By Robert Prasch, Professor of Economics at Middlebury College. Cross posted from New Economic Perspectives
Over the past couple of years there has been considerable back-and-forth over what has been accomplished by the Patient Protection and Affordable Care Act of 2010 (PPACA). While a short post cannot survey the entirety of this multifaceted law, several elementary confusions have been repeated in public discussions and should be addressed in the interest of clarification. The most urgent of these is to point out that, despite the Act’s (deliberately misleading?) title, it addresses neither the practice of medicine nor its cost. At most a government-sponsored institute has been authorized to find and make suggestions. The Act, then, is not about making health care affordable, but an effort to make health-care insurance affordable – a related but separate topic. To understand the implications of this, we must consider the business of health insurance.
Private Health Insurance is a Business
The health insurance business is–it cannot be overemphasized–a business. While its advertising may suggest otherwise, we would do well to remember that business differs from charity in ways that matter. Being private for-profit businesses, health insurance companies are engaged in the pursuit of profit. If the health insurer is a corporation, and many of them are, their profits are expected to show steady growth over time so as to satisfy “Wall Street expectations.” This is not always easy, and firms must be vigilant if they are to achieve these targets. As is the case for any and all businesses, revenues must be greater than expenses if health insurance companies are to show a profit. Without profits they will soon cease to exist. But before this occurs, senior management will be fired. As