Monday, September 10, 2012

Supply and demand

As we know, Republicans are skeptical of government solutions to any problems. They believe the market works wonderfully well in providing an optimum solution for everything. I want to give an illustration of how the market works.

But first, some context. Mitt Romney went on Meet the Press yesterday suggesting that he is in favor of keeping some aspects of Obamacare, particularly those aspects that require insurance companies to accept people with pre-existing conditions. This sounds like a change in position. A major change, in fact. It almost sounds like repealing and replacing Obamacare would result in something very much like Obamacare. And one thing Republicans have been clear on is that they hate Obamacare, because it represents an unwarranted government intrusion into the market.

Naturally, the Romney campaign had to issue a clarification, explaining that they still really do hate Obamacare, and when Romney was talking about covering pre-existing conditions, he was only talking about people who already have continuing coverage. And what will people without continuous coverage do? Here is what the statement from the campaign said:
“[I]n a competitive environment, the marketplace will make available plans that include coverage for what there is demand for. He [Romney] was not proposing a federal mandate to require insurance plans to offer those particular features.”
This sounds reassuring, because it tells people that the market will take care of this problem, and we don't need big, bad government to step in and tell insurance companies to make insurance affordable (and mandatory) for everyone. But it's important to explain what the statement that the marketplace will provide plans "for what there is demand for" actually means, for those who might be a little hazy on their Economics 101. See, the wonderful thing about markets is that they satisfy demand. Whatever we want, the market will provide it. The way the market does this is by pricing every commodity at exactly the point where demand is satisfied. So if there are a lot of potential buyers, and scarce supplies, the way the market continues to satisfy demand is simply to raise the price and, like magic, demand is still always satisfied.

The way this works with your health insurance is as follows: Say you don't have a job that provides health insurance, and you just decide to chance it and go without. Then you get diagnosed with cancer. So you apply for health insurance, but you have to disclose that you've been diagnosed with cancer. And the insurance company then tells you that your premium will be, say, $100,000 a year. (I'm just making a number up out of thin air.) Too bad you didn't apply for coverage before you got diagnosed, the insurance rep might tell you, then it would only have cost, say, $10,000 per year. So now, if you can't afford the premiums, does that mean that the market has failed to provide insurance coverage to satisfy demand? Not at all. It means that you no longer have a demand for health insurance. That is how the insurance market provides coverage for what there is demand for.
 

2 comments:

  1. I think you're right on this one Joe. Supply/demand doesn't really work as it normally would in the insurance racket. They don't really care about getting everyone covered, especially if those people have expensive pre-existing conditions.

    If they did, and supply and demand worked in this case, then people with pre-existing conditions would be able to get coverage without all the hassle.

    Actually, if demand goes up because of pre-existing conditions (lets hope this does not become the case) then insurance companies would probably tighten down even more. A ton of people entering the pool with expensive conditions would almost certainly drive up costs.

    The simple market principles applied to this situation, then there wouldn't be a need for a federal mandate on this issue.

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    1. The scenario you are talking about, where more people with pre-existing conditions enter the insurance market is known as the "death spiral," because premiums would have to keep going up and up to cover the high cost of care for people with pre-existing conditions. And then fewer and fewer healthy people would buy insurance. And then premiums go up even more, etc.

      Romney knows that you either have to allow insurance companies to reject people with pre-existing conditions, or you have to find some way of covering everybody, so that enough healthy people are in the pool to make insurance affordable. He is just trying to fudge the issue by trying to make it sound like he is in favor of covering people with pre-existing conditions, but he knows that he is not proposing this.

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