Thursday, March 8, 2012

In Defense of Obamacare

I know a lot of Americans, many of you included, have reservations about the Affordable Care Act. Some of you may even think it's a gross imposition by the government into everyday life. Throughout this post, I'm going to offer an economic and logical defense and analysis of Obamacare. Some of you may feel turned off just from the title, but I implore you to continue reading, if only just to know the reasoning behind many of the provisions of the law. Who knows? You might even be won over.

Allow me to begin by explaining a few things that are instrumental to my overall argument. Free markets are amazing things, capable of efficiently allocating resources and maximizing overall societal gains. They can process an unthinkable amount of information and distill it down into one simple number--a price. However, it is important to realize that free markets can sometimes fail. The reason, in the case of the insurance industry, is due to two economic anomalies--asymmetric information and adverse selection. Bear with me, as I'm going to explain those in context in just a second.

Essentially, the problem boils down to one of balancing risk in insurance plans. For those of you who don't know much about health insurance, here's a quick primer. A health insurance plan is basically a bunch of policyholders who pay premiums that all go to the same place--the insurance company. All of these policyholders are put into one big risk pool as a means to "balance out" the healthiness of the pool as a whole, because they don't know for sure how healthy everyone is (people sometimes lie, that's where the asymmetric information comes in). So everyone pays and the company basically uses the premium money to pay for hospital procedures where it is needed. Where's the problem, you ask? Well, let's say that the younger people decide that, hey, I'm healthy, why do I need to pay thousands of dollars for this health plan? I'll talk about the problems with this later, but what this does is that the overall level of risk is driven up in the pool as the healthy leave it. With higher risk, comes higher expected costs for the insurer, so they have to raise premiums. That in turn leads to more younger people who value the insurance less to drop coverage, raising riskiness, raising the premiums again, and so on. Eventually, the premiums rise to a point that even those who desperately need insurance will be priced out of the market. That's what's known as an insurance death spiral. Congrats, the market for insurance has just collapsed.

So why don't we see this in everyday life, you may ask? Well, to be quite honest, we do see it. However, insurance companies nowadays take steps to try to slow this down by denying coverage to people with pre-existing conditions, etc, as a means to lower overall risk levels. This is the problem with saying that health care reform can be achieved by simply saying that insurers cannot discriminate or charge preposterously high premiums. Regulating the industry in that way without mandating that everyone purchase insurance will simply lead to a much faster death spiral. 

This isn't just the theoretical ramblings of an economics student, states have tried regulation without a mandate. The results were quite disastrous:
"A classic example is New Jersey. In 1993 the state implemented guaranteed insurance issuance and community rating in its direct-purchase market—where individuals buy health insurance directly from an insurer, not through their employer. Older, more costly individuals enrolled in coverage, and premiums rose by up to 155 percent from 1996 to 2000. Even the premium of the state’s Health Maintenance Organization plan—which more aggressively manages costs—rose by 48 percent over this period. As a result, overall enrollment declined by 41 percent in the same period—consistent with a death spiral caused by adverse selection."
The report goes on to say that 7 other states tried this same thing and they all have led to much, much higher premiums relative to the national average. This is why participation in the health care system needs to  be universal. In so doing, the nationwide risk pool can be balanced between the healthy and the sick. No death spiral, no adverse selection, no market collapse. 

So how can we do this? Well, there's a single-payer system, in which people pay taxes like they do for Medicare and are all covered in return. However, it seems that this just isn't politically feasible in America, despite the fact that it is more cost-effective. The other option is, of course, the individual mandate. Obamacare has one of these, as you all know. It says that all who can afford insurance should have it, all who can not will be given a tax credit or a subsidy with which to purchase it, and if you're still unable to after that, you're already probably enrolled in Medicaid. 

Obamacare's many critics (even though the individual mandate was a Republican idea put forth as an alternative to Clinton's health care plan) claim that mandating that people purchase something is a violation of liberty. Yes, I get it, it does kind of suck to be required to purchase something, but the alternatives are no better:

An alternative to this is single payer health care, which would address the problems I've talked about, but that also effectively requires people to buy insurance through the tax code. It's also politically unfeasible, as I've said before. If we chose to stick with what we have, people who voluntarily choose not to be insured end up going to the emergency room and their is care paid for by insured people in the form of higher premiums. Because you chose not to be insured, you're effectively violating another person's liberty by making them pay for your care. This problem is in addition to the millions of uninsured people, rapidly rising costs, etc. So there's that. In order for no one's liberty to be violated under our current system, basically what would have to happen is that we, as a society, would have to let uninsured people die on an operating table rather than be forced to pay for their treatment. Needless to say, mandating health insurance coverage is preferable to that. If Americans want a health care system that doesn't discriminate based on certain pre-existing conditions, (and there are a lot of them) then the only way to ensure that it actually works is through mandated coverage. That's simply an economic fact.

In addition to solving the problems above, Obamacare reduces the federal deficit by over $200 billion in the next decade. Not a bad deal, considering the number of uninsured people will be reduced by 32 million. What's more, the Congressional Budget Office estimates that with a mandate, the average premium will drop by about 10%, whereas without it, premiums will rise 20%. Effectively, everyone wins in this situation. Those who already have insurance will benefit from lower premiums and those who can't afford it will now be able to get coverage. Only those who can afford it but choose not to purchase it will be charged a penalty. The justification for this initially came from The Heritage Foundation, a conservative think-tank that said, “each household has the obligation, to the extent it is able, to avoid placing demands on society by protecting itself.” Which, to their credit, is precisely the point I made earlier.

I guess the way I see it is that from an economic point of view, (and a logical one, I might add) there really isn't any downside to Obamacare that any of the alternatives could realistically mitigate. It isn't socialist, as it utilizes the existing private insurance market. It saves money in terms of the deficit as well as individual premiums. It covers millions of people who wouldn't be covered otherwise. As far as religious liberty goes, Obama's compromise provides exemptions to religiously affiliated institutions while still covering contraception directly through insurance companies, so I don't see a problem. Moreover, 28 states already have similar contraception laws already. People are complaining that they don't want their tax money to pay for women to have sex. Well, aside from the fact that the pill has other uses, taxpayer money, by and large, won't be paying for it, because people will be buying their own insurance most of the time. That kind of slippery-slope "I don't want my tax dollars paying for X" argument simply doesn't hold up under scrutiny. I don't want my tax dollars paying for oil subsidies, but they are. And so it goes. All the law says is that contraception must be covered under insurance plans. This seems perfectly appropriate to me, because birth control is a boon both for women's health and  their economic prosperity. Mandating contraceptive coverage doesn't carry with it the ethical issues that abortion does, and it allows women to time and space out their children, thus allowing them to more easily have careers. What's more, easier access to contraception will severely cut down on unplanned pregnancies, (almost half of all pregnancies in the U.S.) which will in turn save money otherwise spent on expensive natal and pre-natal care, further driving down premiums. Taken together, these facts present a strong economic case for the birth control mandate.

How does Obamacare stack up against other free, first-world nations' health care systems? Well, Switzerland and the Netherlands have a similar system, and by three different measures done by three different organizations, they're ranked even more highly than the United States is in terms of how free those countries are. This is even more impressive given the fact that tax rates in both of those nations are much higher than in the U.S. and that Obamacare achieves the same coverage with much lower tax rates. Hardly what I'd call a tyrannical system. So remind me again, what's wrong with Obamacare?