Home > Health Care Policy, Obamacare > An Analysis of Obamacare Part II: Obamacare and Health Care Costs

An Analysis of Obamacare Part II: Obamacare and Health Care Costs

In my previous essay, I argued that Obamacare will drive up the price of health insurance.  Here I will use some simple economics tools to see if we can discern how Obamacare will affect health care expenditures in the U.S.  President Obama has claimed that Obamacare will reduce health care expenditures.  I will argue that Obamacare is likely to raise health care expenditures; both the price and quantity of health care services bought by the public will rise.

The Health Care Market

In the graph below I show the health care market where I have combined, for simplicity, all health care goods (drugs, medical procedures, and doctor visits) into one aggregate commodity called “Health Care.”  Supporters of Obamacare claim that the program will allow more individuals to buy health care services.  Let’s take them to be correct and so Obamacare will increase the demand for health care services at any level of health care prices.  The graph below shows a rightward shift in the demand curve to represent this fact.  The graph also shows what will happen in the health care market: both price and quantity rise comparing the two intersection points of the demand and supply curves.  Therefore health care expenditures, the product of price times quantity, unambiguously increase.  Note that we are using the “ceteris paribus” assumption frequently employed by economists, meaning that we are holding everything else to be constant in the economy.

Price Controls Create Shortages

It is reasonable to ask if we can find any way to change the conclusion that we just reached that might cause the President’s comments about health expenditures to be correct.  One way to answer this question would be to see what happens if the government were to impose price and/or quantity controls.  The graph illustrates the effects of price controls.

Price controls cause shortages.  The dotted line with the arrows at each end shows the size of the shortages that result from price controls after the increase in the demand for health care.  Suppliers will only supply more if the price of health care services rises.  If the government prevents prices from rising, shortages are the result.  Note that Medicare sets the prices which it will pay for health care services and it chooses which procedures will be covered.

What seems more likely, given the past comments of the President, is that quantity controls will be imposed to try and reduce health care expenditures.  This is the stated purpose of the panel of Obamacare “experts” that will be charged with making judgments about procedures that may or may not be allowed.  There is no way to tell if the quality of health care will decline due to these quantity controls.  But the simple analysis here makes it very clear why people are worried about the quantity controls embedded in Obamacare since they may well reduce health care quality in the name of reducing health care costs.

Obamacare could lead to a decline in health care expenditures if some of its provisions increase the supply of health care so much that health care prices fall very substantially.  I know of no aspects of the new law that might be expected to do this.

The Bottom Line

There appears to be little chance that Obamacare will actually reduce or slow down the growth of health care expenditures unless substantial quantity (and possibly price) controls are imposed.  Is it likely that such controls will do the job?  Since these controls are almost certain to generate public hostility, this seems doubtful because public hostility should cause price and quantity controls to be minimal enough to avoid a public outcry.  Thus it seems that health care expenditures will rise faster than they have in the past, contrary to the claims made by President Obama.

Next Up: Obamacare and Buyer Incentives

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Economics One

A blog by John B. Taylor

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One economist's views on economic policy.

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