Obamacare allows monopolies in rural areas

This is one of the most important articles I’ve seen yet on the future of Obamacare: Health Care Law Fails to Lower Prices in Rural Areas.

This article addresses actual flaws in the law’s effects. (That is, it is NOT about how bad the website is, and this is why I found it worth reading.) Overall, I think Obamacare will benefit the country, but I hope we  take concerns like this seriously. Here is your vocab du jour:

Monopoly (power)!

Monopoly: A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.

As I see it, the intent of the health care exchanges to weaken insurance companies’ leverage over their customers by creating competition between insurers. If a rural county is served by only one insurer, they can exert monopoly forces over the market. That is, they can afford to jack up prices at the expense of losing a few customers. Basic economic theory tells us, essentially, that too little of a service is provided, it is provided at too high of a cost, and it is often of a lower quality.

In a market where insurance is mandated by law, the effect is worse. If there are no other alternatives (other than facing penalties), more people will sign up for health care than they would in a market in which they are free to take or leave the service. At best, it’s good for health care numbers, but economically it’s worse than a simple monopoly.

There are multiple possible solutions. One, from the article, is to provide “multistate” plans. Essentially, it is a option provided by the federal government. However, as law professor Timothy Jost points out, the multistate plans are often the same one as the county’s single insurer: “If you’ve got Blue Cross competing with Blue Cross, it doesn’t give you much competition.” So we’d need at least two insurers to compete in multistate plans to make sure there are two different companies (at least) competing in any given county, and the monopoly is actually broken up.

Why barriers to entry are dangerous.

Another possibility is the co-op (“consumer operated”). The idea is that even if the insurers don’t think the market in a rural county is big enough to be worth their while, the people living there still care a lot about how much they pay for health insurance. If they can provide it at lower cost by pooling their resources—with the help of some federal funding—consumers will choose that option and put downward pressure on prices in their market. The co-op illustrates an important point about monopolies: they can only hold on to their control of the market when other firms face barriers to entry into a market.

Whatever else Obamacare does, the online system is doing its best to eliminate barriers to entry by allowing consumers to view and sign up for plans offered by smaller providers and co-ops. In the long run, I would not expect monopolies to survive in an open market, because another corporation or a co-op would enter the market.

The question is what to do until then. I would suggest deferring the insurance mandate for single-provider counties to give them enough time to produce (at the very least) two providers. This would allow consumers to avoid getting the bad end of a monopoly deal, and may even exert downward pressure on the cost of health care until then.

Obamacare is chipping away at the power of health care and health insurance providers over their customers, but there is still much work to be done. Hopefully, we will see the value in keeping our population healthy and continue to improve it, not try and dismantle it.

Republicans treat US Government like all-you-can-eat buffet… economically speaking

• Marginal Utility: The additional satisfaction a consumer [or society] gains from consuming one more unit of a good or service.
• Law of Diminishing Marginal Utility: A law of economics stating that as a person [or society] increases consumption of a product – while keeping consumption of other products constant – there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

I told myself I wouldn’t get into the government shutdown on this blog, but here I am. However, I promise this post is not meant to be political or an attack on Republicans—I’m trying to teach some economics here!

Finding themselves in the hotseat for the government shutdown, Republicans began passing piecemeal legislation to fund particular government programs (Some in G.O.P. Try to Pick and Choose Amid Spending Fight, New York Tmes, Oct 5). I found their choices to reveal truths about government (especially government spending) that they don’t often voice. More importantly, we have a great economic framework to describe them!

Imagine you are tasked with creating the budget for the current fiscal year to take effect as soon as the shutdown ends. It’s all up to you—but here’s the caveat: they have haven’t actually told you how much money they are going to authorize. What do you do?

If it was me, I’d make a list. Start with the federal programs that give you the most bang for your buck—the most benefit, or utility, per dollar—then work my way down. Not knowing when the money would run out, I would make sure the good ones are right at the top. What would your list look like? Maybe something like this:

• “Fully fund the National Institutes of Health”
• “Supplemental nutriton program for women, infants, and children”
• “National parks”
• “Nutrition for the impoverished”
• “Guarantee that federal workers…will receive back pay once the government reopens”
• “The Smithsonian Institution”
• “Funding the V.A.”
• “Head Start classrooms”
• “Finance border security and enforcement”
• “Nuclear weapons security and development”
• “Indian education and health services”
• “The Food and Drug Administration”
• …continue the list…

This is basically list offered so far by House Republicans. My own list would have included “Obamacare” up there somewhere, but hey, that’s just me. So it appears that Republicans are picking and choosing from last year’s budget like it was an all-you-can-eat buffet, but the analogy gets better. Finding definitions to introduce the concepts in this post, I noticed Investopedia’s follow-up explanation for the Law of Diminishing Marginal Utility:

“Say you go to a buffet and the first plate of food you eat is very good. On a scale of ten you would give it a ten. Now your hunger has been somewhat tamed, but you get another full plate of food. Since you’re not as hungry, your enjoyment rates at a seven at best. Most people would stop before their utility drops even more, but say you go back to eat a third full plate of food and your utility drops even more to a three. If you kept eating, you would eventually reach a point at which your eating makes you sick, providing dissatisfaction, or ‘dis-utility’.”

That mouse enjoys the last cookie way less than the first.

But like a buffet, however, you’re not just glopping generic “government spending food” onto your budget plate. You pick your favorite foods first, and fill the white space on your plate with the next-best choices. As you fill your plate, the marginal utility of each item decreases. Why? Because you’ve already picked the best ones! In Congress, it’s obviously not that simple. Politics and differing opinion of which programs are actually valuable means some good programs face cuts, while other less useful pet projects get funded.

So the Republicans have picked made their “best” picks, and I find it fascinating that they chose many programs that they were trying to defund weeks earlier. I think the shutdown forced them to come face to face with their anti-“big government” platform to see what happens when these institutions aren’t in place. If there’s a silver lining in the shutdown, it is that it served as a reality-check for lawmakers to see what government services people actually rely on and care about. To be clear, I don’t think this is a responsible way to finance the government. But I do think it is a positive way to start conceptualizing how the government provides services to the public, and we need to keep telling Congress to line up the programs it funds with the benefit they give to the country.

I have to say, I can sympathize with Republicans when it comes to the inefficiencies of government bureaucracy. Perhaps our tax dollars could be better spend. But I think it is better than the alternative, and I find it hard to make the case that we need less spending when so many quality programs run on a shoestring budget and there is so much more room for investment in public goods (top of my personal “marginal utility” list: public education, modern public transportation, fixing failing bridges and infrastructure…). If there is room for common ground between the poles of the political spectrum, I think it lies in closer consideration of the actual utility of government programs, not sweeping statements about government spending. If we think critically about the specific services provided by the government, I think we’ll all have a better idea of just how big the government should be.

Welcome to Opportunity Science.

I named this blog for one of the most basic and important concepts in economics: opportunity cost. But I wanted to flip that notion on its head. It’s not just a cost, but literally an opportunity. Instead of the “dismal science,” let’s think of it as the science of opportunity.

An excellent example of the kind of economic literacy this blog aims to promote. Infographic by Max Henkels.

The goal of this blog is multifaceted. First, I want to make basic economic principles and concepts applicable in areas you care about. This discipline has much to offer in environmental and social situations in ways many people are unaware.

Second, I want to make these concepts fun and allow you to recognize them in everyday life. In a sense, every decision you make is an economic one, and I want to shed some light on the tools economics has to offer. If you don’t already, check out NPR’s Planet Money podcast, which does a great job of this already. I will be using some of their podcasts as starting points.

Last, I want to offer news commentary with an economic spin. Usually my thoughts end up on facebook as a two-sentence blip, and I want to have a space to explore them more thoroughly. I will be pulling largely from the New York times, and using what I see in the news as fodder for my first two goals.

I welcome questions, respectful debate, and suggestions for posts. Welcome to Opportunity Science.