Obamacare-A Complete Fail in Market Economics
- Posted by Jeff Carter
- on October 19th, 2013
I am in San Diego at Stocktoberfest with Howard Lindzon and the gang. It’s been great so far. I received this post from a reader, and in lieu of me blogging, I am reposting their work here.
I want to thank Jeff Carter for allowing me to present some of the economic consequences of the Patient Protection and Affordable Care Act (aka Obamacare) on the healthcare industry and the American taxpayer. While it is true that health care costs are sky-rocketing, millions of Americans are uninsured and many go bankrupt paying for unexpected health care costs, Obamacare does absolutely nothing to solve any of these problems. Instead, this highly complex law, with over 20,000 pages, is doomed for failure by the very basic economic principle of supply and demand. Today, I am going to try to simplify four of the direct impacts Obamacare will have on every tax paying family.
The law of supply and demand is something about every rational person should agree. Demand represents how much of a product or service consumers want to purchase. The quantity demanded is the amount people are willing to buy at a certain price. Supply is how much the market can offer. The quantity supplied refers to the amount of a certain good or service producers are willing to supply when receiving a certain price. The relationship between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. When a market is at equilibrium, demand for a service is equal to supply for the service at a given price.
The American healthcare system is currently not a free market and, as a result, heath care rates are artificially high. If it were a free market, individuals could negotiate a price for a specific healthcare service. If you have tried to negotiate a price to pay for health care, you know this is impossible. For example, let’s say you need an MRI. Have you ever tried to call hospitals so that you could select this service based on price? I have. The hospital’s response is typically, “We have to bill your insurance company to find out how much it will cost you. We cannot bill your insurance company until you have the service.” Individual doctors can usually provide you with their base fee schedule but there is no way for you to know how much the doctor will be paid until your insurance company has been billed. Moreover, if you do not have health insurance today, you will likely pay the highest price possible, the doctor’s non-negotiated base rate.
Medicaid reimburses doctors for the exact same service at a significantly lower rate than commercial insurances. HMOs sometimes pay even less than Medicaid. In addition, Medicaid imposes a cap on what it will reimburse, based on medical specialty. (Example: Let’s say a doctor charges $300 for a service. Medicaid may cap reimbursement for this service at $80. The doctor must then decide if he/she is willing to take the lower reimbursement rate or refuse to see the patient.) Medicaid also has more stringent regulations for patient treatment than commercial insurance companies, resulting in doctors being able to see fewer Medicaid patents than commercial insurance companies in the same amount of time. The net impact of the fee cap, lower reimbursement rate and additional regulations result in a doctor’s pay being 30-50% lower for a Medicaid patient than if the same patient had commercial insurance.
American Taxpayer Impact #1: Obamacare will cause an extreme shortage of doctors in America.
Obamacare does not encourage a free market system. Instead, it actually creates an even greater distortion in demand and supply. Obamcare increases demand for health care by forcing every American to purchase health insurance. Companies currently providing health insurance to retirees and union workers now have the option of forcing these people the healthcare exchanges. The exchanges are very similar to current health insurance but reimburse doctors at a rate much closer to Medicaid than commercial insurances.
The law of supply and demand says the majority of doctors will not be willing to subject themselves to more costly regulations or take a massive pay cut. Rational behavior would be to do one or more of the following: greatly reduce the number of Medicaid or exchange insurance patients, change specialties, hire more physician assistants and nurse practitioners or leave the industry through retirement or shifting to a cash only basis. The healthcare industry shortage will be exasperate as young people entering college who would have chosen medicine will choose another path as the pay scale can no longer compensate for the years of training and cost of college. (There is a much broader discussion that the impact PA and NP have on the healthcare industry, but we have to save it for another blog.)
Let’s look back at that supply and demand curve. For sake of convenience, let’s pretend that our current healthcare system was at equilibrium. (It isn’t, but that is a blog for another day as well.) At equilibrium, the supply of doctors available in America satisfies the demand of the American people to see a doctor.
Now what happens when you reduce the amount you are will to pay for a good or service? You slide down the left axis as demand grows. Since fewer doctors are willing to supply their service at that price, there is shortage. Given the lower reimbursements for exchanges versus current health insurance companies, the supply of doctors will shrink even more!
American Taxpayer Impact #2 – Americans will pay a much larger percentage of medical expenses out of pocket. For the majority of Americans, the cost of a doctor visit will increase from a $20 copay to paying the entire bill, at the negotiated rate.
Supporters say that Obamacare is making health insurance more “more affordable”. This is being done on the exchanges through high deductible health insurance plans. Currently, the vast majority (70-75%) of Americans are not on a high deductible plan. Americans who have health insurance probably know what they pay for their insurance premiums, deductibles and copays. They do not look closely at the actual cost of the service they have received. This is perfectly rational behavior because the actual cost of the service is outside their control.
In order to save costs on medical insurance, my husband’s company moved to a high deductible plan about 8 years ago. As a result, I am intimately familiar with high deductible health insurance and very aware of the actual cost of health care. Our current plan has a $9,000 annual deductible, which means we pay $9,000 out of pocket before our insurance pays one cent. Taking my child to the pediatrician for a strep test typically costs my family about $210. (The doctor’s fee is $100 + the strep test in the doctor’s office $45 + second test sent to the lab + $35 + medication $30). The majority of Americans are in for a very rude awakening when they start getting their medical bills on a high deductible plan.
Because of my high deductible, I have a very large incentive to control my medical expenses. If healthcare were a free market economy, I could shop around to find a doctor to do a strep test at a lower price. Obamacare does not provide Americans the opportunity to control their healthcare costs as they are completely removed from the negotiation process.
American Taxpayer Impact #3 – Healthy Americans with commercial insurance will have higher health insurance rates.
President Obama claimed that Obamacare would reduce the average American health insurance costs by $2,500. If this were true, it would be completely irrational economic behavior. Insurance companies are in business to make a profit. Companies that are not profitable do not remain in business. Insurance companies have remained profitable by minimizing exposure risk. Pre-existing conditions allow insurance companies to minimize their risk and minimize the fee they charge consumers. While it sounds nice to “eliminate pre-existing conditions”, insurance companies must remain profitable to stay in business. The only rational behavior is for businesses to pass the additional cost of insuring more expensive people on to the rest of the consumers.
American Taxpayer Impact #4 – Americans using FSA and HSA accounts in the past will pay more taxes simply by the new cap.
For the last several years, in order to offset the higher cost of health insurance, Americans have been able to put money tax-free into both a Health Savings Account (HSA) and a Flexible Savings Account (FSA). In the past, HSA maximums were set by the insurance company or employer providing health insurance. Personally, in 2013, our maximum was $6,250 into a HSA (Health Savings Account) as well as $1,000 into a FSA (Flexible Spending Account). In 2014, under the Affordable Care Act, HSA & FSA combined contributions are capped at $2,500 for a family and $1,250 for an individual. Personally, that means we will pay taxes on $4,250 of income that was tax-free in 2013.
The economic law of supply and demand proves that the Affordable Care Act is doomed to failure. Rational behavior will result in a significantly smaller supply of healthcare providers and an increased number of American people expecting health care. The only possible solution is extreme shortages. Importantly, Americans, without the power to control their own medical costs, will be forced to pay higher rates for less care.
To end on a high note, one possible outcome is that a secondary healthcare industry is created. Many doctors and hospitals would break free of the constraints of the Affordable Care Act to become cash only providers. In this new free market industry, consumers would be able to shop the market and negotiate the best value for their health care. As an economist, it would be interesting to watch this new industry emerge. Ideally, it would demonstrate its superiority and enable the rest of the country to follow
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Jeffrey Carter is an angel investor and independent trader. He specializes in turning concepts into profits. He co-founded Hyde Park Angels one of the most active angel groups in the United States in April of 2007. He previously served on the Chicago Mercantile Exchange Board of Directors. He has done market commentary for (More...)