24 June 2012

The Poverty of Price

It's now conventional wisdom that ObamaCare is dead; Roberts and company will apply the garrote. What's the likely effect? Not what the Right Wingnuts expect, in the medium to long term.

The Wingnuts expect that the 1% will be graced with cheaper healthcare, with the hoi polloi removed from access. They're quite wrong. While real world data may be lurking out there somewhere, we don't need it to explain what will really happen. The result, simply put, is that the 1% will price themselves out of healthcare, too.

It is insurance company propaganda that the point of insurance is to both share risk and manage unusual outcomes. For-profit insurance companies do neither. What they do is attempt to capture consumer surplus. The WikiPedia article does an adequate job of explaining the notion. What's key to understanding the stupidity of the Wingnuts is that insurance companies extract the consumer surplus through market segmentation, and that by killing the individual mandate this process reaches the limit, i.e. the far left-hand point on the demand curve. This point is minimum supply and maximum price.

Why will this happen? Because it's what the insurance companies want (all the money), and there's nothing to stop them.

Let's think about MRI. I'll concoct some numbers for specificity, but they'll only differ from reality by some magnitude, not effect or kind.

# of MRI procedures: 1,000
Cost/procedure: $100
# of MRI machines/year: 100
Cost/MRI machine: $100,000

# of MRI procedures: 10
Cost/procedure: $10,000
# of MRI/machines/year: 1
Cost/MRI machine: $1,000,000

As time goes by, the number of MRI procedures and machines produced will diminsh as more and more folks get priced out while the insurance companies push the supply back up the supply curve.

The reason for the individual mandate is quite simple: insurance is, by definition, both pooled risk and not current consumption. Buying healthcare directly, which is what some of the Wingnuts mean when they say, in essence, that the young and healthy should be allowed to opt out "until they get sick". Nick Gillespie, self named libertarian but just another Wingnut, played that standard line on Maher's Friday show. Healthcare isn't consumption, anymore than auto insurance is. The Wingnuts always do the cockroach sidle when that is pointed out. The morons will cut off their noses to spite their faces.

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