Why we have the Affordable Care Act  (ACA)

Insurance or the pooling of risk should shield people from the financial risk of disease.  Unlike, other types of insurance, the healthcare marketplace has some unique problems including moral hazard and adverse selection.    With  asymmetric information, healthy people tend to round their low risk estimation to zero and drop out of the insured pool, which raises the average cost to insure everyone left to a level above that which low risk people will pay.   On the other hand, when insurance companies assess applicant risk and underwrite in order to price profitably, 1 in 7 applicants prior to the ACA were  rejected for individual health insurance. 

 Like electricity, phone, and cable markets the healthcare marketplace is not competitive but consist of local monopolies.   Other problems include that people can not assess their utility (probability of loss times the amount) , they aren’t aware of taxes, and that the interest of future generations is not reflected in the market.

Most people get insurance from their employer sine the insurance benefit is not taxed and employers generally have a healthier risk pool.  Most large companies self -insure their risk.   The risk is that employees who get sick loose their jobs and then their insurance. 

One original health insurance model was that insurance companies would offer pairs of insurance policies.  The healthy would buy the less expensive and less generous plan, which the sick would avoid.  That is how the market would segment.   Experience showed many comprehensive plans were not profitable due to adverse selection.  

If the average cost is higher than the demand curve the market brakes down

The ACA has been implemented and there is a lot of complaining by some.  So why do we have this.  It was the reaction to a problem.  15% of us didn’t have healthcare insurance and 13% of us were underinsured.     Healthcare costs were increasing at an unsustainable rate and expected to grow to 35% of GDP.  

            In 1963, the economist Kenneth Arrow predicted medical insurance would increase the demand for medical care.   The Rand experiment and Oregon experiment showed that providing health insurance increases annual spending by 25%.   Rand showed people spend less up to their stop loss limit.  However the amount is 25% less than the  predicted amount because people foresee that at the end of the year their marginal cost of healthcare is zero.  High deductible plans often have a self-pay to $3000 and then the insurance pays.   

The provision of healthcare insurance increases moral hazard and the price and quantity used but the lack of healthcare insurance leads to under utilization and a lower quality of life.   Leaving Medicaid to the states leaves areas of third world healthcare access with third world healthcare outcomes in poor areas of the US. This contrasts with Rwanda which is able to provide a uniform level of basic healthcare throughout the country.

            The growth in healthcare spending led to to an increase in investment and development of new technology.   The demand increase was led by these improved technologies with their low cost to patients and the moral hazard of providers who are rewarded for their use.   Provider side moral hazard is demonstrated by the 15% drop in Medicare hospital length of stay with the introduction of DRG financing which paid a fixed amount for each hospital admission.  ACA does try to reduce cost buy encouraging Accountable Care Organizations, which would provide care at a fixed cost and by taxing luxury health plans. 

            Thus we have multiple problems including the rising cost of healthcare, unequal access and distribution and lack of social services which lowers US healthcare statistics to that of Cuba, and that without an individual mandate that makes everyone pay into the system people won’t buy healthcare insurance until they are ill.   The ACA is one improvement step but not the final answer.