The goal of the Affordable Care Act (ACA) is to matriculate 26 million uninsured Americans, many with expensive pre-existing conditions, into the current health care system where the numbers of doctors, hospitals, and insurance companies are shrinking. Because I understand the law of gravity, I know if I drop an object from a height it will fall towards the Earth. Similarly, because I understand the principle of adverse selection and the laws of supply and demand, I know that if not repealed, the ACA will end in failure. Here is the sequence of events that will eventually lead to the ACA’s demise:
(1) The ACA will increase the per unit cost of healthcare for everyone.
(2) Some fortunate Americans will see their increased premiums subsidized by their neighbors, giving those subsidized the illusion of a cost reduction.
(3) Some unfortunate Americans will see astronomical increases in their health insurance premiums and income taxes.
(4) Healthy middle class Americans will eventually drop their expensive coverage and opt to pay the less expensive “tax.”
(5) Insurance companies will incrementally leave the health insurance market until the whole scheme fails.
The Obama Administration and a Democratic majority in Congress can pass laws to suspend gravity or change the speed of light, but they will not succeed because physical laws are unaffected by human desire. Health Insurance operates by certain economic laws in the same way matter follows physical laws in the natural world. According to the economic laws of supply and demand, if you increase the demand for a good or service and the supply remains constant (or decreases), the unit cost for that good or service will increase. Good intentions can’t change this economic reality. The ACA is going to increase the demand for health care by entitling unhealthy, expensive patients to unlimited access. Simultaneously, rational, healthy, and inexpensive patients are going to drop their expensive health insurance policies and opt to pay the cheaper “tax” instead. The ACA magnifies the insurance problem known as “adverse selection,” where only people needing immediate health insurance will buy it. Adverse selection will push the cost of health insurance to astronomical levels. Using price controls, the ACA will attempt to prevent insurance companies from raising their premiums, making the sale of health insurance a losing proposition (too few healthy people paying in, and too many sick people making claims). Many insurance companies will exit the health insurance market (like mine did recently) due to their inability to run a profitable business under the ACA. This will result in a reduction of quality as well as access to health care.
When Congress violates economic laws by artificially holding down the price of a good or service, they inadvertently reduce the supply of that good or service. In the early 1970's the government set the price of gasoline below market equilibrium, and the supply dropped overnight because gas station owners refused to sell gas at a loss. The same thing has happened historically with rent control. Whenever government uses its coercive powers to hold down rent prices below market equilibrium you get a predictable reduction in the number of landlords willing to rent property at a loss. We will have the identical experience with health care; governmental price controls will reduce the number of health care providers resulting in rationing and an erosion of health care quality and access. History is replete with examples of presidential and congressional failures using price controls to appease citizens ignorant of the laws of economics.
Under the ACA, the unit cost of health care will rise for everyone; but, the cost increase of insurance premiums for lower income citizens will be paid by someone else, giving the voting poor the illusion that the ACA drove down costs. If Citizen A is currently paying $400/month for health insurance that costs $400/month, but on 1/1/2013 he is charged $200/month for insurance that costs $500/month, Citizen A will think the ACA reduced the cost of health insurance when in reality someone else will be saddled with the increase. Unfortunately for Citizen B, he will experience a health insurance cost of $800/month; $500 for his own insurance and a $300 tax increase to subsidize his neighbor.
Whereas government subsidies and price controls almost always lead to increases in the unit costs of regulated goods and services, free markets allow unit costs to drop for all Americans. The unregulated costs of Lasik surgery, laptops, digital watches, and flat screen TV's have dropped in unit price for EVERYONE. There has been no cost shifting for the aforementioned items, but instead universally experienced cost reductions in real terms for all Americans. Poor people and rich people can buy a flat screen TV for prices much lower today than they could 10 years ago. The same can't be said for the overregulated health care market. The free market brings unit costs down and drives quality up for ALL consumers. Because the ACA removes most of the free market forces that drive costs down and quality up, everyone can expect higher costs per unit of health care and a simultaneous reduction in access and quality. I concede SOME Americans will have their expensive health care paid for by others, giving less educated citizens the illusion of a cost reduction, but the cost per unit will not decrease, due to the immutable laws of supply and demand and adverse selection.
Most financially secure Americans aren’t stupid; they will figure out how to protect themselves from bad economic legislation. Wealthy parents will encourage their adult children to apply for Medicaid, rationalizing such behavior as “We are paying for Medicaid anyway, so we might as well have our own children use it.” Healthy citizens making more than 400% of the government’s designated poverty income level but less than $300,000, will quickly discover that dropping their health insurance coverage and paying the “tax” for not carrying health insurance to be in their best interest. The money they save from not carrying insurance (until the need it) will help offset their tax increases. The very wealthy, who up until this point didn’t buy health insurance because they were able to self-insure, will now find buying health insurance cheaper than the tax for not carrying the insurance. Because the ACA forbids lifetime limits on insurance protections, the wealthy will be encouraged to let an insurance company shoulder their expensive financial risks cheaper than they could themselves before the ACA. For high income citizens, it would be foolish not to buy coverage under the ACA, especially if they have poor health. Just another example of how governmental ignorance of economics leads to silly policies that hurt the very people it tries to help, and helps the very people it tries to hurt.
While it is true the American health care system is in need of a complete overhaul, the Affordable Care Act is not the answer. The ACA, if implemented, will fail due to the predictable economic laws of adverse selection and supply and demand. When the ACA does fail, I hope we learn from our mistakes and consider using free market solutions that have reduced prices and increased quality and access wherever free markets have been allowed to operate.
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