Editor’s Note: For a more detailed analysis of this topic, sign up for Dr. Murphy’s 4-week online Mises Academy class, beginning November 20. The course will cover the standard arguments for government intervention in health care and health insurance, including the common claim that “socialized medicine works in Europe.”
Near the end of Human Action Ludwig von Mises declared that it was the “primary civic duty” to learn the teachings of economics. The public’s growing furor over the Patient Protection and Affordable Care Act — popularly known as “ObamaCare” — beautifully illustrates Mises’s point. No one has any business being shocked — shocked! — that millions of Americans will lose their current health insurance (including the present, irritated, writer), because such an outcome was obvious all along. Furthermore, the hilarious snags with healthcare.gov are merely a sideshow; the true problems with ObamaCare run much deeper than a malfunctioning website.
The Basic Structure of “ObamaCare”
The Affordable Care Act (ACA) was formally signed into law on March 23, 2010. There are numerous provisions that kick in at various stages, through 2020. For our purposes in this article, there are four key elements of the ACA that merit our attention:
- Insurers are legally required to provide coverage to all applicants, regardless of medical history, with a partial “community rating” system for premiums, which means that insurers must set premiums based (mostly) on geography and age, rather than sex and (most) pre-existing conditions.
- Health insurance policies must meet minimum standards (called “essential health benefits”), including no caps on annual or lifetime payments from the insurance companies for an individual policy.
- Everyone is required to obtain health insurance, except for waivers granted for certain religious groups and those deemed to be unable to afford coverage. Government subsidies and state-based “health exchange markets” will be provided to assist individuals.
- An “employer mandate” penalizes firms with 50 or more employees if they do not offer coverage for their full-time employees, defined as those working 30 or more hours per week.
Intended Consequences
There are reasons for the particular provisions above, which sound superficially sensible (if you don’t know much about economics). Obviously, before the passage of the new law, there were millions of people without health insurance coverage. Although many of them were young and healthy — thinking they could risk going without coverage — many of them wanted coverage but couldn’t obtain it, either because of the price or an outright refusal of coverage because of a pre-existing condition.
Now, given that the government wanted to mandate that health insurers provide coverage to all applicants, there had to be specific rules on what premiums they could charge, and minimums on the type of policies offered.
Otherwise, the health insurers could say, “Fair enough, President Obama, we will indeed give a policy to any applicant — even someone with brain cancer.
It’s just that the annual premium for people with brain cancer will be $2 million, and we will cap our total payment at $100 per year. Who wants to sign up? We’re more than happy to comply with the new mandate.”
Otherwise, the health insurers could say, “Fair enough, President Obama, we will indeed give a policy to any applicant — even someone with brain cancer.
It’s just that the annual premium for people with brain cancer will be $2 million, and we will cap our total payment at $100 per year. Who wants to sign up? We’re more than happy to comply with the new mandate.”
Moving down the list, let’s consider the individual mandate, which requires that (just about) every American carries health insurance. The reason for this provision is to avoid what’s known as adverse selection. If health insurers were required to provide coverage to all applicants, with (partial) community rating, and if individuals retained the freedom to buy coverage or not, then the private health insurance companies would quickly go out of business. Healthy people could drop their coverage, saving on the hefty premiums each year, and then apply for health insurance whenever they got sick. This would be analogous to people buying car insurance only after they’d gotten in an accident; it clearly wouldn’t work for any firm to offer insurance in this environment. Finish reading>>
