The Effects of the New Health Care Plan on the U.S. Economy (Research Paper Sample)

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The Effects of the New Health Care Plan on the U.S. Economy
Health care policy and reform is a crucial issue in the contemporary USA, as evidenced by widespread debate and influence in recent presidential elections. The current U.S. health care system draws from Obama’s health care reforms resulting in the Patient Protection and Affordable Care Act 2010. One of the main considerations in health care debate in the USA concerning this new plan is its economic implications. Comprehending the effects of the new health care plan requires a discussion based on appropriate economic principles. The current discussion details the economic implications of the U.S. health care system in terms of the principles of public versus private goods, externalities, rent-seeking, and bureaucratic inefficiencies. Overall, this discussion holds that the new health care plan results in various forms of economic inefficiencies.
The New Health Care Plan: Patient Protection and Affordable Care Act (PPACA) 2010
An understanding of the new health care plan is necessary before undertaking an analysis of its economic effects. Gruber (4) summarizes PPACA 2010 as consisting of three major aspects. First, it entails reforms on the non-group health insurance market, outlawing exclusions based on preexisting conditions and other discriminatory practices, and imposing limits on insurers’ abilities to charge differential prices according to health status. The second aspect entails a requirement that individuals purchase insurance, with most individuals required to have health coverage or pay a penalty (5). The third aspect involves government subsidies aimed at making insurance affordable for lower income families through two approaches. First, the new health care plan provides for an expansion of the Medicaid program to all individuals whose incomes are below 133% of the poverty line, given by $10,830 for individuals and $22,050 for a four-member family. Second, the plan provides for tax credits that offset the cost of private non-group insurance designed to cap the proportion of income individuals spend on insurance (6). Importantly, the new health care plan significantly expands public insurance and subsidizes private insurance health coverage. It also raises revenue from several new taxes and reorganizes spending on Medicare, the largest health insurance plan in the USA (U.S. Department of Health and Human Services). The plan also creates state-based American Health Benefit Exchanges for individuals to purchase coverage, with premium and cost-sharing credits available to families and individuals whose income is between 133-400% of the federal poverty level (H.K Family Foundation 1-2).
Economic Implications of the New Health Care Plan
Public versus Private Good
Musgrave (24) contrasts public and private goods, describing the former as those that one cannot be excluded from the goods’ benefits regardless of their willingness to access the goods or their ability to pay for the goods. In its purest form, a public good is indivisible into discrete units, precluding the ability to offer the public good in the market (Courtney, Briggs, and Briggs 35). In contrast, a private good is one which excludes those who are unable or unwilling to pay for the good. Further, a private good is divisible into discrete units, meaning that more access for one person translates to less access for another person. Upon analysis, it is evident that the new health care plan tends towards viewing health as a public good in the mould of European health care systems. This is because one of the primary objectives of the health care plan is to maximize access to health care for citizens. For instance, the plan seeks to cover an additional 34 million uninsured individuals through the expanded eligibility Medicaid and the Exchange programs (Foster 3-4). Further, the new plan provides for individual mandate by placing penalties for individuals who fail to access coverage. Besides, the plan seeks to ensure equity by eradicating the access of health care coverage for one group at the expense of others, such as the disparity in access between the rich and the poor in the pre-PPACA health care system.
One of the effects of the new health care plan’s inclinations towards a public good is the increased in taxation. The government has to raise taxes in order to expand and maximize access to health care coverage. PPACA’s new taxes to fund the expanded coverage evidence the relationship between increased the government’s spending on healthcare and taxation. According to Gruber (6), the new health care plan provides for an increase in the Medicare payroll tax by 0.9% and the extension of that tax to capital income. Others include new excise taxes on various sectors benefitting from the PPACA’s medical spending, a Cadillac tax, a non-deductible 40% excise tax on costly individual and family insurance products, and taxes on higher wages resulting from reduced employer insurance spending. Besides the effect of raising taxes, the new health care plan will result in inefficiencies as the nation seeks to increase health care coverage. Such inefficiencies, in turn, lead to higher costs of providing health care services, countering the primary objective of lowering health care costs. This is mainly because the new plan does not create a purely public good, instead reinforcing the multiple payer health care system that duplicates costs and exhibits inefficiency. According to Musgrave (24), such health care is a quasi-public good rather than a public one, manifesting price-exclusion and being congestible. Ultimately, the inclination towards a public good while only achieving a quasi-public good status leads to economic implications entailing tax elevations and inefficiencies resulting in costly health care service provision.
Impact of Externalities on Efficiency
Dewar (76) discusses the concept of external benefits or costs of consumption, noting that consumption may result in passive, indirect benefits or costs to the rest of society. For instance, cigarette and alcohol consumption may result in external costs of consumption on the society such as antisocial behavior and secondary smoking. On the other hand, vaccination against communicable diseases would result in external benefits of consumption to the society owing to the preclusion of other people from falling ill. Courtney, Briggs, and Briggs expound on the concept of externalities, noting that the consumption of services by an individual can have crucial effects on the demand of the services by others (35). In this case, health care financing leads to successful treatment of infected individuals, which has an external effect on those who did not pay for the service. Importantly, the existence of externalities prevents market mechanisms from accurately determining the efficient level of consumption of such services. Johannesson (14) argues that the presence of externalities results in the demand curve underestimating the benefits of health care.
In the case of PPACA, the increased health care coverage would result in the aforementioned externalities. As the number of people covered increases, the number of people accessing health care services will also increase. However, this increase will result in secondary prevention as increased treatment of communicable diseases prevents spread to other members of the society. Therefore, the demand for health care services may decrease saliently, with the demand and supply curves unable to capture such changes. According to Henderson (77), such externalities have an effect on economic efficiency. In the current context, increased health care coverage leads to benefits of positive externalities, which lead to a level of output that is nonoptimal. The competitive output rate is too small because the policymakers cannot capture the positive externality by-product. The marginal private benefit arising from providing health care coverage will be less than the unquantifiable marginal social benefit, creating nonoptimal output. This is a manifestation of economic inefficiency, which may lead to the U.S. economy spending for non-utilized services.
Impact of Rent-Seeking: Creation of Monopolistic Inefficiencies
According to Henderson (333), economic rent represents a payment for a resource exceeding its true opportunity cost. In this case, some entities in the market may use scarce resources to secure monopoly profits, which describes rent-seeking behavior. Jones expounds, defining rent-seeking as the phenomenon of producers or suppliers using the political process to gain protection from competition (227). In relation to the role of the government in the market, introduction of regulations may transfer monopolistic benefits to given suppliers in an industry. In health care, Feldman (175) argues that government regulation may appear beneficial, but may translate to the regulatory effect affording preferential competitiveness to certain firms or entities. These firms may exploit the regulations to prevent new entrants or overcome existing competition. Several undesirable effects accompany such rent-seeking behavior, including direct and salient costs to society. The behavior equates to anti-competitiveness, which results in poor services for consumers and reduced innovation. Further, the elimination of competition through rent-seeking results in the inefficiencies associated with monopolistic markets. Besides, wastage may accompany rent-seeking behavior as the firms involved incur costs while lobbying for the rent.
In terms of the new health care plan, the government has introduced several regulations that inadvertently create economic rent in the health care insurance sector. The government has imposed various policies on the health insurance market that reduce the incentives for entry into the se...