The Senate voted in dramatic fashion at midnight to not go ahead with the Health Care Freedom Act, which has been called a “skinny repeal” of the Affordable Care Act. Or Obamacare. Primarily the skinny repeal was to do away with the individual mandate where individuals are required to buy health insurance or face penalties. It has a lemons problem.
George Akerlov won the Nobel Prize in Economics for a paper he published in 1970 called “The Market for Lemons: Quality Uncertainty and the Market Mechanism”. In it he said that markets could collapse if one side of the transaction had more information on the quality of the product than the other. For example, if a buyer could not tell apart a bad car (a “lemon”) from a good car (a “peach”), they would not be willing to pay a price greater than the average quality of the car they expected to buy. That would lead sellers of peaches to withdraw from the market, since the price they would get for their car would be less than the value they knew it to hold. And, we would be left with a market in which only lemons were sold.
This is obviously an example taken to an extreme, but does indicate the directional impact of doing away with the individual mandate. People who are more at risk would be more likely to buy insurance, leading to a riskier pool, and put upward pressure over time on premiums. Rising premiums would, in turn, push people who are on the fence, i.e., the relatively lower risk participants, to not seek insurance in the future. Thereby putting additional pressure on premiums. And so on. Potentially leading to a non-functioning market.
Obamacare also does not allow premiums to be based on pre-existing conditions. This, in some ways, is the other side of the glove of the individual mandate. In that it allows premiums to be priced purely on age, and not on other health considerations. We could argue the merit of that. But then, we abut against philosophical considerations on insurance. The purpose of insurance is to pool risk. I may not be sure on an outcome to me any given year, but by putting myself in a much larger pool, I tie myself to the security of the group outcome. Obamacare helps insure that. Pricing based on individual health considerations, however, reduces this pooling of risk. And taken to the extreme, each of us gets a health plan tailored to our specific needs, and pays the premium associated with it. Which really means no insurance at all, at least from a pooling perspective. Let the chips fall where they may… And given the cost of health care, very few people really want that.
Which brings us full circle to the fundamental problem faced in the country with health care. Costs have been on a tear pretty much since the 80s. The skinny repeal does not address this increase in cost. In fairness, Obamacare does not either. But, neither can it be blamed for it. Cost is a pre-existing consideration that is being ignored by both our great parties.