Possibly for the first time since 2010, good news about Obamacare: premiums on the newly-minted California health insurance exchange are lower than predicted. The rates published last week are so much better than what critics of the Affordable Care Act predicted that no less a Cassandra than Rick Ungar has admitted he was wrong. It seems like this whole insurance exchange thing might work out. Either that, or we are the objects of a clever public relations campaign. Avik Roy argues that individual rates are actually 64% to 146% higher on the exchange. He also bases his analysis on comparisons between the cheapest policies available before Obamacare—the ones that don’t meet the minimum standards for the California exchange—and the bronze-level coverage available now. So we can say with confidence that somebody is well-paid to mislead us, even if we don’t know who.
Still, it seems like Ungar is right, if for no other reason than he doesn’t cherry-pick his data. In California, insurance companies seemed to regard market share as more valuable than per-customer returns, and so they have competed their way to lower rates across the exchange. Ironically, this aspect of the dreaded, socialist Obamacare has been made to work by the free market.
Maybe that’s not so ironic after all. Maybe the health insurance market before the Affordable Care Act was not so free. Insurance differs from other widgets, after all. For one thing, it costs a different amount of money for nearly every customer. It’s also a product many people neither select nor pay for themselves, while still other people buy it only under duress. And it isn’t so much a product itself as a mediator/negotiator in another exchange of goods and services, so that the market for health insurance is really a market for paid protection from another, even weirder market.
All this is to say that health insurance ain’t exactly Adam Smith buying wool. The externalities of the health insurance market are such that it is paradoxically more free under conditions of government supervision.
The introduction of the individual mandate, for example, along with the countervailing prohibition against denying customers with pre-existing conditions, mean that insurance companies no longer have a financial incentive to prevent certain consumers from buying their product. That scenario has been a defining feature of the health insurance market for so long that we have forgotten how bizarre it is, and how contradictory to laissez-faire ideology. Show me another industry where producers try to keep certain customers from buying their products.
I mention this phenomenon because we often think of the free market as a kind of natural ideal. That’s a mistake; a free market may be ideal, but it by no means always occurs naturally. Simpler industries like commodities may tend toward free-market conditions without government intervention, but other ones—the market for railroad shipping in 1878, for example, or for health insurance in 2005—tend toward oligopoly, arbitrary price growth and general weirdness. An unsupervised market often becomes less free.
Paradoxically, the extremely regulated conditions of the California health insurance exchange just might have created a market that is more free. If it’s really working, it’s a reminder that the “free market” on which we base many of our personal and political ideas about economics is a theoretical construct.
The real-world markets that we get from real-life economic conditions are usually restricted by one force or another, be it government meddling or the inconvenient fact that people without health insurance are more likely to die. Such forces are no less constraining when they stem from economic phenomena than when they are imposed by the state. As Milton Friedman famously argued, the young Englishwoman who can’t visit Russia doesn’t much care whether its because of government restrictions on her visa or an unfavorable exchange rate.
We should therefore not make the mistake of treating a free market as synonymous with a market absent government regulation. In the same way that a football competition works better when you have sidelines and refs, economic competition often works better in a circumscribed market with defined rules. I really hope the California insurance exchange works, for a variety of reasons including but not limited to what it might teach us about postindustrial capitalism. Maybe we’ll learn that some free markets need to be free of natural forces, too.