Utah’s nonprofit health insurance cooperative, Arches Health Plan, recently announced it is shutting down. This is the 10th health insurance cooperative (10 out of 23) to close their doors, citing lower than expected enrollment as the culprit. Billions in federal loans were made to these health insurance cooperatives for the purpose of providing a non-profit, credit union-like alternative to profit centered health insurance companies, under the theory that by removing the profit motive, health insurance cooperatives would be able to pass on their savings to policyholders. Unfortunately, those funds loaned to the now shuttered co-ops are gone forever. (These failed co-ops should not be confused with the very successful health care sharing ministries (HCSM’s)). These closures were highly predictable. When the Affordable Care Act (ACA) was signed into law on March 23, 2010, it was a political victory but an economic disaster. Now that we are entering Obamacare’s third year, the full weight of what happens when policymakers ignore the tenets of basic economics are unfortunately starting to appear.
Because we understand the law of gravity, we know if we drop an object from a height it will fall towards the Earth. Similarly, because we understand the principle of adverse selection and the laws of supply and demand, we know that if not repealed or drastically adjusted, the ACA will ultimately end in failure. Here is the sequence of events I wrote about in another blog back in July of 2012 before the implementation of the ACA that predicted some of the outcomes we are observing today:
(1) The ACA will increase the per unit cost of healthcare for everyone.
(2) Some fortunate Americans will see their increased premiums subsidized by their neighbors, giving those subsidized the illusion of a cost reduction.
(3) Some unfortunate Americans will see astronomical increases in their health insurance premiums and income taxes.
(4) Healthy middle class Americans will eventually drop their expensive coverage and opt to pay the less expensive “tax.”
(5) Insurance companies will incrementally leave the health insurance market until the whole scheme fails.
While governments can pass laws to suspend gravity or change the speed of light, they will fail because physical laws are unaffected by human desire. Health Insurance operates by certain economic laws in the same way matter follows physical laws in the natural world. According to the economic laws of supply and demand, if you increase the demand for a good or service and the supply remains constant (or decreases), the unit cost for that good or service will increase. Good intentions can’t change this economic reality. Predictably, the ACA is increasing demand for health care by entitling unhealthy, expensive patients to unlimited access. With state insurance commissioners recently announcing premium increases of 5-35% across the nation, we will begin seeing rational, healthy, and inexpensive patients dropping their expensive health insurance policies by opting to exercise one of the several insurance mandate exemptions allowed by law, or by paying the cheaper “tax” instead. The ACA magnifies the insurance problem known as “adverse selection,” where only people needing immediate health insurance buy it. Adverse selection is pushing the cost of health insurance to astronomical levels. Using price controls and federal subsidies, the ACA attempts to prevent insurance companies from raising their premiums, making the sale of health insurance a losing proposition (too few healthy people paying in, and too many sick people making claims). As we are seeing with health insurance cooperatives, for profit health insurance companies are also exiting the market due to their inability to run profitable businesses under the ACA. Losing health insurance providers will eventually lead to reductions of quality as well as access to health care.
When governments violate economic laws by artificially holding down the price of a good or service, they inadvertently reduce the supply of that good or service. In the early 1970’s the government set the price of gasoline below market equilibrium, and the supply dropped overnight because gas station owners refused to sell gas at a loss. The same thing has happened historically with rent control. Whenever government uses its coercive powers to hold down rent prices below market equilibrium you get a predictable reduction in the number of landlords willing to rent property at a loss. We are now observing the identical experience with health care; governmental price controls are reducing the number of health care providers resulting in rationing and an erosion of health care quality and access.
Under the ACA, the unit cost of health care is rising for everyone; but, the cost increase of insurance premiums for lower income citizens is paid by someone else, giving the voting poor the illusion that the ACA has driven down costs. If Citizen A is currently paying $400/month for health insurance that costs $400/month, but on 1/1/2016 he is charged $200/month for insurance that costs $500/month, Citizen A will think the ACA reduced the cost of health insurance when in reality someone else will be saddled with the increase. Unfortunately for Citizen B, he will experience a health insurance cost of $800/month; $500 for his own insurance and a $300 tax increase to subsidize his neighbor.
Whereas government subsidies and price controls almost always lead to increases in the unit costs of regulated goods and services, free markets allow unit costs to drop for all Americans. The unregulated costs of Lasik surgery, laptops, digital watches, and flat screen TV’s have dropped in unit price for EVERYONE. There has been no cost shifting for the aforementioned items, but instead universally experienced cost reductions in real terms for all Americans. Poor people and rich people can buy a flat screen TV for prices much lower today than they could 10 years ago. The same can’t be said for the over-regulated health care market. The free market brings unit costs down and drives quality up for ALL consumers. Because the ACA has removed most of the free market forces that drive costs down and quality up, nearly everyone is experiencing higher costs per unit of health care and a simultaneous reduction in access and quality.
Many of the ACA’s supporters are claiming the law is a resounding success. They state that millions of people who once were denied health insurance because of pre-existing conditions or expensive premiums now have access to it. What the ACA’s supporters don’t admit is that millions of different Americans are rapidly finding health insurance so unaffordable they and/or their employers are dropping coverages due to unaffordability. Insurance programs don’t survive when unhealthy, expensive people sign up to buy at the same time healthy, inexpensive people are leaving.
While it is true the American health care system is in need of a complete overhaul, the Affordable Care Act is not the answer. Due to the immutable economic laws of adverse selection and supply and demand, the ACA, is failing, When the ACA does fail, I hope we learn from our mistakes and consider using free market solutions that have reduced prices and increased quality and access wherever free markets have been allowed to operate.