The Patient Protection and Affordable Care Act, colloquially known as Obamacare, is an attempt to provide affordable health insurance and care for everyone in America. Unfortunately, as Reed Abelson notes in The New York Times, many health insurance and healthcare providers have significantly raised their prices since the law passed. Many article commenters are blaming these price increases on greed, claiming that that the healthcare providers just do not want to bear the regulatory costs and are passing the costs onto the patients. In making such claims, they ignore the economic forces behind the prices.
As anyone who has taken a class in economics should know, prices reflect supply and demand. When prices are allowed to work, they tend to match the quantity supplied with the quantity demanded, preventing shortages and surpluses. While theories of market value imputation go much deeper than that, understanding those theories is not necessary for one to generally understand why healthcare prices are rising in response to Obamacare. Obamacare, as most people realize, has effectively stimulated demand for healthcare and health insurance, but it has also reduced the supply. The latter effect is less obvious than the former.
Decades ago, health insurance only covered major medical needs. Routine checkups and treatment of minor injuries and illnesses was usually paid for directly by the patient. In the 1980s and 1990s, managed care plans become widespread. These plans cover just about all medical expenses. Under Obamacare, this type of coverage is expanding to even low earners and the unemployed, meaning that almost everyone will soon be relying upon insurance to cover all of their medical expenses. This is a fairly obvious reason for a demand-driven increase in the prices, but the regulatory burden of the law also causes a costly reduction of supply.
The increased regulatory costs to healthcare providers and insurance companies have opportunity costs. These costs are reductions in the providers’ savings, which means less investment into their productive operations. If a producer wishes to increase production, he or she must accumulate capital, which requires deferral of consumption, or saving. Government interventions that reduce the amount of capital that businesses can save will result in reductions in future production. This reduction in supply, or predicted reduction in future supply, in addition to the increasing demand due to more widespread, subsidized, healthcare coverage, is responsible for the increasing healthcare costs. This type of restriction of supply is common to most, if not all, regulations. Though some may make the case that the intended outcomes of regulations are worth the higher prices, as most argue about food safety regulations, the price increases are a fact of economics, and any government policies which fix the prices low will result in shortages.
Then again, as the inevitable anti-price gouging arguments following natural disasters indicate, many people are adamant that shortages and the resulting first come, first serve situations are an acceptable consequence of low prices for the people who can take advantage of them. This attitude, unfortunately, may lead to the unavailability of necessary care and to the stifling of life-saving innovations in medical technology.
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