The Administration’s Rigorous Defense of the Affordable Care Act

Hal Singer —  7 January 2012

In yesterday’s Washington Post, Health and Human Services Secretary Kathleen Sebelius makes an impassioned plea for skeptics to reconsider the Affordable Care Act. Secretary Sebelius argues that the Act will bring down health care costs by, among other things, assisting those who cannot afford health insurance coverage. Although expanding health insurance coverage is a worthy goal, bringing more folks into the health care system could result in higher prices for health care services. The housing market provides a nice example: although subsidized mortgage rates allowed more people to own homes, more buyers eventually meant higher home prices.

Secretary Sebelius reminds us of the broth of new regulations designed to constrain the worst impulses of insurance providers, including requiring providers to justify premium increases above 10 percent in an online forum; to spend at least 80 percent of premium dollars on health care as opposed to salary or advertising; to accept applicants with preexisting conditions; and to charge zero copays for so-called preventative services. This level of micro-management seems excessive, even by regulated-industry standards.

Given the raging debate over the constitutionality of the Act’s requirement that everyone buy health insurance, the other provisions of the Act have received relatively little attention. To an economist who believes in the efficacy of prices to allocate scarce resources in an economy, the zero-copay rule is perhaps the most offensive provision of the Act. Even for preventative services, a positive copay ensures that users do not abuse their privileges. For any doubters (who live or work in major cities), look out the window during rush hour to see what happens when an activity (using a road) is priced at zero. It is not clear that the increase in demand for preventative services will be offset by the promised decrease in demand for treatment of chronic ailments. Moreover, providers are likely to react to a zero-copay rule by raising deductibles; these terms are highly interrelated. Finally, there is no limit to what constitutes preventative medicine; some men do get breast cancer, but not enough to justify free mammograms for all men.

This is not the first time the Administration has imposed a zero-price rule. The chairman of the Federal Communications Commission, who was carefully screened by President Obama on the issue of net neutrality, adopted the Open Internet Order, which banned an Internet service provider (such as AT&T) from charging a price to an Internet content provider (like Sony) in exchange for speedier delivery. Under the Commission’s rationale, if some websites could not afford the surcharge for higher quality of service, then no one should.

It seems that prices for “critical” services such as preventative medicine and Internet access are evil because they exclude certain segments of the economy. To be fair, under certain conditions such as information asymmetries, externalities, and adverse selection (common in health insurance markets) market-based prices may result in too little or too much consumption relative to the socially optimal level. But the attacks on the price mechanism by these two pieces of regulation do not seem to be grounded in those traditional market-failure arguments. Without a limiting principle, one could oppose prices for just about any good or service, as there will always be someone who cannot afford it. Better to leave prices in place (and subsidize those who cannot afford the “critical” service) than to ban pricing altogether. In contrast to a zero-price rule, the cost of the subsidy is transparent to taxpayers.

5 responses to The Administration’s Rigorous Defense of the Affordable Care Act

  1. 

    BDG,

    If I understand your first point correctly, then insurers need the government to coordinate around a zero-pricing rule for copays for preventative medicine–else each (myopic) insurer will charge a positive price. In other words, insurers can’t control themselves and need the government to solve a collective-action problem. Was this really the Administration’s basis for the zero-pricing rule? Even if there is a theoretical basis for a positive spillover, as you posit, such heavy-handed intervention should be bolstered with empirical evidence of the size of the spillover and the likelihood that the benefit redounds to some other insurer. Let’s make the burden of proof for zero-price rules fairly high.

    My point about the roads was much simpler: Whenever we fail to price things, users tend to abuse their privileges. Would you have preferred the buffets at Vegas hotels (which are given away)? My other concern is that the definition of preventative services is not fixed; future administrations could curry favor with constituencies by expanding the definition to include every service under the sun. Imagine getting an appointment at your doctor’s office for a non-preventative service!

    Regarding your last point, assuming we think the market will deliver too few preventative services, I would also object to telling medical providers they can’t charge for these services. If government can meddle with impunity, then nothing will stop its growth. Better to make the cost explicit, even if it results in deadweight losses. That’s just part of the cost of intervention.

    Hal

  2. 

    I think you have the economics wrong. The analogy to highways is misleading. Traffic is a pure negative externality. But preventive care (although it likely would contribute to congestion) is also, from the perspective of the insurer, a positive externality, since the insured will probably be covered by someone else at the time the investment in prevention pays off. Thus preventive care seems to fall exactly into the “externalities” exception you acknowledge in your last paragraph.

    The more interesting question, from my point of view, is the subsidy vs. penalty issue you raise in an aside in the last sentence of the post. Probably one could get to a similar policy result by paying customers the cost of their co-pays (similar to what Medigap plans do now for Medicare enrollees). But that would require tax revenues, which impose deadweight loss. Isn’t it possible that insurers are in effect the least-cost avoider: imposing the costs on them as a kind of stick for failing to provide preventive care is socially more efficient than paying for the carrot to consumers? Adding complexity here, medical providers profit either way; I’d be open to and interested in consideration of whether making them bear some or all of the costs of preventive care would be more efficient than allocating that cost to insurers.

  3. 

    Why is the government going on the offensive for their health care reform act? Is the 50 year history of the federal government trying to price control health care not going so well?

    -Common Sense Capitalism

  4. 

    Why are health insurance rates going up faster than inflation? An analogy.
    Health Insurance Thirst Mandate. Excerpt:

    === ===
    His Benevolence: I have decided to banish thirst from the land. All health insurance will henceforth include unlimited purchases of refreshing drink, like Coke, Pepsi, and 7-Up. The peasants will slake their thirst and be reimbursed by the insurance companies. No co-pay.

    Advisor: Your name will be legend. Sire, will you be paying for this bounty?
    His Benevolence: The insurance companies will pay.
    Advisor: Sire, the peasants will have to pay the insurance companies.
    === ===

  5. 

    Here here! Dr. Singer has this absolutely right.

    As Richard Posner has pointed out, taxation by regulation is especially pernicious because it allows politicians to allocate rents in ways that are largely invisible to taxpayers/voters. Zero co-pays for preventative care will result increased demand, yielding signifant quasi-rents for the purveyors of those services. Those wondering why the AMA supported Obamacare ought to ask what proportion of its members were “winners” in the wealth transfer game. The same question likely provides the primary explanation for the rapid decline in its membership (down 5% last year) since taking this controversial position.