OPINION:
With the 11th U.S. Circuit Court of Appeals recently finding the individual mandate portion of the Patient Protection and Affordable Care Act (PPACA) unconstitutional, the goals of health care reform are making headlines once again.
Many of these goals 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. They hope to lower health care costs through better information and accountability. They also claim that these 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 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 included 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 everyone 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 with 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 insurance premiums that must be paid by those who presently are 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 likely would 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 uninsured now. The Affordable Care Act offers such generous subsidies to low- and middle-income workers that many companies and workers would benefit if firms dropped health insurance coverage and paid the required fine of $2,000 to $3,000 per worker for not offering insurance. The insurance premiums firms would save by not insuring each worker are at least twice as big as the fine, and companies can pass part of the savings on 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 through government insurance exchanges than if their employers provided their health insurance.
Not only will the PPACA cost the government more than anticipated, it likely will make insurance less affordable for those who do not get large subsidies to buy insurance from government exchanges. Many healthy people will choose not to buy health insurance. Even if the individual mandate eventually is upheld by the Supreme Court, many will refuse to buy insurance and pay the penalty, which is a function of income - but just $95 per person in 2014, rising to $695 in 2016. 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 young, healthy people who do not qualify for government subsidies.
The problem with the PPACA is that a rationally devised formula developed and administered by government bureaucrats will not reduce costs and improve efficiency. Rather, demand and the costs of meeting health care needs would be controlled more effectively with decentralized decision-making in a market economy.
Each consumer has numerous valuable alternative ways to spend his income. In deciding to purchase health care, each consumer must choose to give up the next best alternative good or service that he could have bought with the same money. If consumers paid the full cost of health care themselves, they would have a powerful incentive to find a provider who offers the best price for a given quality and quantity of health care or - if purchasing an alternative good that is more valuable to them - avoid a visit to the doctor or hospital. When most of the cost is paid by a third party, consumers won’t try as hard to find the best price, and some will purchase health care even if it offers limited benefits. The result is steadily increasing demand, which leads to higher prices that attract more and more of the economy’s resources into health care while government expenditures rise unsustainably.
Maybe the Supreme Court will rule that the entire law is unconstitutional. If not, let’s hope voters realize before the next election that we cannot afford the PPACA.
Tracy C. Miller is an associate professor of economics at Grove City College.
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