Fair Competition?

With the new healthcare reform bill phasing in over the next few years, there has been much debate over whether or not the new healthcare bill passed last year is constitutional or not. Personally, forcing people to buy health insurance, is not constitutional. Not only that, it creates what the text book calls a negative externality. The text book defines a negative externality as "...when one party directly imposes a cost on others" (pg. 327). By forcing people to buy insurance and by passing legislature requiring insurance companies to offer coverage regardless of whether or not the individual has a pre-existing condition or not, it increases the cost to those who are paying premiums. An article by Sheryl Gay Stolberg of the New York Times explains that "Requiring coverage brings both sick and healthy people into the pool of those insured, which is essential because premiums paid by the healthy offset the cost of covering the sick. Otherwise, healthy people wait until they are ill to buy insurance, which leads to what policy analysts call a “death spiral” in which premiums skyrocket out of control"(http://www.nytimes.com/2011/11/16/health/policy/insurance-mandate-may-be-health-bills-undoing.html). The government has stepped out of bounds by passing the new healthcare reform bill. By requiring insurance companies to cover a larger pool of individuals, the cost to the companies will rise and we as a result will have to pay higher premiums. The healthcare reform bill creates a negative externality for society. Whether it is by paying higher premiums or paying higher taxes in order to support the new socialized medicine program, the cost to us will continue to increase.


Ethan said...

Fair Competition

The new healthcare reform bill could definitely be considered a negative externality. In this situation, the government is acting as the outside source which is only considering the benefits and costs of a specific group of people. This becomes a negative externality to healthy individuals who really do not need health insurance. I for example am a very healthy individual and rarely need to visit a doctor, it has been years. I do not carry insurance on myself because the cost of having insurance outweighs the benefit of having health insurance. If the government requires me to acquire and carry insurance on myself, I am forced to pay for something that I do not need. This creates a negative externality for me and other healthy individuals.

Dr. Tufte said...

-1 on Mitchell for a poorly formatted link.

At least in part the negative externality Mitchell discusses is supposed to offset the negative externality of having uninsured people (whose costs are often borne by taxpayers anyway) avoiding short-run treatments that may be cost-effective in favor of long-run treatment that are not, but which are covered by the taxpayers. That's the theory, at least.

Ethan: you paying for insurance may be a misfortune, but it isn't an externality.

Joe said...

I have been thinking about the role of government lately and this post seems to be a good place to highlight some of those thoughts. First of all, how would you like to be the CEO of a health insurance company right now? Consider their dilema: if they don't prepare for the healthcare legislation being approved by the Supreme Court they will lose huge market share by not being able to take advantage of the new policyholders via the state market exchange. Alternatively, if they prepare for the law to be upheld they will incur a lot of cost doing so, and if the law is not upheld they have wasted that money. I suppose this is why we have been learning about gaming theory; it seems to me that this game is exponentially more difficult because the rules keep changing.

Dr. Tufte said...

-1 on Joe for a spelling error.

I think the comment is a good one though: this is exactly why we study game theory in ManEc. Dealing with government is an infinite sequential game, and there aren't a lot of easy solutions for those.