Health insurance keeps making media headlines in the United States and around the globe. With the passage of the Patient Protection and Affordable Care Act, or Obamacare, the market of health insurance is undergoing profound shifts. As more people enter the healthcare system to obtain insurance, many more have to pay fines for being uninsured. Associated Press (2014) reports that, in 2015, these fines are going to be substantially higher than in 2014. In 2016, those who do not have health insurance and do not qualify for more than 30 exemptions will have to pay up to $1,100 in fines (Associated Press, 2014).
Meanwhile, an average American is entitled to pay $328 for a simple health insurance plan on a monthly basis (Humer, 2013). Many of them are eligible for government subsidies that make the cost of health insurance even lower (Humer, 2013). In this context, questions emerge as to how the changes in health insurance costs can influence the supply of and demand for health insurance and whether government interventions to control the provision of insurance to citizens can have any unintended effects on the market.
To start with, demand is defined as the amount of good buyers are willing to purchase at the given price (Mankiw, 2000). With the price of the good going higher, the quantity buyers are ready to buy will decrease (Mankiw, 2000). Prices of substitute and complement goods, changes in preferences, as well as changes in incomes influence the patterns of demand, shifting the demand curve (Mankiw, 2000). It is possible to assume that, as the cost of health insurance becomes higher, the demand for this type of good will slow down. By contrast, with health insurance becoming more affordable to consumers, they will be better motivated to seek insurance coverage in the U.S. market. However, when it comes to health insurance, price alone cannot determine the level of demand. Here, government subsidies also come into play. After the passage of the ACA, the demand for health insurance will continue to increase as a result of (a) lower costs due to government assistance, and (b) fines for being uninsured. The latter should motivate U.S. buyers to seek insurance coverage, regardless of its cost. However, in most instances, the fines buyers have to pay are still lower than the average cost of a simple health plan per month (Associated Press, 2014). Nevertheless, the number of individual buyers who decide to obtain insurance coverage is up 46 percent compared with the end of 2013 (Levitt, Cox, & Claxton, 2015).
The cost of health insurance is the primary determinant of demand in the health care market. Like many other products in the healthcare industry, the demand for insurance is highly elastic. That is, “individuals and groups will make purchasing decisions based on the cost of insurance, insurance options in other markets, and consideration of the consequences of being uninsured” (Klein, 2013). As of today, the prevailing majority of younger consumers find it easier to be uninsured than to spend their limited budgets on health coverage (Klein, 2013). They do not perceive the absence of health insurance as a serious threat to their social status or health. Also, they do not envision the long-term consequences of being uninsured. Therefore, unlike older buyers who spend much of their time dealing with health care routines, younger people are much more sensitive to changes in health insurance costs (Kleine, 2013). Statistically, it will cost approximately $1,944 for a 26-year-old male earning $32,000 annually to pay for his health plan (Kleine, 2013). It will also cost him $200 in fines for being uninsured (Kleine, 2013). The difference is too obvious to ignore. It is difficult to imagine that these younger and, apparently, healthier young individuals will change their minds about getting health insurance in the nearest future.
The cost of health insurance is a complex product of multiple influences, the structure of the insurance market being one of them. It is not a secret that the health insurance industry is one of the most competitive ones in the U.S. economy. Health plans and insurance providers struggle preserve their market position and expand their presence. Meanwhile, the health insurance industry in the U.S. is unique among other countries of the developed world in its reliance on multiple private insurers (Pfeffer, 2014). To a large extent, it is an example of a contestable market with low entry and exit barriers and a highly differentiated product offered to individual and business buyers. Unfortunately, multiple market players create unprecedented bureaucracy, which inevitably leads to an increase in health insurance costs. Under the influence of the ACA, the health insurance market will gradually transform into an oligopoly, with a few large market players offering standardized health insurance plans at a cost that will be lower than it is today. At present, private insurance companies are nothing but intermediaries that create additional pressure on health insurance costs. The future holds the promise to change the balance of forces in the health insurance market.
No less important are the questions of government interventions and their implications for the costs of health insurance. Nowadays, federal and state governments participate in the health insurance market by (a) fining citizens for being uninsured and (b) monitoring private insurance providers, so that they do not deny coverage to buyers with a pre-existing health condition (Arnold, 2010). As mentioned earlier, the finds for not getting insurance are so low that many young and healthy buyers are willing to stay uninsured, until they become sick. These uninsured individuals reduce the pool of those, who manage to obtain coverage (Arnold, 2010). The insurance pool being smaller, the cost of health insurance becomes higher for everyone, who is in (Arnold, 2010). Unfortunately, even with the growing number of people who purchase health insurance, the ACA will hardly succeed in providing universal insurance coverage to everyone in the U.S.
In summary, the cost of health insurance changes under the influence of the ACA. However, even government subsidies do not motivate young and healthy U.S. citizens to seek insurance coverage. The level of fines for being uninsured is considerably lower than the average cost of a simple health insurance plan. The demand for health insurance is highly elastic, meaning that consumers are extremely sensitive to any changes in health insurance costs. Government interventions make the situation even more complicated. This being said, universal coverage is a task that will hardly be accomplished in the coming years.
- Arnold, R.A. (2010). Microeconomics. Belmont, CA: Cengage Learning.
- Associated Press. (2014). Not having health insurance in the US will cost you more in 2015. The Guardian. Retrieved from http://www.theguardian.com/us-news/2014/dec/30/us-health-insurance-irs-penalties-2015.
- Humer, C. (2013). Obamacare’s average monthly cost across U.S.: $328. Reuters. Retrieved from http://www.reuters.com/article/2013/09/25/us-usa-healthcare-exchanges-idUSBRE98O03P20130925.
- Klein, P. (2013). Obamacare ignores the elasticity of demand for health insurance. Washington Examiner. Retrieved from http://www.washingtonexaminer.com/obamacare-ignores-the-elasticity-of-demand-for-health-insurance/article/2532302.
- Levitt, L., Cox, C., & Claxton, G. (2015). Data note: How has the individual insurance market grown under the Affordable Care Act? The Kaiser Family Foundation. Retrieved from http://kff.org/health-reform/issue-brief/data-note-how-has-the-individual-insurance-market-grown-under-the-affordable-care-act/.
- Mankiw, G. (2000). Principles of microeconomics. South-Western College Publications. Pfeffer, J. (2014). Why health insurance companies are doomed. Fortune. Retrieved from http://fortune.com/2014/10/20/health-insurance-future/.