It was a bipartisan position — the health care law needs fixing. Even so, no changes could get through this year’s new Congress yet.
The Affordable Care Act remains the law of the land despite agreement that it doesn’t work well. Economic principles explain why the law is not living up to its expectations, and point directly to its needed reform.
The ACA is simply another government effort at price control.
Under this law the government has the power to keep insurance companies from raising prices by any amount determined to be “unreasonable and unjustified.” In some states all rate changes are scrutinized. In Idaho, only increases of more than 10 percent are subject to review by state insurance examiners.
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Even though individuals can buy health plans with government subsidies, economics teaches us that these consumers will have fewer and fewer choices and poorer service over time. Both theory and historical evidence show that when the government restricts price changes, consumers face fewer choices. That is, rationing occurs.
A classic example comes from the rent controls of earlier decades. Like restrictions on health insurance premiums, rent controls are price ceilings — legal maximums on the price at which a good can be sold. Price ceilings below the market price always create shortages.
The goal of rent control sounded good: “make housing more affordable for the poor.” However, apartment owners found ways to ration the service, discriminating against those with the least ability to pay (minorities, families with children), or accepting under-the-table payments. Further, the quality of available apartments deteriorated.
The same story is playing out in the health insurance market. ACA price ceilings are reducing the number of offerings and lowering the incentives providers have to deliver good service. Like rent control before it, expect to see more rationing in the health care market, or even worse, doctors accepting side payments from their patients.
True reform will happen only when Congress removes the ACA price controls. Other simple changes, like reducing coverage mandates in policies, opening this insurance market to interstate competition and eliminating the restrictions on electronic medical services, will do more to help the ACA meets its intended goals.
Let’s not hear any more of this same old price control story.
Peter Crabb is professor of finance and economics at Northwest Nazarene University in Nampa. firstname.lastname@example.org