Monday, January 18, 2010

ObamaCare Price Controls: Bending the Value Curve Down

The hallmark of ObamaCare is that health insurers will be prohibited from denying coverage to those patients with pre-existing conditions. How is that goal achieved and what are the implications of such a daunting mantra? In order to achieve ObamaCare’s overarching purpose, health care price controls would be put into effect to ostensibly limit the premiums paid to insurers and reimbursements to health care providers, but would also cause in and of itself an overall rationing of health care. In the attached Cato Institute podcast, Michael F. Cannon discusses the ramifications of health care price controls, which is the centerpiece of ObamaCare in both the House and the Senate versions of health care legislation.

Fundamentally all economists agree that price controls degrade both quality and quantity of goods and services. Governments can impose artificial price controls on free enterprises, but that does not change the economic reality of underlying costs, associated production and the accompanying harmful economic distortions and results. In fact Larry Summers, President Obama’s Director of the National Economic Council, is quoted saying such in a testimony to the IDB Conference on Development Thinking and Practice, Sept. 4, 1996,
“...price and exchange controls inevitably create harmful economic distortions. Both the distortions and the economic damage get worse with time. Meanwhile, attempts to preserve price controls induce otherwise avoidable rationing schemes and goods shortages. And when goods disappear from official markets -- except perhaps those designated for privileged consumers -- they reappear in unofficial ones, but at much higher prices.”

Mr. Cannon illustrates the above by way of example.
If it cost $20 to produce a widget and the government forces an enterprise to sell the widget for $10, then the enterprise will limit both the quality and quantity of widget production to manage to a selling price of $10 in order to be profitable and stay in business. How would this example translate into a health care insurer environment? If an insurer charges $50,000/yr. for a health insurance premium and the government requires the insurer to charge $10,000/yr. to cover health costs this may appear to be attractive to the insured. However, this “price control” imposed on the insurer incents the insurer to reduce health care coverage that would cause them to be unprofitable, e.g., reducing coverage for diabetic patients, cancer patients, heart failure patients, etc, which in turn reduces the value of the health insurance plan.

This is precisely the sort of economic distortion President Obama’s own chief economic adviser warned against. Both quantity and quality of health care would be compromised by ObamaCare price controls.

Mr. Cannon provides valuable insight into the economic realities and distortions of ObamaCare price controls that would undercut and compromise it’s intentions and, most importantly, compromise the quality and quantity of health care for all Americans. The jury is still out as to whether ObamaCare will in fact bend the health care cost curve down, but it will most certainly bend it's value curve down.

Michael F. Cannon is the Cato Institute's director of health policy studies. Previously, he served as a domestic policy analyst for the U.S. Senate Republican Policy Committee under Chairman Larry E. Craig, where he advised the Senate leadership on health, education, labor, welfare, and the Second Amendment. Cannon is coauthor of "Healthy Competition: What’s Holding Back Health Care and How to Free It". He holds a bachelor's degree in American government (B.A.) from the University of Virginia, and master’s degrees in economics (M.A.) and law & economics (J.M.) from George Mason University.

1 comment:

Matt said...

I see the Democrats engaging in what will become more obvious over time. A hard pragmatism, as personified by Ezekiel Emanuel. If you want a chill to run up your spine, read his descriptions of health care rationing.