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Archive for February 23rd, 2011

Rate Regulation

In “Supreme Neglect” Epstein goes into detail about rate regulation. I have never really considered rate regulation as a power of the government. But once I thought about it, it made complete sense. Of course the government is able to set minimum and maximum rates, through law or even just through social practices. I am not sure that I am completely comfortable with this idea. We are all so protective of our property rights and the due process that the Constitution affords us yet we never think to consider the indirect ways that the government has an affect upon our so-called private property rights. I don’t know if it is just because I have never taken an economics class before or if it is just highly over looked but the idea that “rate restriction can be sustained by police power” is a complete farce as I see it.

Applying Economics to Health Care

I’m not going to go into the politics of last year’s health care reform legislation, but chapter 11 in Epstein did get me thinking about some of the economic aspects of the bill. In a Traditional way of thinking, as Epstein points out, competitive industries should be exempt from rate regulation. This traditional view doesn’t allow for regulation of the insurance industry. However, the ever-growing Progressive view fears domination by large firms, even in a competitive industry. So regardless of market structure, those with Progressive viewpoints will favor rate regulation.

Now, how does this apply directly to the health care reform bill? According to a decision handed down on February 23 by US District Judge Gladys Kessler, “The individual decision to forgo health insurance, when considered in the aggregate, leads to substantially higher insurance premiums for those other individuals who do obtain coverage.” If I buy insurance even if I shouldn’t need to use it for at least 20-30 years, that money ends up helping pay the costs of those who do need to use their insurance and ultimately decreases the rates for all. As far as I can tell, it’s sort of like the Social Security system. Just as the Social Security system worked fine until we realized that all the “baby boomers” were getting old and starting to pull their share of the funds from the system, the individual insurance mandate could be considered a good idea until we all get cancer, require chemotherapy and expensive treatments, and end up pulling our share (or more) of the funds from the system. Kessler’s language essentially makes the individual mandate a matter of rate regulation, instead of a matter of providing better health care. Doctors aren’t going to become more skilled, but they will, potentially, cost less.

A “traditionalist” would look at this situation and say that it should be left alone. There are multiple insurance companies in each state, and even more if you expand your search to the entire nation. The beauty of a competitive market is that insurance rates are kept relatively low because more people will buy insurance plans at a competitive rate. If Provider A wants to charge me $500 a month for insurance, but Provider B offers me a similar plan at $350 per month, I’m going with Provider B. If Provider B’s plan were $450-500 a month, then I would weigh the quality of the plans more than if I were choosing between a large price difference. A person with a more progressive viewpoint says that rates should be regulated anyway, even with the competition. I am then left to wonder: If everyone has to buy insurance, what’s to stop the “competitive” price from rising instead of falling, as many people wish?

After reading the section on the Baptists and Bootleggers, it got me thinking about living in Utah, or at least Logan. I began to wonder if there was any sort of thing in Logan while there was a ban on selling liquor on Sundays. Then I thought, it would not have been too successful because Idaho was so close and their beer has the normal percentage, unlike Utah’s. There might have been motivation to set up a shop in Logan to satisfy the people that forgot to buy their drinks on Saturday, but at what point would the population of a relatively small town’s small minority grow to a size that would make the venture and its risks profitable? The attitude of local law enforcement would need to be taken into consideration, also. How aggressively would they pursue such actions? Would it be like cultivating and smoking marijuana in California, where as long as it is for personal use and discreet, nobody cares much in some places? Or, since there is little else to occupy law enforcement in Logan – other than traffic violations – would it be a “cause celeb,” relentlessly pursued as a badge of honor for the municipality? It would have been interesting to see if it approached anything like the Probation Era, but hopefully with better tasting liquor. I heard back then the libations pretty much tasted like rubbing alcohol. Hopefully, the technology and production methods of a more modern era could help with that.