(HT Drudge Report) Yesterday, Health and Human Services Secretary Kathleen Sebelius announced that beginning January 1, 2013, that insurance companies must cover women's preventive care without copays under the Affordable Care Act of 2009. Tens of millions of women are initially expected to gain benefits and that number is expected to grow over time (“Federal health department approves free birth control”). Included under the decision are breast pumps and here begins the allegory.
In our fictitious economy, 1% of GDP is spent on breast pumps and 10% of pregnant women use them. The government changes insurance laws so that all women have a zero copay. Prior to the change in insurance law, on average, women paid $200 for a breast pump. After the change in the law, doctors recommend pumps that cost 50% more than the average expenditure.
An informed pregnant woman, Molly, considers breast feeding her baby. Given her schedule, she estimates that she will need to use a breast pump eight times per week or make small alterations to her schedule. After talking to friends, she learns that pumps are a little uncomfortable and somewhat time consuming. As part of her research she looks at the price of breast pumps. Because Molly believes that there is a good chance that she will decide that it is easier to alter her schedule than use the pump, she tentatively decides to buy an inexpensive $100 pump. If she does not like it, her loss would be small.
During her next checkup Molly asks her doctor, Dr. Who, about feeding options for her baby. The conversation centers on breast feeding. She describes her research. Who realizes that she is unaware of the change in law and suggests that she try using a breast pump costing $300 because it causes less discomfort and because of the zero copay. Molly agrees. The order is processed through her insurance company adding an additional $100 to the cost.
This conversation is repeated with all pregnant women. The 10% of women who originally decided to use breast do not alter their decision but they do decide to alter the breast pump models that the purchase so that the average cost is $300 per pump. Women who had decided to use a less expensive pump decide to use the $300 model. An additional 20% of women decide to try pumps. Half find the pumps satisfactory and continue their use and half stop using the pumps after a brief time. Another 10% of women are embarrassed that they do not want to breastfeed and agree to try the pumps with no intention of continuing their use. All women who are persuaded to try a breast pump choose the $300 model.
The change in the law chased an 800% increase in breast pump purchases. Because women now on average buy $300 pumps rather than $200 pumps and four times as many women purchase them, breast pump purchase now represent 6% of GDP. The cost of processing claims represents 2% of GDP. Breast pump manufacturers wake up and smell the coffee. There is no reason to specialize in producing inexpensive pumps. The average price of pumps increases. Doctors retain their practice of recommending breast pumps that costs 50% more than last year’s average. Breast pump prices spiral upward.
How much better off are we as a country? The original 10% of women using breast pumps are clearly better off. They wanted to use breast pumps and they end up using a more expensive model at a cheaper price. The next 10% of women who chose to try a breast pump and continue its use are $300 better off if they correctly measured their costs and benefits. The remaining women are no better or worse off. In total, pregnant women are gifted an additional 6% of GDP but their welfare gains total only 2% of GPD. Insurance companies also gain 2% of GDP.
The same cannot be said of taxpayers. They are clearly worse off. They are paying an additional 7% of their income for breast pump purchases and insurance processing. The lesson from this allegory is simple. Markets produce a better allocation of resources that produces a higher level of well-being for society.
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