Thursday, January 25, 2007

Supply Curves and Bush's Health Care Plan

This is an interesting application of basic supply and demand theory that we will be discussing this semester. Keep the following facts in mind: You have an upwards sloping demand curve and a downwards sloping demand curve (draw your basic graph here).

Now let’s apply this to the latest Bush proposal on health care. Essentially the plan boils down to this. Currently, if you get a health plan through your company that health plan is tax deductible. That is, the company (or you) pays the bills and then you can write if off on your tax returns (making it cheaper). But if you buy insurance on your own you do not get a tax break.

This creates a potential distortion because you have an incentive to get insurance through your employer rather than on your own. Those who cannot get insurance through their employer are thus at a disadvantage. The plan being proposed is to remove the distortion by creating a universal tax deduction regardless of whether you get insurance from your employer or on your own.

The debate on whether this is a good idea is a huge own and parts of it go beyond the purvey of this class. However, one aspect of the debate can be discussed using a simple supply and demand analysis. It runs something like this:

The tax break to get insurance through your employer is a subsidy. This subsidy allows people to purchase insurance. People with insurance go to a doctor, pay a small premium ($5-25 say) and then the insurance company picks up the rest. Since consumers do not pay any additional money if the doctor uses expensive equipment (if your doctor visit costs $200 or $500 you still pay a flat co-payment). Thus demand shifts to the right and prices go up, pricing other people out of the market.

The argument is advanced here. A counter argument is that the supply curve for medical services is actually flat. That is, prices rise in the short term but this induces people (doctors) to enter the market and shift the supply curve back down (think perfect competition). Therefore, prices do not rise.

Whether this argument holds is a tough question to answer. Personally, the limited supply of doctors (due to regulations and the difficulty of being licensed) means that the supply curve likely has an upwards slope.


king said...

Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.

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