The Affordable Care Act will not achieve its goals

Many of the goals of health care reform seem laudable. Proponents of health care reform want health insurance to be available to all Americans with premiums unrelated to a person’s health status. In addition, they want to make health insurance affordable for everyone regardless of income or employment status. They hope to lower health care costs through better information and accountability. They also claim that the above goals can be achieved with small increases in government expenditures that can be offset by modest targeted tax increases. If these goals were attainable via the provisions of the Patient Protection and Affordable Care Act (PPACA), it might deserve our support.

Not only are many of the goals that led to the PPACA appealing, but economic principles played an important role in how it was designed. For example, the Obama administration decided to include an individual mandate as a way to overcome the economic problem of adverse selection. In short, if government requires insurance companies to provide insurance to those with existing health problems for the same price as those who are healthy, most healthy people will choose not to purchase such insurance, raising the cost substantially for those who do. By requiring healthy people to buy insurance, and prohibiting insurance companies from setting rates based on health status, Congress intended to force healthy consumers to share some of the costs of insuring those in poor health, so that premiums in the aggregate are high enough to cover costs.

In spite of the efforts that went into its design, the PPACA will do more harm than good. Although it might reduce the premiums paid for insurance for those who are presently unable to afford health insurance, it will not come close to accomplishing the other goals listed above.

Insurance could become affordable for most of the uninsured via the subsidies included in the PPACA, but the amount spent on subsidies would likely far exceed the government’s cost projections, adding considerably to government deficits. The reason for this is that the subsidies likely would go to many more than those who are now uninsured. Subsidies in the Affordable Care Act are sufficiently generous for low and middle income workers that many companies and workers would benefit if firms drop health insurance coverage and the firms paid the required fine of two to three thousand dollars per worker for not offering insurance. The insurance premiums that firms would save by not insuring each worker are two or three times as big as the fine and companies can pass part of the savings to workers in the form of higher wages. As a result, moderate and low income workers would have more income left over after paying subsidized health insurance premiums though government insurance exchanges than if their employers provided their health insurance.

Not only will the PPACA cost the government more than anticipated, it will likely make insurance less affordable for those who do not get substantial subsidies to buy insurance from government exchanges. This is because, in spite of the mandate, many healthy people will choose not to buy health insurance and pay the penalty, which is a function of income, but no higher than $2250 per family per year. Thus those who buy insurance will be sicker than average and many will wait until they get sick to purchase insurance. Premiums will rise to reflect the higher health care costs of those who purchase insurance, making insurance too costly for people with good health who do not qualify for government subsidies.

The problem with the PPACA is that in a world of scarcity a rationally devised formula developed and administered by government bureaucrats will not reduce costs and improve efficiency. Rather, costs of meeting health care needs will be more effectively controlled with decentralized decisionmaking in a market economy. In a market system, prices and quantities continuously adjust to coordinate supply and demand in light of the economic calculations of each market participant. The desire to consume alternative goods and services would constrain each consumer’s demand for health care thereby limiting its market-clearing price. When government pays or mandates that insurance companies pay for health care, prices and quantities no longer reflect the economic calculation of each market participant. Instead of prices and the value of alternatives constraining their demand for health care as they would in a free market, consumers purchase health care with little regard to cost. The result is steadily increasing demand and prices for health care with more and more of the economy’s resources devoted to health care, and government expenditures rising unsustainably.

Since the PPACA will not achieve most of its goals and will increase the budget deficit much more than proponents have claimed, now is the time to redouble efforts to repeal it, either by the current Congress or after the next election.

The Problem of Being Overinsured

One of the arguments for health care reform is that millions of Americans with employer provided health care are underinsured. Proponents of this view are saying that people are underinsured if they are paying too many of their health care costs out-of-pocket. A little reflection on what insurance is and is supposed to do suggests that the problem is really the opposite- many, if not most Americans are overinsured- they have too much health insurance coverage.

On what basis can I claim that Americans have too much health insurance? The purpose of insurance is to protect people from risk. Private companies offer affordable insurance against losses from automobile accidents, accidental death, fires, storms, and floods, among other things. These kinds of insurance arose in response people’s willingness to pay for a contract that will compensate them for losses due to a relatively low probability event over which the insured party has little or no control. Yet, unlike other kinds of insurance, most of what is covered by many health insurance plans does not fit this description. This is why so many people who do not have employer provided health insurance are either uninsured or purchase only catastrophic coverage.

The problem with many existing health insurance plans is that they cover the cost of routine treatment for illnesses, such as colds and flu that occur frequently or the cost of care for conditions, such as pregnancy, that are heavily dependent upon the choices of the person who is insured. Basic economics teaches that paying for routine treatment via a third party insurance company will raise the total cost of that treatment. This happens for two reasons. First the insurance company, as middleman between the consumer and the health care provider, has costs that must come out of what the consumer pays. Second, insurance that pays for routine care lowers the cost of each doctor visit to the consumer, thus increasing demand. Higher demand with a given supply means higher prices.

It does not matter whether consumers or employers pay health insurance premiums. The premiums are part of the cost of health care. Eliminating routine care from being covered by health insurance would mean premiums would decrease and employers could pass the savings along to their employees as higher wages. The average consumer would be better off as a result. If it were not for the tax deductibility of health insurance premiums, employers would not cover routine care and avoidable conditions as much as they do.

This is not to deny that many Americans do not have sufficient access to affordable health care nor that the inability of some to afford health insurance is something we should be concerned about. Although it does not make sense for insurance to cover the ordinary medical costs of child birth, treating chronic asthma, or flu symptoms, it may be a good idea to have insurance in case of complications resulting from childbirth or to cover hospitalization for pneumonia and other serious illnesses.

The best way to help those who cannot afford basic health insurance is not to require or subsidize the kind of comprehensive health insurance plans that most employers now offer. On the contrary, health care costs and the cost of health insurance that would cover life threatening illnesses and serious accidents would be considerably lower if the existing system of taxes, subsidies, and government regulations did not result in so many people being overinsured.

Why subsidizing wind energy does not make economic sense

In spite of the vision of Al Gore and others, windmills cannot be expected to supply a major part of our energy demands. For a good discussion of the problem with wind and other forms of green energy, see The Wrong Way to Get to Green, by Robert Bryce.

According to Bryce, windmills require 45 times as much land as nuclear power to produce the same amount of energy. Wind farms tend to be located far from population centers and so would require hundreds of miles of additional power lines to reach consumers. When you add up the land, new power lines, and the concrete and steel and other inputs required to build and operate a windmill, the expense per megawatt of electricity is higher than for most other sources of power. And not only is it expensive, but wind power is often unavailable on the hottest days of summer when energy demand is greatest.

Besides the high cost of land and materials required, wind energy is costly in terms of its impact on the environment. Windmills and the new high voltage lines associated with them kill birds, disfigure the landscape and create noise that irritates nearby residents.

For the above reasons, the government should stop subsidizing and pressuring utilities to use wind energy and let the market determine how viable it is. Wind might be cost effective in some locations, but it is not economically viable on a large scale. The greater the share of electricity in a grid that is generated by wind, the higher the cost. This is because standby generating capacity from other sources must be maintained to meet demand on some days when their is little wind. Existing sources of electricity like oil, natural gas, nuclear, and coal are much more reliable and less costly than wind, even when environmental costs are accounted for.

Without subsidies and mandates requiring a specified percentage of electricity to be generated from renewable sources, utilities would only use wind and other forms of renewable energy if they were cost effective. Some argue for subsidies to renewable energy sources because they claim that conventional sources of electricity are subsidized either through tax breaks or by not having to pay for the pollution they cause. If this is the case, the solution is to eliminate subsidies and make sure that utilities pay the full cost for each source of power they use. Market prices will give utilities and their consumers the correct signal about the scarcity of the resources involved in producing electricity, thus motivating utilities to economize in choosing how to generate electricity and motivating consumers to economize in choosing how much electricity to consume.