Below is a cut and paste of a facebook note written by Tom Lehman, economics professor at IWU. It is a great evaluation of the economic ramifications of the new healthcare bill:
“In response to a flurry of inquiries this week from present and former students and others, I offer my economic assessment of the recent health care legislation. My comments here will deal strictly with the economics of the policy, not the politics. I believe too much has been made about the politics of the policy, both left and right, and not enough attention paid to the economic incentives that the policy creates. The debate has been largely about the normative principles of the right to “universal access/coverage” vs. “government takeover” of health care. But, what are the economics of the policy, regardless one’s position on the role of government or the right to the access of health care services?
From what we know at this point, the policy, in brief, 1) requires that everyone be covered by health insurance, either through a private employer-provider, or a government health insurance “exchange” (which are to be set up by states in due time); 2) prevents insurance companies from denying coverage to anyone with a preexisting health condition; 3) requires employers with 50 or more employees to provide health insurance for their employees OR pay into a government exchange fund for health insurance that their employees can access; and 4) requires everyone to buy and pay for insurance in some way so that relatively healthier people are participating in the same insurance pool as the unhealthy who cost more to cover (i.e., the healthy cannot opt out to avoid paying high premiums leaving the unhealthy clustered together in the same risk pool making them all too costly to insure).
These seem to me to be the prominent features of the policy. What are the economic consequences of this?
My former and present students will recall the “law of unintended consequences” that we discuss in my Microeconomics course: policies as envisioned by their crafters rarely have the intended effects, and almost universally have unintended consequences because policymakers cannot possibly anticipate the myriad ways in which market participants will react to the incentives created by the costs and benefits of the policy. My suspicion (call it a “forecast” if you wish) is that a similar outcome is likely for the recently passed health care bill. Here are some thoughts:
Strictly in the context of supply and demand, this bill will increase demand for health insurance and health care services by bringing in more consumers of health care (the uninsured and unemployed), while simultaneously restricting supply through regulations on insurance coverages and mandated coverages by businesses for their employees. Market demand will increase any time you add additional buyers into a market. By increasing the number of demanders of health insurance by roughly 32 million (the roughly estimated number of currently uninsured), the demand curve will shift outward or up. But, as we know, regulations and mandates on coverages for insurance companies will add costs and restrict supply. The mandate on insurance companies that everyone be covered, that no one be turned away, and that preexisting conditions be covered at “reasonable” premiums similar to those paid by the healthy who are much less costly to insure and pose a much smaller risk to the insurance pool, will certainly boost insurance costs and thus shift the supply curve to the left (I do not buy the argument that the economies of scale from the additional buyers of insurance will offset this cost effect on supply).
All else equal, this will create a temporary shortage in the market which will put upward pressure on prices, contrary to the stipulated goals of cost reductions, and will then force the jobless and otherwise uninsured into the government health insurance “exchange” plan by default, since private insurance premiums are likely to eclipse government-subsidized health insurance exchange premiums. And, because of the regulations on insurance coverages and business mandates for employees, unemployment and/or lower wages will likely be related problems, since higher mandates on employee coverage will have the same effect as a tax on workers, causing firms to reduce the number of employees they hire. In other words, if you compel a business firm to pay more in health insurance benefits at a potentially higher premium, employers will be forced to offset those additional payroll costs by either 1) laying off workers, 2) hiring fewer workers, and/or 3) cutting wages to compensate for the added benefits costs (they may also try to raise prices to consumers but with varying degrees of success). This is not, apparently, an appealing outcome for workers since had they truly valued health insurance benefits over wages to begin with, they would have been willing to trade off and negotiate lower wages for higher health care benefits, or found alternative employment that offered this tradeoff. That they are now forced into this situation indicates that their revealed preferences are being altered in a way that is not optimal from their own point of view (whether they supported this new health insurance policy or not is irrelevant, since many of them would not have anticipated this economic effect or thought through the economic implications for themselves and others).
Finally, if the government insurance exchanges and regulated insurance plans are then subject to further price caps (which seems an inevitability to me) in order to restrain cost pressures and the almost certain public overspending resulting from this policy, a chronic shortage of health care will prevail across the entire U.S. economy. Even the most basic Econ 101 principle teaches that a binding price ceiling drives a wedge between supply and demand and creates a permanent shortage where the quantity demanded chronically exceeds the quantity supplied. This, of course, is the very set of circumstances that has, to this point, kept U.S. health care prices rising so rapidly: third-party subsidies to health care consumers (both public and private) insulate them from the true costs of their health care consumption decisions, and continually drives demand above supply, lifting prices higher. The new policy simply does more of the same and in a much bigger way (“on steroids,” you might say). Eventually, it is my prediction that the government will inevitably be forced to step in further and mandate price controls on what doctors, hospitals and pharmacies can charge, and then on what consumers and patients will be allowed to purchase, not because the government is “evil” or wants to torture people or wants to euthanize granny, but simply to control costs in a world of scarcity where market forces and market discipline have been eliminated and/or corrupted. Thus, the policy will not result in more people getting better coverage and better care. It will instead likely result in everyone having access to much less care than would otherwise be available.
The empirical evidence on this outcome is fairly consistent across all countries and economies that have implemented a national health care policy or approach. All these economies, from Great Britain to Canada to Germany and France and even Japan, tend to have chronic shortages of hospital space, doctors, nurses, medical technology and access to drugs. This is the relatively high opportunity cost that must be confronted when we try to achieve “universal access” to health care, or when we begin treating health care as a “right” instead of an economic good. We can get universal access through government policy, no question. The real question is, once we have universal access to health care, will anyone think that that health care will be worth having access to?
Bottom line: we live in a world of scarcity. Health care is a classic private scarce good. That means it will have to be rationed in some way. It can either be rationed through a market where profit-seeking firms respond to price signals and attempt to supply paying consumers with a variety of health care services with varying degrees of quality, but where not everyone receives an equal amount of health care or an equal quality. Or, we can ration health care services “universally” to everyone, where all have equal access, but where price signals are no longer available or are no longer accurate enough to convey the amount of scarce resources that should be allocated to meet health care demand, leading to shortages and non-market rationing of care. As an economist, I much prefer the former price-based market system to the latter non-price-based command-and-control system. Under the market system, while health care would never be equal or universally accessible, it would be more widely available to the poorest members of society who are the most vulnerable.
By way of analogy, people would die without food, just as they die without health care. But, if government began subsidizing food consumption for the poor the way it has health care consumption for the poor and elderly through Medicare and Medicaid, or gave special tax deductions for employer-provided food benefits for their employees, the consumers of food would have no incentive to economize on consumption, prices of food would rise faster than overall inflation, and the government would probably (mistakenly) conclude that food was too expensive for the poor, that markets had failed, and that more government regulation of food and food production was needed. In fact, all that would be necessary would be for government to stop distorting pricing signals and the demand for food through policy interventions, repeal those policies creating the distortions, and allow competitive markets to allocate food and food production according to the forces and discipline of supply and demand.
The same goes for health care. Indeed, the more critical the good or service is in sustaining and preserving life, the more important it becomes that that good or service be allocated by accurate price signals and the discipline of market forces.
Now, I’m sure that some who read this note and who disagree with me will conclude that I have some kind of political bias, that I am pooh-poohing the policy out of some ideological allegiance. All I can do is say in return that I do not and am not. If we could have government pass laws that outlawed scarcity, eliminated disease and poverty, and reduced all prices and costs to zero, I would be the first to jump on that bandwagon, believe me. Free lunches all around! However, just as a physicist or astronomer knows that the world is round and not flat, economists know there is no such thing as a free lunch, scarcity exists, and that policies distorting pricing signals away from market-determined equilibria will have effects similar to assuming away the law of gravity and then jumping off a tall cliff in hopes of flying like a bird: disaster. That’s the science of economics, at least for those among us who are willing to learn from it.”
Posted by Dan Zoeller 
An anonymous software company has announced plans to release an amazing bioorganic device that is far more complex than anything ever created. 
