The Affordable Care Act and allocative efficiency in health care

Economic Efficiency

Right now, we are seeing the beginning of the rollout of Obamacare, the kludge solution to America's broken health care system. The Affordable Care Act is a suite of laws and regulations that are designed to improve access to health care services in the United States, and the rollout has been spaced out over the course of a few years. Right now, the rollout is intensifying but the most significant elements will not arrive until 2014. As with any major policy change, there are myriad criticisms, and in this case one of those criticisms is the impact that Obamacare will have on the economics of health care in the United States. This paper will examine the effect of the law from the perspective of allocative efficiency.

Background

The key concept here is allocative efficiency. When a market operates under the condition of allocative efficiency, "the value consumers place on a good or service (reflected in the price they are willing to pay) equals the cost of the resources used up in the production" (Tutor2U.net, 2013). Thus, the price equals the marginal cost. When that condition is satisfied, total economic welfare is maximized (Ibid). There are a number of preconditions to allocative efficiency, none of which are present in the current health care market, and none of which are likely to be present under the Affordable Care Act either.

The Affordable Care Act does a number of different things that draw away from allocative efficiency. It proposes mandatory buy-in of insurance wherein one's health care consumption is not matched by costs out of pocket at least in the short run (Fisher, 2012), places caps on insurance rates, negotiates lower drug payments, and establishes funds to help consumers pay for their insurance (HHS.gov, 2012). Pre-existing issues drawing away from allocative efficiency include differential bargaining power between buyers and suppliers, FDA monopoly protection on new drugs and government involvement in health care via Medicare, Medicaid and Veterans' Services.

Policy Recommendations

If the government wanted to seek allocative efficiency in health care, the ACA will not do that. Obviously, the Act is seeking to reduce the negative externalities associated with low information (by setting up information exchanges), poor bargaining power of buyers (by setting up insurance exchanges) and lost productivity at work (by insuring tens of millions of previously uninsured Americans). Whether any of these things comes to pass is not known yet, because the ACA is not fully implemented yet. It is doubtful that government can resolve these issues. However, no intelligent human being could make a case that the health care system is operating anywhere remotely close to economic efficiency at this point. The ACA might make it worse, might make it better, or might just make a different type of mess than the one we have now. Either way, the health care system is nowhere near efficiency, never was, and probably never will be.

The best alternative is to work to reduce some of the core underlying reasons for inefficiency. Some of the market failures result from government attempts to achieve social outcomes rather than economic -- economic efficiency has never been the objective of any government, anywhere, ever. The new drug monopolies are to encourage new drug development, for example. But if the government wanted economic efficiency, it would need to remove all involvement from the health care business at all -- no FDA, no Medicare, no ACA, no Veterans' Affairs, no Medicaid, and no regulation. Even then, efficiency would not exist. There would still be information asymmetry, since most of us are not doctors, let alone pharmaceutical researchers. There would also still be negative externalities. Actually, there would be more since people would in general be sicker, and more often, costing the economy even more than illness does already. So there are no perfect answers in health care. The existing system seeks to find a balance, and the ACA seeks to shift the balance, but in either case the health care market has basically no hope of ever being allocatively efficient.

References:

Economics Online. (2013. Types of market failure. Economics Online. Retrieved November 4, 2013 from http://www.economicsonline.co.uk/Market_failures/Types_of_market_failure.html

Fisher, D. (2012). The big problem with Obamacare: It doesn't help many. Forbes. Retrieved November 4, 2013 from http://www.forbes.com/sites/danielfisher/2012/03/28/the-big-problem-with-obamacare-it-doesnt-help-many/

Frakt, A. (2011). Health care market failures. The Incidental Economist. Retrieved November 4, 2013 from http://theincidentaleconomist.com/wordpress/health-care-market-failures-and-what-can-be-done-about-them/

HHS.gov (2012). The Affordable Care Act and the prevention and public health fund report to Congress for FY2012. Department of Health and Human Services. Retrieved November 4, 2013 from http://www.hhs.gov/open/recordsandreports/prevention/fy2012_aca_rpt_to_congress.pdf

Tutor2U.net. (2013). Economic efficiency. Tutor2U.net. Retrieved November 4, 2013 from http://www.tutor2u.net/economics/content/topics/competition/efficiency.htm