President Obama recently gave a speech praising the recently passed version of health insurance reform and warning insurance companies not to use the new law as an excuse to raise prices. But unless strong measures are taken to prevent this, “Obamacare” will actually cause the price of health insurance to rise.
I oppose Obamacare, primarily because it requires all Americans to have health insurance. In my opinion, this violates everyone’s rights because people have the right to decide how they want to spend their own money, as long as they don’t do anything that violates the rights of anyone else. But according to economic theory, the individual mandate has a bad side effect as well – it makes the cost of health insurance go up.
If you haven’t studied economics before, here are the basics:
Usually, the higher the price of a good, the less the demand. Makes sense, right? Also, the higher the price of a good, the higher the supply, because producers are more willing to make a product if they can sell it for a high price. The supply and demand curves (or lines) can be shown on a graph. The point where the two lines intersect is called the equilibrium. This represents the quantity and price that will be produced in a free market.
However, by requiring everyone to purchase a product (in this case health insurance), the government stops demand from responding naturally to price. The degree to which demand for a good responds to price is called price elasticity of demand. People will buy necessities such as food, water, or insulin for diabetics regardless of their price. In economics-speak, the demand for these goods is inelastic. The demand for things such as lattes, CDs, and stuffed animals is elastic, because people can live without them and therefore tend to buy less of them if the price goes up. When demand is perfectly inelastic, the demand curve looks like a vertical line.
By forcing everyone to buy health insurance, the government makes the demand artificially inelastic. The problem with this is that when demand is perfectly inelastic, price basically approaches infinity. If consumers are going to buy something no matter what it costs, you can bet that producers are going to charge a lot.
Bottom line: according to traditional economics, the individual mandate will make the cost of health insurance go up.