This is the first of a three-post arc discussing the impact of demand-side subsidies upon particular areas of the economy that will bring the August economics marathon to an end.
In the post Economics 151: Insurance Basics and the Affordable Care Act, I noted that health insurance has grown in the scope of benefits offered; it is no longer just protection against the cost of a catastrophic illness or injury but pays for a significant portion of routine medical care including office visits, physical examinations and prescriptions. It has long been my premise that the availability of a source of ready payment for such services means that the cost of the services will increase to absorb available funds. The insured rarely shop for healthcare based on price because the deductible/co-payment will either be a fixed amount or relatively insignificant and somebody else is paying for the balance. Health insurance itself acts as a demand-side subsidy.
The substitute for the price-conscious consumer is the insurance company itself which will ration care and/or dictate what healthcare providers are paid. Insurance companies are not the fan-favorite in this competition. As with many other areas where demand-side subsidies are offered, the policy emphasis is on the consumer’s “need.” This process will lead to government mandates that certain benefits be provided (meaning that insurance companies will have to look to patients with less “popular” conditions for savings). There are also problems where the service is provided by a healthcare practitioner not contractually tied the the insurance company’s reimbursement rates but where the government protects the patient from full responsibility for the cost of care from the non-participating practitioner.((See here for an early explanation of New Jersey’s then-new law on the subject.))
Jay Bohn
August 23, 2021