1. 2. 3. There Aint No Such Thing as a Free Lunch: July 2011 4. 12. 15. 16. 19. 20. 21. 22. 23.

There Aint No Such Thing as a Free Lunch

24. 25. 26. 30. 31. 32. There Aint No Such Thing as a Free Lunch: July 2011

Tuesday, July 19, 2011

The Affordable Care Act will not achieve its goals

Many of the goals of health care reform seem laudable. Proponents of health care reform want health insurance to be available to all Americans with premiums unrelated to a person’s health status. In addition, they want to make health insurance affordable for everyone regardless of income or employment status. They hope to lower health care costs through better information and accountability. They also claim that the above goals can be achieved with small increases in government expenditures that can be offset by modest targeted tax increases. If these goals were attainable via the provisions of the Patient Protection and Affordable Care Act (PPACA), it might deserve our support.

Not only are many of the goals that led to the PPACA appealing, but economic principles played an important role in how it was designed. For example, the Obama administration decided to include an individual mandate as a way to overcome the economic problem of adverse selection. In short, if government requires insurance companies to provide insurance to those with existing health problems for the same price as those who are healthy, most healthy people will choose not to purchase such insurance, raising the cost substantially for those who do. By requiring healthy people to buy insurance, and prohibiting insurance companies from setting rates based on health status, Congress intended to force healthy consumers to share some of the costs of insuring those in poor health, so that premiums in the aggregate are high enough to cover costs.

In spite of the efforts that went into its design, the PPACA will do more harm than good. Although it might reduce the premiums paid for insurance for those who are presently unable to afford health insurance, it will not come close to accomplishing the other goals listed above.

Insurance could become affordable for most of the uninsured via the subsidies included in the PPACA, but the amount spent on subsidies would likely far exceed the government’s cost projections, adding considerably to government deficits. The reason for this is that the subsidies likely would go to many more than those who are now uninsured. Subsidies in the Affordable Care Act are sufficiently generous for low and middle income workers that many companies and workers would benefit if firms drop health insurance coverage and the firms paid the required fine of two to three thousand dollars per worker for not offering insurance. The insurance premiums that firms would save by not insuring each worker are two or three times as big as the fine and companies can pass part of the savings to workers in the form of higher wages. As a result, moderate and low income workers would have more income left over after paying subsidized health insurance premiums though government insurance exchanges than if their employers provided their health insurance.

Not only will the PPACA cost the government more than anticipated, it will likely make insurance less affordable for those who do not get substantial subsidies to buy insurance from government exchanges. This is because, in spite of the mandate, many healthy people will choose not to buy health insurance and pay the penalty, which is a function of income, but no higher than $2250 per family per year. Thus those who buy insurance will be sicker than average and many will wait until they get sick to purchase insurance. Premiums will rise to reflect the higher health care costs of those who purchase insurance, making insurance too costly for people with good health who do not qualify for government subsidies.

The problem with the PPACA is that in a world of scarcity a rationally devised formula developed and administered by government bureaucrats will not reduce costs and improve efficiency. Rather, costs of meeting health care needs will be more effectively controlled with decentralized decisionmaking in a market economy. In a market system, prices and quantities continuously adjust to coordinate supply and demand in light of the economic calculations of each market participant. The desire to consume alternative goods and services would constrain each consumer's demand for health care thereby limiting its market-clearing price. When government pays or mandates that insurance companies pay for health care, prices and quantities no longer reflect the economic calculation of each market participant. Instead of prices and the value of alternatives constraining their demand for health care as they would in a free market, consumers purchase health care with little regard to cost. The result is steadily increasing demand and prices for health care with more and more of the economy’s resources devoted to health care, and government expenditures rising unsustainably.

Since the PPACA will not achieve most of its goals and will increase the budget deficit much more than proponents have claimed, now is the time to redouble efforts to repeal it, either by the current Congress or after the next election.

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