Nova workboard

a blog from young economists at Nova SBE

Obamacare: redefining the meaning of insurance

A major provision of the U.S. Affordable Care Act is scheduled to come into force in January 2014: from this date, health insurers will no longer be permitted to discriminate on the basis of health status. This means that individuals with pre-existing conditions cannot be denied coverage, the pre-existing condition itself must be covered and the insurer cannot charge a higher premium because of it.

The whole idea of insurance is based on the transfer of risk. A healthy person signs up for health insurance because he or she faces the risk of developing a condition requiring expensive medical treatment. But what risk is being transferred when a cancer patient signs up for insurance? That he will require expensive treatment is by then a certainty, and the prohibition on charging higher premiums ensures that he will always in effect be receiving subsidized care.

This provision, by itself, would create a system in which no one would get insurance until they developed a serious problem. So the government, ever so eager to “solve” problems (of its own creation), decided to require everyone to purchase health insurance (the individual mandate provision).

Remarkably, while the individual mandate is by far the most unpopular provision in the ACA, the provision that guarantees coverage to people with pre-existing conditions is one of the most popular: even Republican legislators have steered clear of criticizing it.

In any case, the penalty for not holding insurance is so low that many young, healthy adults may prefer paying it to purchasing insurance they don’t need anyway. The end result is a classic case of adverse selection, where only sick old people buy insurance.

Obamacare is socialized medicine through the back door: by introducing even more senseless regulation in the already over-regulated health insurance market, it puts the whole system on a near-certain road to complete failure. But fear not: when that finally happens, the government will be there, as always, to solve the problem.

Diogo Pereira

Author: studentnovasbe

Master student in Nova Sbe

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