Perspectives Online

You Decide: How will the health care market change?

In economics we often talk about markets. Markets are simply where buyers and sellers come together to trade. In the old days, these transactions occurred in a physical market. Today, they can also occur in electronic markets, where buyers and sellers don’t even see each other.

Any economic market answers three questions: (1) What is produced and sold? (2) What is the price of the items sold? And (3) How much is sold? In an unconstrained, or free market, these questions are answered by the interactions between buyers and sellers and the competition among sellers.

In determining what is sold, sellers have an incentive to provide what buyers want. Competition between alternative sellers keeps prices at levels that cover costs, compensates for risks and gives the seller a sufficient return to stay in an uncertain market. The resulting price is that which equates the amount sellers want to provide to the amount buyers want to purchase.

With the passage of the Patient Protection and Affordable Care Act – the health care bill – each of these three questions in the health care market will be directly influenced by the federal government. Here’s how.

The legislation gives the federal secretary of Health and Human Services the power to set the provisions and coverage in health insurance plans. In other words, the HHS secretary will have a strong role in saying what is produced and sold in the health insurance market.

The new bill also gives the HHS secretary some direct power over the prices (premiums) charged for health insurance policies. Specifically, the legislation says the secretary can review “unreasonable” increases in premiums for health insurance coverage.

Finally, the new act mandates that everyone have health insurance, and if not (with a few exceptions), a penalty will be levied for not having coverage. This restriction obviously puts a floor on the third market question of how much is sold; now everyone must have at least some standard health insurance policy, where “standard” is defined by the secretary of HHS.

These expanded powers of the federal government in the health care market are obviously controversial – some say they go too far, while others say they don’t go far enough. Rather than take sides, let me raise some issues and questions – some pros and cons – that might clarify the debate and help you decide where you stand.

Giving the HHS secretary the power to say what health insurance policies will cover is based on the notion that everyone should be guaranteed some minimal level of health insurance protection. But left unsaid in the legislation is how the secretary will determine what’s in health insurance policies. Also, if changes are made to the standard policy over time, will those changes apply only to newly written policies or all policies – new and existing? We don’t know.

The new power given to the HHS secretary over insurance premiums is in response to public displeasure with some of the increases in premiums that have occurred in recent years, although it should be pointed out that government data show health insurance prices have actually risen slower than the average of all consumer prices since 2005.

Still, there are many unanswered questions related to this new authority. For example, how will the secretary define unreasonable premium increases? Will there be coordination between the allowable premium increases and the required insurance provisions, especially when new provisions are mandated? Like any private business, if insurers can’t recover their costs, they won’t remain in business.

The mandate that everyone have health insurance has sparked some of the most heated debates about the new health care bill. Indeed, there may be a constitutional challenge to this requirement. Opponents say the federal government doesn’t have the power to require anyone to purchase a private product. Leaving this constitutional question to the lawyers, supporters of the mandate say it is necessary for two reasons. First, as a compassionate society, no one will ever be denied health care. Thus, without a mandate, there is the likelihood some individuals would simply not purchase health insurance and then rely on the free provision of care when needed.

Second, one of the goals of the new health care bill is to moderate the increase in insurance premiums that can occur as an individual ages and uses the health care system more. However, to accomplish this objective, young and healthy individuals must be part of the health insurance pool. The young insured persons would pay somewhat higher premiums than their health condition would indicate. In essence, the payments for health insurance would be “front-loaded,” higher than needed when young but lower than needed when older.

Health care and the new health care bill will continue to be discussed and debated. There remain many unanswered questions about implementation of the government’s new powers and effects of those powers that will have to be decided. How the bill is applied may be just as important what the bill does! -- Dr. Mike Walden

Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his /You Decide/ column every two weeks. Earlier /You Decide/ columns are at

Related audio files are at

For more news from the College of Agriculture and Life Sciences, please visit