Reform Needs Healthy Life Incentives

Jonathan Jackson

Joey Chadwick

James Petkovski

As of lately, healthcare 'reform' seems to be a hot political topic. This article addresses the regulatory cost and benefits related to health insurance. House Democrats hope that their major legislation will decrease the costs of healthcare, regardless of health status. Critics argue that the 'risk adjustment' associated with the legislation and the proposed regulations will impose higher costs on society, the private insurance market, and individuals in good health.

Economically, there are two questions that need to be addressed. First, why is regulation needed to reform healthcare in terms of cost related to health status? Second, do the inefficiencies of healthcare justify governmental invention? Inefficiencies in healthcare spawn from a variety of economic problems. One in particular is asymmetric information. Asymmetric information exists in the healthcare market, because insurers can't distinguish the healthy and unhealthy individuals. Therefore, the insurers have one premium they use as a fixed price for everyone, if the healthy people are paying the same as the unhealthy people they have incentive to drop out of the insurance policy and find a cheaper one. This phenomena will then represent a loss of profits, leading to inefficiency.

The justification of the House Democrat's legislation is whether in some way it can eliminate the information asymmetry in the heathcare market, and move to a more socially efficient outcome. If the private insurance market can do this by offering financial incentives to healthier people, then economics tells us government regulation is not needed. Although, this is a good method towards obtaining such efficiency, measuring and offering financial incentives towards healthy individuals is a difficult task.

Determining whether the House Democrat's solution will move society to a more optimal position in the healthcare market is really a function of what the private market operations are. The problem exist in the operation of offering financial incentives to different members under different insurance plans. Quite clearly , the Democrats proposed regulations are not pareto efficient as they will leave the private-sector worse off than before. However, the proposed legislation may clear up information asymmetry and market inefficiencies. Yet, that is to be determined.

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