30 September 2010

This is why I like economics

When I was in school (read: college), my focus was entirely on avoiding any kind of writing class(es). Except for my first year, in which I was forced to take remedial courses until I was able to pass the "Subject A" examination, this really wasn't a problem. In fact, I took it a step further and just avoided as much as I could that wasn't related to my major, computer science. During my third or fourth year, I had to take some kind of economics course to "round out" my education. I had a friend who had been taking environmental economics courses, and so I decided to try it out, thinking that even if I had trouble, I knew exactly where to go for help.

That was my first and, unfortunately, last experience with economics in college. Perhaps "unfortunately" is the wrong word, depending on how you view economics, as taught in school. At any rate, I say "unfortunately" because I found the course very interesting, and not necessarily because of the subject matter, per se. Rather, what I found interesting was the overwhelming number of examples of unintended consequences presented during the course. For whatever reason, I just found the fact that implementing some kind of pollution reduction scheme (remember this was environmental economics) would actually lead to an increase in pollution.

[As a quick aside, a cap and trade program is the example I remember most vividly presented in the course. In the example, companies generating more pollution would buy credits from lesser polluters, thus increasing their ability to pollute. So, in the end, the heavier polluters could continue polluting (albeit, at a higher cost) while the lesser polluters would just sell their unused credits while maintaining pollution at the same levels.]

Today I ran across an article describing some unintended consequences of the so-called "Obamacare" law. The short version is that the law requires that health insurers spend 80-85% of their revenue on patient care. Stated differently, they must limit their administrative costs (e.g. salaries of employees) to 15-20% of said revenue. Sounds great, right? Money spent on health care actually goes to health care, and CEO's can't pay themselves inflated salaries. Problem solved!

Not quite. It turns out the companies like McDonald's, Home Depot and others are actually planning on getting rid of their health benefits because of this requirement. "Those bastards!", you say. Well, hold on. These companies tend to have high turnover rates (meaning that administrative costs of health care are high due to putting people on the plan and then taking them back off), and their employees tend to be young (meaning that actual health care costs are low due to the employees not actually needing and using the services). Given that, it's all but impossible for the 15-20% administrative cost cap to be met by these companies, and if they can't comply with the law, the alternative is to just not run afoul of it by not providing coverage in the first place.

So, there you have it: a policy intended to achieve a certain outcome effecting the exact opposite. While I certainly feel for those without health care coverage and those about to lose it, on an academic level, I find the whole situation very interesting.

UPDATE: Here is a story on Marketplace's website about the same thing.

UPDATE (2): And another from Consumerist. I like Consumerist for the information, but they seem to have a very anti-business attitude in their writing. For example, look at the last sentence in the linked article. The author seems to think that McDonald's owes health insurance to its employees and is evil for not providing it. Hey Phil, why not point the finger at the government policy that upset the apple cart in the first place.