New Premium Prices Could Actually Be Better

A lot of the complaint around Obamacare is the result of the fact that some people are seeing increases in healthcare premiums, as noted by Forbed.com. And while this article in the Wall Street Journal shows that healthcare expenditures (as a percent of gdp) have been declining in the past few years, it is no secret that the premiums themselves may cause trouble for some people. As with most legislation, there are winners and losers.

But this brings to mind a comment I made on one of our fellow student’s blogposts about Obamacare. I noted that higher prices for health insurance, while unpleasant, may in fact be closer to the prices that arise in a closer-to-perfect market than the prices we saw before Obamacare was implemented. In this post, I’d like to expand on that idea a bit.

To start, let’s first recall that before Obamacare, there were many people who wished that they had health insurance but did not, either because it was too costly or because people were denied access for pre-existing conditions. In this sense, the pre-Obamacare market was imperfect from a welfare point of view because many people who wished that they had insurance did not.

Now, with Obamacare, that imperfection is essentially deleted. Everyone has access to healthcare coverage because, well, it’s required (and it’s probable that most of those who didn’t have coverage in the first place did indeed want it) and because those who could previously not afford it now can, with government subsidies. The wealth distortions is may cause are likely outweighed by the improvement in welfare.

Now, the big flaw with this argument is that the market previously was more perfect because demand curves are a function not only of your preferences for having or not having healthcare, but also your ability to pay for them (ie your budget constraint). But, the idea that this made the market more perfect assumes that there aren’t substantial welfare gains from Obamacare. That is, the pre-Obamacare demand curve may have been more pure when you think only about wealth maximization, but when you consider that the new, increased demand curve is associated with increased welfare for many people who gained a lot of utility from their newfound ability to purchase health care coverage, you might say that the new Obamacare demand curve is purer from a welfare point-of-view (which, ultimately, is what economists care about anyway).

 

 

2 thoughts on “New Premium Prices Could Actually Be Better

  1. davus@umich.edu'davus

    I struggle to see how the new premiums are better. While there are some people who are made better by this (those who couldn’t afford it before, and those with pre-existing conditions). The first group that is helped is a group that in comparison to the whole population, is actually quite small. The second group, seems to misunderstand what insurance is for. Insurance is for the possibility of loss, not the certainty. The fact that preexisting conditions are where not insurable reflects the reality that these people are not looking for insurance, but a rich patron to pay their bills. I do not see how the market is more efficient for including these two group, groups that wouldn’t have other wise participated. According to the authors logic, are price floors and ceilings result in more efficient markets since it allows people into the market that wouldn’t otherwise participate? I think a review of economic efficiency is in order.

    1. mdbold Post author

      When I say “better”, I don’t mean “more enjoyable.” I mean that the new demand curve that arises as a result of Obamacare (ie an increased demand curve) probably corresponds to higher welfare gains, and that increased demand curve is at least part of the reasons prices have increased. I think a review of the difference between wealth and welfare is in order. Also, I’m not only talking about people with pre-existing conditions getting insurance; I’m also talking about those too poor to afford it, such as college students who are not covered by their parents plans or those who live in poverty.

      I have no idea what you’re talking about when you reference price floors and ceilings; I said nothing about that. So no comment there.

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