Economics and Government

The state of CA talked about having regulation of health insurance premiums, so that any decision by a health insurance company to increase premiums would have to be approved by a state agency. When government regulation is involved, it’s to deal with a negative externality. In this case, the externality is that if premiums are too high, less people can afford the insurance, and uninsured people cost everybody money when they don’t pay their medical bills. This idea is a whole other issue to discuss from an economic view, but I want to focus on this idea of rate regulation. The government is creating a price ceiling here, assuming more people will be able to get health insurance this way. However, if you look at a graph; if the equilibrium the market would get is at one price, and the price ceiling is below this, essentially the market moves down the supply curve. This means that at this price, the health insurance companies will only be willing to meet a certain level of demand; it’s not worth it to them to do more than that. So, the government won’t be getting more people insured; less people will be insured. These people may be happier because their premiums are lower, but it won’t serve the purpose of getting more people insured.  Another way the suppliers could respond is to keep prices that low, they offer a lower quality product; for health insurance, that means changing how much they cover expenses, and what they cover. Since supposedly another huge concern for the government is the amount of underinsured people, this won’t help them either if everyone gets insured, but at an inadequate level (although, what is adequate coverage could also be another topic of consideration).
Overall, this is an example of force on the market causing the problems the government says it’s trying to correct. Competition among companies will drive prices down to a fair level over time. There’s no way of knowing how long that time will take, but allowing the market to act freely will achieve better, lasting results at lowering premiums and getting more people adequately insured than setting a price ceiling. 

Dani Pierson-Cook