Economics teaches us to always consider the opportunity costs of alternatives--that is, not to just evaluate the costs and benefits of one outcome but also to consider the costs and benefits of alternatives. The health insurance reform debate could benefit from an opportunity cost approach.
Critics of health insurance reform rail against the potential harms and shortcomings of the Democrats' reform plans. However, they seldom mention the actual problems caused by the exisitng health insurance system.
A number of stories this week remind us that the status quo in the health insurance market has significant problems. In an earlier post, I linked to the story about the 39 percent rate hike that Anthem Blue Cross of California is imposing on its customers. At Slate, Timothy Noah relates how BlueCross BlueShield of Texas systematically rejects and discriminates against applicants with health issues. And yesterday, the advocacy group, Health Care for America Now, reported that profits for the five largest U.S. health insurers rose in 2009 by 56 percent (not bad for the worst recession in half a century), while the companies reduced private coverage by 2.7 million customers.
Collectively, the stories show that the critics' health care horror stories already apply to the current system.
Rationing. Critics of health insurance reform warn that the Democrats' proposals will lead to rationing. At the hysterical end of the scare-mongering spectrum are Sarah Palin's (and others') claims that reform would lead to "death panels."
Anthem's actions and the Health Care for America Now report remind us, however, that rationing already happens in the existing insurance system and more generally in health care markets. In insurance markets, rationing happens through movements in the price of insurance. As prices go up, insurance purchases go down, either through people buying less coverage or by people dropping insurance coverage altogether. The Anthem premium hike is an outrageous example; nevertheless, it is rationing.
Timothy Noah's story reminds us that rationing also happens in other ways, such as when insurance companies limit the payments that they will make, the customers they will enroll, or the services that they will cover.
Rationing also occurs when certain services simply aren't offered because a provider can't make a living or a profit offering them.
Critics (and proponents) of health insurance need to be upfront in stating that rationing will and must happen. Health care is costly, and its supply is not limitless. It's not feasible to provide as much health care as everyone might possibly want. Rationing isn't a matter of whether but rather a matter of how.
Somebody's hands are already probably on your health care. The critics' mantra throughout the insurance reform debate has been for the government to keep its "hands off our health care." The critics neglect to tell you, however, that many hands are already all over most people's health care.
For market-based insurance, the supply, conditions, and price of insurance policies are set by a few business executives whose primarily goal isn't to provide as much service as possible but to obtain the highest profit possible. If increased service and increased profit coincide, consumers win; however, if service and profits don't coincide, consumers' interests will be thrown overboard. All of three stories that are referenced about show how firms can actually increase profits while serving fewer people.
And this assumes that firms act in a rational way. Business owners are actually free to do as they want. Competitive markets act as a disciplining device, but they are a very harsh and imperfect device. If an owner does something and persists in something that the market won't support, the business fails. That provides a strong incentive to make profit-maximizing business decisions, but it doesn't prevent owners from making bone-headed decisions. If a bad decision results in a business failure, a lot of people can be hurt in the process. Thus, it's important to remember that one of the "hands" on private insurance policies is the "invisible hand."
You could lose your private insurance. In a market system, companies are free to offer insurance if they want to and mostly under the terms they want to. However, they are also free not to do these things. In addition, a company isn't compelled to offer insurance next year just because it offered insurance this year. If companies stop offering certain types of policies or go out of business, customers are left to fend for themselves.
Private markets provide lots of incentives for companies to supply products and services. When there are many potential suppliers and customers and when all of the potential market participants have adequate information about the goods being transacted, markets provide socially efficient outcomes on the whole.
Many insurance markets, however, have few competitors (are concentrated), which allows the existing monopoly or oligopoly suppliers to reduce the services that they offer and still enjoy a profit.
Also, insurance markets are characterized by asymmetric information. Customers have more information about their health needs than insurers. This can lead to certain types of insurance just not being offered at all.
Finally, as mentioned, competition, when it is applicable, often works through business failures.
Where does that leave us? The health insurance status quo is great for corporate profits. However, it leads our country to spend nearly twice as much per capita on health care than the next most expensive country. At the same time, it produces inferior health outcomes while still leaving approximately 46 million people in America uninsured and exposing many people to financial risk and bankruptcy.
The status quo redistributes income to the wealthy, costs too much, provides too little, and exposes people to unnecessary risk. To paraphrase Sarah Palin, that's how that free market-y insurance thing is working out for ya.
