowledge Gap. Hayek's critique of central planning stated that it was impossible for a small, selected group of "enlightened" individuals to possess the massive amount of knowledge necessary to effectively and efficiently "plan" an industry (obviously a very poor summary on my part).

I think the intuitive points of this theory are very obvious and quite convincing, from a basic common sense perspective. What is even more interesting though, in my view, is that in today's health care system, which is very much a top-down, centralized regime, we have a tug-of-war between knowledge and power. In other words you have a couple hundred of legislators with the most power but least knowledge, followed by legions of bureaucrats with less power but more knowledge, finally ending with health care professionals, mostly private sector, with the least power but the most knowledge. So, in essence, you have this bizarre power/knowledge paradox where those who understand the system best are more or less the slaves of very naive politicians with very bad incentives.

I think what this will do will create a long-term race to bottom for health. At least that's what the systemic incentives in place tell me what will happen. You will have episodes like the one above ("Yes, we have to cover children with pre-existing conditions, but where does it say we have to cover children at all?) or simply a decrease in quality because the best and brightest will not have the power incentive (autonomy) to match the knowledge they possess and the cost it took to attain that knowledge.

Like with all complex pieces of legislation, the unintended consequences, the Unseen as Bastiat said, are very difficult to foresee and account for.