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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.

  1.  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.

  1.  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.

  1.  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.

Originally posted to The Termite on Mon Feb 22, 2010 at 12:26 PM PST.

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Comment Preferences

  •  Good idea, I don't wanna (1+ / 0-)
    Recommended by:
    The Termite

    pay that much for a dummy anyway.

    ...and now that I have snarked, it's time to actually read what you wrote.

    "Everybody lies... except POLITICIANS? House, I do believe you are a romantic."

    by indiemcemopants on Mon Feb 22, 2010 at 12:30:10 PM PST

  •  This is exactly why (2+ / 0-)
    Recommended by:
    The Termite, Hens Teeth

    the right wing argument is stupid:

    Health care insurance is not health care.

    Were price caps to actually exist in the first place, government-set price caps wouldn't apply to health CARE access. Just health insurance.

    But the system we have now ALREADY rigs the game, effectively letting the "free market" of monopolistic colluders (is that a word?) make the prices for health insurance whatever the hell they want and THEN allow the insurance companies to set a health care cap.

    The actual purpose of health insurance IS a freaking health care cap. They lose money when they provide care.

    "Everybody lies... except POLITICIANS? House, I do believe you are a romantic."

    by indiemcemopants on Mon Feb 22, 2010 at 12:41:46 PM PST

  •  Not a myth. (2+ / 0-)
    Recommended by:
    The Termite, Hens Teeth

    Republicans use their well oiled, unified messaging machine to incite the teabaggers and give a gold medal assist in completing the transition from a democracy to regressing us to an oligarchic 3rd world.  Obama may not be some's ideal but he's all we've got to slow the complete takeover while we build our movement.

    My point is that the repubs use "price caps" as a means to demonize.  Their one and only schtick:  price caps will take away your freedoms.

    •  The teabagger dynamic here is weird (2+ / 0-)
      Recommended by:
      Hens Teeth, pamelabrown

      On one hand, they are ostensibly anti-corporate, or at least anti-mega-corporate, and decry corporate influence in government.  And also, ostensibly populist.

      On the other hand, they don't want the black president telling anybody what to do with respect to anything, and that's apparently more important to them than tenet #1 above.

      YOU grab a mop. I'm gonna invent a car that runs on hate.

      by The Termite on Mon Feb 22, 2010 at 12:46:09 PM PST

      [ Parent ]

  •  Competition (1+ / 0-)
    Recommended by:
    The Termite

    Very well written diary. I think the key piece is here.

    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.

    Even acknowledging this, though, what you can't get around is that the cost of delivering health care is rising inexorably. Competition doesn't really play much of a role there, either, for a lot of reasons. And so far we're short of good ideas to harness market forces to rein them in. The Excise Tax is the main one on the table now.

    "The smartest man in the room is not always right." -Richard Holbrooke

    by Demi Moaned on Mon Feb 22, 2010 at 12:45:49 PM PST

    •  As I understand it... (1+ / 0-)
      Recommended by:
      Demi Moaned

      ...a key driver of increased cost of care is technology.  We are innovating at an unprecedented pace these days, and that's expensive.

      I don't think we want to suppress technological health care advancement.  But there might come a day when ethicists have to consider that question.

      YOU grab a mop. I'm gonna invent a car that runs on hate.

      by The Termite on Mon Feb 22, 2010 at 12:48:10 PM PST

      [ Parent ]

      •  Rationing (1+ / 0-)
        Recommended by:
        The Termite

        Yes and no. No doubt newer technologies are generally more expensive and they do make possible better treatments and cures.

        But the availability of the technologies as sources of revenue for health-care providers drives the demand for them in a way that is only loosely correlated to the benefits they provide. You should really read Atul Gawande's New Yorker article "The Cost Conundrum" to see how this operates in practice.

        I don't see the necessity to 'suppress technological health care advancement', but we may have to get into some form of rationing to counteract frivolous use.

        "The smartest man in the room is not always right." -Richard Holbrooke

        by Demi Moaned on Mon Feb 22, 2010 at 01:15:06 PM PST

        [ Parent ]

  •  I just tried to explain your Diary to a group of (1+ / 0-)
    Recommended by:
    The Termite

    Teabaggers.

    This was their reaction:

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