The Republican FUD machine is in high gear this morning after the unveiling of Obama's new health care reform proposal, especially with respect to the following, which opponents are inaccurately calling "price caps."
Review of unreasonable insurance premium increases and rebates if unjustified; health insurers with a pattern of excessive rate increases can be blocked from selling through new insurance exchanges.
As with all proposals before they become actual bills, the devil is in the details here. But since debate and disinformation wait for no details, here's a quick and dirty mythbusting primer for the econ-challenged out there.
MYTH: This clause means price caps.
We should be so lucky.
This clause leaves all sorts of wiggle room in terms of the final bill, and clearly is not intended as a ceiling on prices nationwide or in any given market.
Who decides what is an "unreasonable" premium increase is left to one's imagination. If health insurance companies have any say, I suspect they'd prefer it to be them.
MYTH: Price caps will diminish health care "supply."
This particular myth is insidious because it sounds like it could be true. If you took enough econ in college to be dangerous, you might remember that artificially capping prices below the equilibrium might result in producers exiting the market. Lying Republicans have no conscience about extrapolating this idea to sell a vision of children dying in line while waiting for a bone marrow transplant.
A few key "buts" make this argument completely disingenuous at best, and thuddingly stupid at worst.
- Health care insurance is not health care.
To diminish supply, you'd need to make doctoring an economically inviable activity, such that physicians simply stopped practicing. What this proposes to do is regulate prices charged by insurers. Not physicians.
- Equilibrium prices are not reservation prices.
Even if we eliminate the distinction between health care insurers and physicians, and consider them as one entity, it does not necessarily follow that price caps that register below equilibrium prices would diminish supply.
Here, the applicable horizontal line on the supply-demand graph is not equilibrium price, but seller's reservation price -- the price below which a rational seller would opt out of a given market.
Let's use a simplified example.
Assume you pay $2 to make a pitcher of lemonade, inclusive of all costs including opportunity cost, which you then turn around and sell at $4. The market bears this cost. Therefore, $4 is the equilibrium price, while your seller's reservation price is $2.01. Your profit is $2.
And absent some other fungible and more accretive activity, you'd stay in the lemonade business even if the government showed up and said you could only charge $3.90 a pitcher. In fact, you'd stay in until government capped your price at $2.01.
- This ain't no free market.
The notion of an equilibrium price supposes true competition, and as anybody who has followed this debate knows, there is no true competition in the health care insurance business. The McCarran-Ferguson anti-trust exemption allows health care insurance companies to operate as monopolies, oligopolies, and even cartels, depending on what market you're examining. They are simply not subject to competitive pricing, which allows them to price far above a theoretical equilibrium price.
The difference between an equilibrium price that you as a consumer would pay in a truly competitive marketplace and the price you pay in today's upside-down health care landscape are called "rents," and the act of charging these higher prices is called "rent-seeking." Unless and until McCarran-Ferguson is repealed and anti-trust laws are enforced against Big Insurance, any price regulation is overwhelmingly likely to merely control rent-seeking, not eliminate sacrosanct health insurance profits.