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Economic Freedom Arguments Fail in Health Insurance Markets

 

Economic Freedom Arguments Fail in Health Insurance Markets

 

 

 

So, the Republicans finally published a plan to deal with Obamacare. Read the bill text here.

 

Incidentally, Obamacare has been getting a lot of attention in my classes lately, so why not comment on the issue like the other countless civilians, political commentators, and angry Facebook posters?

 

An interesting argument from critics of the Affordable Care Act (ACA) is that it violates one of the most fundamental American ideals of the consumer’s economic freedom. Generally, the argument follows this pattern:

“America embodies free choice, and it is impossible to fathom a free America in which consumers are legally required to spend their hard earned money on a good or program that they would not buy for themselves had there been no legal obligation placed on them. If I do not want to buy health insurance, then I should not be required to buy health insurance.”

Some critics even go as far as to add that they are willing to take on the financial burden of health care costs for discounting their health care cost risks irrationally. Essentially, this subsection of the critics acknowledges that their economic decision to forego health insurance carries a sense of individual responsibility that should not burden the public at large by having local, state, and/or federal governments help cover excessive health care costs. If someone needs health care and they do not have insurance, then they themselves and not the public are on the hook for the medical care costs. These critics maintain the core argument “my money, my economic decisions.”

 

I call this argument interesting, because it is interesting. From my experience, the ACA is largely a partisan issue—if you’re a Republican, you hate it, and if you’re a Democrat, you like it. Also from my experience, Republicans claim to understand the economy and the constructs of rational economic decisions to a degree that liberals do not. People, presumably Republican conservatives, who oppose the ACA because they believe in economic freedom demonstrate a failure to understand basic economic principles in regards to health insurance markets.

 

Sorry to break the news, but not all economic markets are equal.

 

Insurance markets specifically are plagued with inefficient incentives and outcomes. Robert Cooter and Ariel Porat do a great job presenting the dilemma faced by insurance markets in their paper advocating for a concept they call anti-insurance.

 

Here’s the rundown when consumers can freely choose their health care decisions in regards to insurance companies:

 

Health care insurance markets specifically exemplify a huge market failure called adverse selection. Adverse selection is what occurs when insurance companies are seeking insurance consumers, but the consumers know more about their own health and welfare than the health care insurers. If a consumer knows that there is a great likelihood that he or she will not need health care services, then they are not likely to get health care insurance. Let’s refer to these consumers as the “healthy people.” Alternatively, if a consumer knows that they have a great likelihood that he or she will need health care services because they have health issues or suspect that they do, then they will seek out health insurance. Let’s refer to these consumers as the “unhealthy people.”

 

Health care insurance companies know that rational consumers will evaluate their likelihoods for utilizing health care services. They know that consumers who need health care will want insurance and consumers who do not need health care will not want insurance. Health care insurance companies want to insurance as many healthy people as possible, because they maximize their own profits when they insure the largest amount of healthy people (healthy people don’t need health care services, so the insurance company do not have to cover health care costs). However, only unhealthy people want insurance. The cost of health insurance rises in order to meet the typical cost it would take to insure an unhealthy person.

 

Because the cost of health insurance is increasing, unhealthy people are re-evaluating their insurance options. The cost of insurance is higher, so the demand decreases, because unhealthy people who are not so unhealthy that they need health insurance decide that they do not want to get health insurance. Insurance companies know this, so they increase the cost of insurance again to now cover the cost of those people who are so unhealthy that it makes sense for these people to keep their insurance. Ultimately, the price of health insurance increases until no one can be insured. When the insurance market is left unregulated, no one who needs insurance gets it. This is an inefficient market.

 

What does this have to do with the ACA and economic freedom? In a world where everyone has complete economic freedom in the health care insurance market, adverse selection still exists and no one who needs health insurance gets it. We still have a market failure.

 

Economic freedom is an economic failure in this instance. That’s why the argument is so interesting.

 

Picture credit: http://www.differencebetween.net/science/health/difference-between-obamacare-and-medicare/

http://media.npr.org/assets/img/2012/03/19/obama-aca-signing_custom-7219…

Read the bill text at http://www.cnn.com/2017/03/06/politics/house-republicans-obamacare-repea…

Grace is a Philosophy and Economics double major and a Government minor at the University of Texas at Austin. Most of her writing focuses on politics and civic engagement, characteristically intertwining her journalism with op-ed takes (usually nonpartisan; depends who you ask). Grace enjoys reading philosophy, reading and discussing politics, gushing over her dog, and painting in her spare time. As a true economics enthusiast, she also loves graphs.
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