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Thursday, April 5, 2012

Why we need the Affordable Care Act

In one of my graduate level econ courses today we discussed the comparison made by Supreme Court Justice Scalia (and others) that has been in the news lately. Judge Scalia asked The Solicitor General, Donald Verrilli, why health insurance is different than broccoli. After all, they are both good for you and markets exist for both.

This is where our professor jumped in.  Our professors insight was very clear and concise, and frankly, if The Solicitor General had been able to come up with something even remotely close to this argument, it would have been difficult to contradict.

The government steps in where market failures exist. For example, if we had to pay for our own roads, we'd have beautiful roads in wealthy areas and no roads anywhere else. Economists agree, government is needed where market failures exist. Economists also agree that there are many things the government does that make no economic sense at all (sugar beet subsidies for example). In the market for health insurance, free markets simply don't work.

In the market for health insurance, there is an unequal equilibrium. On one end, you have super healthy individuals willing to accept an extremely high deductible because they don't think they'll need insurance. On the other end of the spectrum, families, the elderly and those with health needs are willing to pay more money for more coverage. You can see the problem, those who need insurance are willing to pay more for insurance. Therefore, they are at a disadvantage. The only way to provide healthcare for everyone is by pooling risk.

This is why healthcare is often provided through employers. Employers can provide insurance to a pooled group of employees. Do the young subsidize their older coworkers? Yes, and that's why it works. And someday, the young will need additional coverage as well.

Problem: not everyone has health insurance through an employer. So all those that are uncovered (somewhere around 50 million depending on which figure you use), are subject to the prices offered by the insurer. Alone, all these uncovered individuals are subject to very high insurance costs (again, because those that need health insurance are more likely to seek insurance, so insurance companies assume they are willing to pay higher premiums). So, by simply pooling these people (like  an employer only on a very large scale) you can pool the risk and correct the market failure. In basic micro, this is known as the problem of adverse selection. This is something covered in every Micro 101 course.

While I have your attention, this new Presidential Barbie really irks me. It's great that she can stand on her own for the first time, unfortunately she's wearing platforms instead of flats, or even a reasonable heel. And that ruffled suit she has on?? There is a difference between fashionable and business professional. (Sure, business professional can be fashionable, but no professional woman would wear that suit.) Despite her "Legally Blonde" look, I think Barbie may be a more serious candidate than many of the Republican hopefuls have been.

Til next time, peace, love and broccoli.

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