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Market for healthcare

February 7th, 2011 · No Comments

The ‘individual mandate’ in Obamacare obliges everyone to take up an health insurance plan. That seems like a restriction on personal freedom, but there are good economic reasons for that..
A free market, where health care is an individual choice, will lead to a suboptimal outcome in which we’ll all be worse off. What is known to economists as the adverse selection problem.

Basically, the supply side of the market (the insurers) want as many people (pooling as such already reduces risk) with as low risk (that is, healthy people) as possible, while the demand side (the people seeking health insurance) tend to be exactly the opposite as those with higher health risks have a greater incentive to insure themselves.

This will make health insurance more expensive than otherwise, which will lead to more people with low risk dropping out and setting up a vicious cycle in which we’re all worse off.

Is there a market solution for that?
People often know more about their own health situation that the insurance company (basically, the adverse selection problem is a subset of a wider market problem called information asymmetry), but the insurance company could screen applicants to get as much info on their risk profile as possible.

Well, you’ve seen that in practice, in which many people with a pre-existing condition are screened, and not admitted, with often disastrous consequences for the individuals involved.

Which is why mandatory acceptance without the individual mandate would be, well, something of a disaster. It would force health insurance to accept the highest health risk, while not getting compensation from healthy insured people, as they can opt out.

The whole idea of insurance is to pool risk of all, not just those with the highest risk. The latter will make the insurance prohibitively expensive (leading even more people with low risk to drop out, setting in motion the above vicious cycle). Which is, while understandable from an individual liberty point of view, the development described below is worrysome.

Reich: Obamacare ‘Individual Mandate’ Will Die

Monday, 07 Feb 2011 08:33 AM

By Julie Crawshaw

Economist Robert Reich says Republicans may well be able to defund the Obamacare “individual mandate,” the requirement that everyone purchase health insurance, or pay a fine.

“According to a recent poll, 60 percent of the public opposes it,” Reich writes in his blog. “They just don’t like the idea of government telling them they have to buy something.”

Thus far, two federal judges have struck down the individual mandate part of Obamacare, without which Obamacare can’t work. Both judges said the federal government has no more constitutional authority to require that citizens buy insurance than it has to require them to buy and consume broccoli or asparagus.

Only if everyone buys insurance can insurers afford to cover people with preexisting conditions, or pay the costs of catastrophic diseases,” says Reich.

Reich notes it’s curious that Americans don’t mind individual mandates when they come in the form of payroll taxes to buy mandatory public insurance.

“In fact, that’s the system we call Social Security and Medicare, and both are so popular politicians dare not touch them,” he says. “And no federal judge has struck down Social Security or Medicare as being unconstitutional requirements that Americans buy something.”

“So if the individual mandate to buy private health insurance gets struck down by the Supreme Court or killed off by Congress, I’d recommend President (Barack) Obama immediately propose what he should have proposed in the beginning — universal healthcare based on Medicare for all, financed by payroll taxes,” Reich says.

A study published in the journal Health Affairs stated that Obama’s health reforms might result in Americans losing out on coverage because of the mandates introduced under the new laws.

Researchers said that around 28-million people will experience coverage that changes with fluctuating incomes, and that some people might end up losing and gaining coverage on more than one occasion during the course of a year.

Tags: The World according to Economics