Sunday, June 02, 2013

Affordable Care Act

According to a New York Times article, one of the greatest difficulties faced by entrepreneurs is obtaining individual health insurance.  The cost of individual insurance plans can be significantly higher than a group plan through an employer. Some individual may even be ineligible for health insurance.  Even as a small business it had become increasingly difficult to find affordable health care plans to offer your employees.  If you were a small business owner you would pay more for the exact same plan a larger company would pay.  When congress passed the Affordable Care Act (ACA) of 2010 it was designed to lower the cost of health care. One way the ACA sought to lower the cost of health care was to increase the size of the risk pools.  By increasing the amount of people on an insurance plan, the risk would be spread out enough that even high risk members and small business owners would be able to afford health insurance.  According to the New York Times article, the availability of affordable health insurance would allow entrepreneurs to begin new business ventures and shake free of the shackles of their employers health insurance.

There are many issues with the American health system but the most universal is the high cost of care.  But we need to consider why the cost is high.

1) Doctors spend nearly a decade in school accumulating hundreds of thousands of dollars of student loans.  By going to medical school doctors are making an investment in their own human capital in hopes that their future will be more productive and generate more income than they otherwise would.  There is also an opportunity cost in terms of lost income, lost productivity, and the allocation of future income to pay off student loans.

2) The American judicial system that does little to restrict frivolous lawsuits by plaintiffs anticipating an out of court settlement.  One of the main purposes of any government is to enforce personal property laws.  By allowing these lawsuits the government is granting the approval for plaintiffs to steal the productivity and property of doctors. A doctor could allow the case to go to court and fight to defend his honor, practice, and income.  But the opportunity cost may be great enough that an out of court settlement would be the least harmful route for the doctor.  Today many doctors carry malpractice insurance in order to mitigate the majority of the risk of these types of lawsuits.

3) The free market is restricted because insurance providers are not allowed to sell policies across state lines.  Lobbyists and rent seekers have created a virtual monopoly in the health insurance industry through state laws and legislation.  Without free and fair competition consumers will be restricted in finding an affordable policy for their individual needs.  The policies that consumers eventually purchase will be higher than they would be if we expanded our insurance networks nationally.

The ACA does nothing to address any of these problems.  Instead the ACA treats health care as a public good and compelling Americans to purchase insurance plans that the government approves.  But this notion of the health care system being a public good is false.  A public good is a good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from the use and where use by one individual does not reduce the availability to others.  Doctors and patients compete for patients to exchange their productivity and services for income.  Even patients are in competition with one another.  In some cases it may take months to see a specialist or a doctor may stop seeing new patients if their current patient population has exceeded their ability to provide service or fulfills their income requirements. Health care is not a public good because it is excludable and rivalrous.  Doctors accrue opportunity costs, dept, and risk in anticipation that they will be rewarded for the services that they will offer consumers.  Nurses, medical technicians, lab specialists, administrators, and many other careers also accrue opportunity costs, debt, and risk in order to over their services to consumers.

As well intentioned as the government is with the ACA, it will in fact make health insurance prices rise and health care increasingly scarce.  A free market will find a price that both parties benefit from the exchange.  The health care system is broken because of the very entity that is trying to fix it.  The government uses force to get in between the free exchange of insurance providers, health care professionals, and patients.  By enacting the ACA the government has harmed both the consumer and the economy in many ways.

1) In the ACA law, health insurance plans are required to meet criteria set forth by the government regardless of the insurance coverage needs of the consumer.  This interrupts free and voluntary trade between insurance providers and consumers.  Many consumers will end up paying for services they do not need or wish to have.

2) The ACA continues to enforce the restriction of selling health insurance across state lines.  Lobbyists and rent seekers have manipulated the system so that they can benefit financially.  The elimination of competition has caused insurance costs to be higher than free market levels.

3) The ACA forces insurance companies to insure individuals with preexisting conditions.  By introducing these high risk patients into the insurance pools everyone must share in the increased risk by raising the cost of health insurance.

4) The ACA compels Americans to purchase health insurance with an opportunity cost.

5) The ACA compels employers to offer health insurance to employees who work at least 30 hours per week.  Employers have already found ways around this portion of the ACA by reducing hours of low skilled labor to under 30 hours per week.  This forces these individuals to find a second job as a means to their standard of living.  With each employee now having a health care cost to employers in addition to wages it forces many employers to restrict or eliminate new employees, business expansion, and hiring of entry level workers.  The increase in operating costs will cause prices to rise as businesses struggle to maintain profitability.  Unemployment and underemployment among low skilled workers will rise which will have an opportunity cost of disposable income that will no longer be able to be spend at small businesses and start ups.  With less disposable income people will spend less.  The less people spend the more businesses will struggle.  The more businesses struggle the more unemployed we will see and prices rise.  This vicious cycle will destroy small businesses in America and we will only be left with large box stores with enough capital to wait out the coming economic disaster.

These are all reasons why the New York Times articles is wrong in assuming there will be an increase in entrepreneurs because of the ACA.  Capital will be allocated away from small businesses and start up companies.  It will be spend instead on higher insurance premiums and taxes to pay for the unemployed which will cause a decrease in aggregate spending.  But the solution is not to subsidize doctors education because there is not a positive externality.  The solution is not to restrict insurance market size because of rent seekers and lobbyists.  The solution is not to force people into the health insurance networks.  The solution is not to compel employers to offer expensive government approved health care plans.  The solution is to remove the force of government from the health care industry.  The free market will, by trial and error, find the most beneficial prices and services for all parties involved if it is left to its own devices. Only the free market will allow insurance companies to find a balance between risk and reward while consumers find balance between cost and value.  But as long as the government uses its force to manipulate the free market system we will always have unintended consequences and a failure in the health care market.

The New York Times article referred to in this post can be found here.

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