The Rise of Obamacare

I’m back once again after a brief hiatus, since I devoted most of my time on reviewing for my final. Last time we talked about American health insurance industry and the need for a major reform due to the lemon problem that leads to market failure in the industry. If you haven’t read my previous article, I would highly recommend you to spend your time on reading it. Here is the link: http://econoobics.blogspot.com/2014/11/the-health-insurance-sector-asymmetric.html.

To remedy this market failure, the Obama’s administration enacted one of the most important piece of social policy legislation in American history in March 2010 known Patient Protection and Affordable Care Act (PPACA) or Affordable Care Act (ACA) in short. To simply understand the Affordable Care Act (ACA) A.K.A Obamacare, the legislation could be separated into three main parts. Dr. Aaron Carroll made an analogy between Obamacare and a table with three legs. Without further ado, let’s go through each of the three main parts.

http://www.freedomworks.org/content/obamacare-politicians-dreams-are-debased-slothful-governance

In the previous article I hope you still remember that the health insurance companies, in order to maximize its profit, would deny health insurance coverage enrollment if you are found out that you have any pre-existing condition due to the fact that you are more likely to get sick than other clients. Even if you are already insured by the insurance companies and constantly pay the premium to the insurance companies, chances are that you also could be denied payment of your medical cost in the event that you have any pre-existing condition but you purposefully or inadvertently conceal that information during your enrollment. Thus, to fix this broken health insurance sector, the Affordable Care Act (ACA) issues a mandate that prevents health insurance companies from discriminating health coverage against Americans with pre-existing conditions or denying medical payment to those with pre-existing conditions. What that means is that I will be able to claim my medical payment for the prior sickness that is not reported during the enrollment. In addition, young adult can stay covered by their parents’ health insurance plan until they are 26.

http://www.frontpagemag.com/2014/dgreenfield/va-switched-to-processing-obamacare-applications/

The first mandate is probably a bitter pill for the insurance companies to swallow because they would be in trouble if only sick people purchase health insurance coverage when they know that they would get ill soon and healthy people refuse to purchase health insurance until they are at the age of being vulnerable to sickness or know that they would get sick soon. It seems like Obamacare is hurting the insurance companies. Awesome as it may appear to American people, the insurance companies would not be foolish to enter this health insurance market given that there is a high chance of making a loss or possibly raise the premium of the health insurance. The question is how can the government make everyone buy a health insurance. Well, one way is to raise awareness that health insurance is a buffer against future financial hardship in hope that people will buy the insurance which takes longer. There is another way which is more immediate and the federal government has every rights to do so which is to force everyone to buy one. To remedy this situation which is unfavourable to the insurance companies, we come to the second leg of the table - the second mandate of the ACA known as the individual mandate. At the consumers side, the ACA mandated every Americans older than the age of 26 to purchase a health insurance coverage or otherwise face a penalty. You see, the aim of this individual mandate is that the insurance companies would be able to identify the distribution of risk (getting sick) of the American people when a large proportion of Americans buy the the health insurance due to a classic and beautiful statistical concept known as the law the large number. The large of large number simply states that the larger the sample is, the closer and closer the sample mean is to the population mean. From this distribution, the insurance companies can have enough information to charge a health insurance premium commensurate with the likelihood of a person getting sick. In addition to understanding the distribution of getting sick, the ACA also needs young and healthy people who are less prone to illness to help pay for the cost of people who get sick. But that does not mean that there is no point for the young and healthy people to buy the health insurance. You see, sickness and accident is not foreseeable and it does not necessarily mean that a young person never get sick. Thus, to prevent any future financial hardship as a result of a disease, it is wise for the young people to get the insurance. If this mandate can go as planned, the ACA will be able to solve the lemon problem that is a result of asymmetric information.

Last but not least, the ACA does not end here. What happen to those who can’t afford a health insurance plan? There certainly will be a group of people who are not able to afford the health insurance premium, as this may not surprise you since health care in America is very costly. To help those at the bottom of the pyramid so that they are also insured, the ACA also provides subsidy to those who can’t afford it. More specifically, you will be subsidized if your income is less than 400% of the federal poverty level (FPL). That is, subsidy will be provided if you make less than approximately $46,000 if you live alone or approximately $94,000 for a family of four according to Dr. Carroll’s Youtube’s video. You can see the information on the FPL in detail by going to this link: https://www.healthcare.gov/glossary/federal-poverty-level-FPL/. The Federal Poverty level in 2014 is $11,670 for individuals and $23,850 for a family of four.

Folks, those are the important parts of Obamacare: health insurance company mandate, individual mandate and subsidy. We would like to wish that the ACA will be a success but it seems like that not many people are happy with it especially the Republicans who is now controlling both the Congress and Senate. When a social policy is as huge as the ACA, it is almost impossible to avoid talking about politics. Obamacare is one example of how the government can intervene in the market and takes the matter into their own hands without relying on the invisible to do its job. The debate is still going on and we have to wait and see whether the ACA will achieve its goals. I hope to see you in the next article possibly related to efficiency and equity. Have a Merry Christmas and a delightful New Year! See you New York City and DC!  

I have learned a lot from Dr. Caroll and I added some of the information from him. You can view his video at: https://www.youtube.com/watch?v=wBr3fniyb4w

(This blog does not represent the view of any organization or institution)

The Health Insurance Sector: Asymmetric Information and The Lemon Problem

Source: http://www.cnn.com/2012/06/27/politics/btn-health-care/

Last time we talked about the disadvantage side of a universal health care. We also learned that the United States does not have a universal health coverage for American people unlike other industrialized countries. Today we will again focus on health economics and discuss some of the market failures of the American health insurance sector. Most of my arguments are inspired by Professor Gruber of MIT who is known as the architect of the new health reform in the U.S. You can find my reference at the end of the article and view his interesting lectures about the health insurance sector in America. I apologize for not preparing a standard reference of the articles that I cite. For simplicity I will show the link to the original articles so that you can use for future reference.

The World's Ranking of America's Health Care in the World

No doubt the United States is the most powerful nation on earth. Generally speaking, America loves to be number one. America is the number one largest economy in the world. America is number one when it comes to her total mighty military spending. America is number one in the movie industry, that is, the Hollywood movies generate billions of dollars at the box office. America also claims to be a leading country in promoting democracy and human rights in other countries. Well, the lists can go on and on. Despite having said that, when it comes to healthcare, America is nowhere near the number one spot in the world. That is according to the World Health Organization (WHO). Surprisingly, WHO ranked American healthcare system at number 37 in its 2000’s World Health Report. (http://www.who.int/whr/2000/en/). France’s health system was proudly ranked at number one. Another 2014 report of The Commonwealth Fund titled “Mirror, Mirror on the Wall, 2014 Update: How the U.S. Health Care System Compares Internationally” shows that American health system is ranked last among other 11 industrialized nations. You can find the latest report through this link. (http://www.commonwealthfund.org/~/media/files/publications/fund-report/2014/jun/1755_davis_mirror_mirror_2014.pdf)

Despite being on the number 37 spot in WHO’s world health system ranking and last in the latest 2014 The Commonwealth Fund’s report, as a matter of fact, Uncle Sam is spending a lot more on healthcare as a percentage of the GDP than any other industrialized countries in the United Europe. In fact, the U.S. spent 17.9% as a percentage of its GDP on healthcare in 2012, that is, almost 1 in 5 dollars in income is spent on the cost of health care.(http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS) It leaves us perplexed to learn that the most powerful nation is not number one in healthcare or at least in the top ten list.

Source: http://www.lean.org/images/shook_hcchart.gif

The Rising Cost of Health Care

According to the U.S. Census Bureau, 48 million Americans did not have health insurance coverage in 2012. To put the number in context, 15.4% of Americans were uninsured, that is, about 2 in 10 Americans were not covered by health insurance. (http://www.census.gov/hhes/www/hlthins/data/incpovhlth/2012/highlights.html). As a result, overwhelming health care spending on tests and hospitalization has been a leading cause of personal bankruptcies and homelessness in America. That is at least according to the National Health Care for the Homeless Council (NHCHC). In 2008 NHCHC estimated that health problems were responsible for 50% of personal bankruptcies in America. (http://www.nationalhomeless.org/factsheets/health.html) It is indeed a very concerning data for the 48 million uninsured Americans.

The cost of health insurance has also surged gradually over the past decades. In fact, the 2014 Employer Health Benefits Survey conducted by the Kaiser Family Foundation and the Health Research & Education Trust (HRET) found that “the average annual premiums for employer-sponsored health insurance are $6,025 for single coverage and $16,834 for family coverage.” (http://kff.org/report-section/ehbs-2014-summary-of-findings/)

Imagine a person who earn $2,000 per month and could he pay this kind of health insurance premium? This is why it is crucial to have a job in America so that you can be covered by the health insurance. As health insurance is getting more expensive along with the growing cost of health service, more and more people are unable to buy a health insurance plan. Young and healthy people also hesitate to purchase health insurance given its cost and perceived benefits.

Market Failure of the Health Insurance Sector

A large proportion of Americans receive their health insurance plans paid by their employers which is one of the means to attract talented individuals to work for their companies. Although some people are able to afford a health insurance plan, it does not necessarily guarantee that your health insurance application will be approved by the insurance company. To be more specific, some people are not qualified for health insurance given their pre-existing conditions. In other words, say for example John (a make-up name) has been diagnosed with kidney problems. To insure himself against future health hazards, he decides to obtain a health insurance policy from an insurance company called XYZ. Imagine if you were the one who run the insurance company XYZ, would you provide health insurance to John who has kidney failure, although you somewhat know that John has a high chance of getting sick at anytime? The insurance company might be generous and it is willing to help their clients, because the clients and the companies should grow together. That sounds good right? Insurance companies, however, are undeniably profit-oriented and there is a high probability that they would make a loss in the future if they decide to cover John. So is that a good business decision? Unsurprisingly, that is one of the many reasons why many people dislike insurance companies and labeled them as bloodsuckers and immoral. But that is what businesses do and how they operate to minimize cost and maximize profit. Are their behaviours right or wrong? There is no clear cut answer here. The answer lies in the gray area.

In addition to those who are not approved to be covered by health insurance, there is another market failure identified by economists in the health insurance market, caused by asymmetric information or in other words, the situation in which someone holds more information than another person. In the health insurance market, the buyer of the health insurance more often than not understands more about his own body and health condition better than the insurance companies. To avoid paying high premium for his health insurance coverage, the buyer could obscure his real health condition. Let’s say prone-to-illness people would be more inclined to buy a health insurance than healthy and young people. Because of asymmetric information in this insurance product's transaction, the insurance companies risk making a loss due to covering the cost of the opportunistic and unhealthy people. The insurance companies, consequently, would mitigate such risks by raising the premiums of the health insurance coverage. This increase in health insurance premium would ensure that insurance companies can make a profit in light of these kinds of uncertainty. In turn, more healthy people would stop paying the health insurance premium due to its increased cost, which drives the insurance companies again to raise the premium. This vicious cycle is a market failure in the economy or what economists specifically call the Lemons Problem or the Market of Lemons. That is the reason why insurance companies may choose to deny coverage of the buyers with pre-existing condition or even refuse to renew the coverage if he is found seriously sick.

Source: http://insideops.com/wp-content/uploads/2014/06/used_car_lemon.png

There is another group of uninsured people. They certainly want to be insured in the case of any personal calamity, but the problem is they simply cannot afford to pay the health insurance premiums. They are the people who are living under the U.S. government’s poverty line. To be more specific, the poverty threshold in 2013 on average for a family of four is $23,834, according to the U.S. Census Bureau. (https://www.census.gov/hhes/www/poverty/data/threshld/)

The bottom line is that due to asymmetric information, health insurance premiums have gradually increase which make it not affordable for many American and cause healthy people to stop buying the insurance coverage. On top of that, insurance companies also deny health insurance coverage to those who have pre-existing conditions or stop renewing the health coverage once the policyholder get sick. That is why there are close to 50 million Americans who were living without health insurance in 2012. These are some of the problems to manifest the fact that there is a market failure in the health care system in the U.S. The explanations also justifies the role of the government to intervene in the healthcare insurance industry. So how would the government fix this problem? I planned to discuss Obamacare in this article, but it appears that this article is unexpectedly long already. For this reason, I decide to keep the discussion on Obamacare for the next article. Thanks for spending time reading this long article Stay warm everyone!

- The article is for educational purpose. (No copyright infringement intended)

- The article does not represent the view of any institution or organization.

You may also want to go to MIT's OpenCourseWare from which I learn a lot about American health insurance market.

Gruber, Jonathan. 14.01SC Principles of Microeconomics, Fall 2011. (MIT OpenCourseWare: Massachusetts Institute of Technology), http://ocw.mit.edu/courses/economics/14-01sc-principles-of-microeconomics-fall-2011 (Accessed 17 Nov, 2014). License: Creative Commons BY-NC-SA