Will Defection Thwart ObamaCare?

ObamaCare is fresh in the headlines due to the impending government shutdown. In the early part of his article (here) James Taranto of the Wall Street Journal criticizes Ezra Klein's view on ObamaCare. ObamaCare presents an adverse selection problem for those who are at a lower risk of needing health insurance. Why should people pay such high premiums if they have a lower risk for incurring medical expenses? Pooled risk lowers the cost for people who need coverage the most, while placing the highest burdens on people who have a lower risk for needing health insurance. This redistributes costs to insure against the risk of needing health insurance. But the high risk of purchasing ObamaCare may not be worth the future reward.

The issue turns in to the prisoner's dilemma. If many people cooperate and pay the high rates now, they will reap the benefits of lower cost health care policy later when they need it. Yet Taranto argues that "the individual cost of defection will be minimal", and thus will be a likely choice. A 28 year old individual can choose to forego paying the high premiums now, but still receive coverage at the age of 53 with a pre-existing condition. But the free rider problem suggests that many people will naturally revert to this solution, and if enough people defect and refuse to cover the costs, then ObamaCare could cease to be a functional program. This risk of incurring the expenses now for a program that may not be successful later is too high. The optimal solution for the healthy, young, or rich individual would be to abstain from purchasing ObamaCare.

A Public Choice View of Government in Healthcare

On the political scene, America's rising health care and insurance costs continue to be a main topic of debate. An article published in May by Forbes magazine conveniently frames the health care debate in terms of public choice. It argues that the government should spend more money on providing true public goods and less on goods that are simply beneficial to the public. Health care clearly does not satisfy the non-rival and non-exclusionary conditions necessary for something to be a public good. It should then, in theory, be possible for private companies to provide it in an efficient way. This is why, according to the author, the government should focus on providing true public goods which cannot be provided privately and stay out of healthcare to the extent possible.

But if health care and insurance can be provided efficiently by private firms, then why have costs continued to rise far above those expected for an economy of our size? This interesting video describes components of health care which are higher than expected and claims that the area with the largest discrepancy, that of $500 billion, is due to a lack of negotiation power with companies providing health care services. In other words, there are not many alternatives for medical services and so consumers lose the leverage that competitive market theory assumes they have.

So perhaps public choice can provide a solution. The New York Times published an article on competitive bidding laws and mentions how a "pilot program had reduced Medicare costs by 42 percent." So in this example when the government focused on enforcing the free market, health care prices dropped. The free market institution is non-rival and non-exclusionary, and therefore is something that is not likely to be provided efficiently by private companies. It seems to me like the government should focus on providing as close to a perfectly competitive market as possible. The more allocatively efficient outcome should follow naturally - and with it lower costs for consumers.


Sorry for the length - I look forward to reading the comments.