Because Mitt Romney pioneered health care reform and the Obama administration supported the federal legislation that established it, maybe we should call it Robamacare. It’s been having problems, and not just with the website. Blame those on computer scientists. You can blame economists for the price fluctuations and unexpected cancellation of policies.
It has been widely reported that Robamacare originated as a Republican initiative, written by conservatives at the Heritage Foundation. More to the point, though, it was written by economists. The fingerprints of economists are all over it. Two key concepts of mainstream modern economics are central to it. The first I have mentioned in a previous op-ed this year: incentive compatibility. Arrangements are incentive compatible if individuals who act in their self-interest also, however unintentionally, advance the group goals. Economists know that markets are incentive compatible in some circumstances, provided that efficiency is our only group goal. But even economists who lean in favor of free markets know that there are some exceptions and that markets for medical insurance are among them. The keywords are “moral hazard” and “self-selection.” I won’t try to explain them in an op-ed, but key provisions of Robamacare are designed to offset or prevent them. Specifically, the “individual mandate” is meant to prevent moral hazard, and the prohibition of contracts with very limited coverage and exclusions for previously existing conditions is meant to limit self-selection. Thus — in a certain kind of economic theory, at least — the regulated markets for health insurance will be incentive compatible.
A second doctrine of modern economics is that competition is sufficient to keep costs and prices down. If prices are stubbornly high, the market should be made more competitive. That is the reason for the exchanges in which regulated insurance policies may be bought.
But even free-market economists know that competition does not always reduce prices. Competition on price limits the price to approximately the lowest attainable cost. However, when there is competition by quality (or by guile), that sort of competition may well raise costs. For example, hospitals may compete by offering more of the latest, most expensive equipment for diagnosis and treatment, and employers may compete for highly qualified employees by offering really complete medical coverage. Thus, the law includes taxes on medical implements and, after a few years, on “Cadillac” medical insurance benefits. The taxes are meant to discourage the “wrong” kind of competition in the hope that price competition will replace it.
Will it work? We have some experience with this sort of “social mechanism design,” particularly in the “cap-and-trade” approach to environmental regulation and a few other programs. What experience teaches is that it can work, although only after people have gained enough experience with the system that they really understand the incentives it creates. This learning process may, however, take several years. Social mechanism design can also fail, especially if it is vulnerable to fraud or collusion (or both). Only time will tell, and we probably won’t know for sure until after Hillary Clinton’s second presidential term.
Meanwhile, I want to wish you all good health!
Roger McCain is a professor of economics at Drexel University. He can be contacted at [email protected]