Saturday, February 11, 2012

Aborting the contraception policy follies

The economist reports an apparent "compromise" on the issue of forcing insurers to cover contraceptives but neglects to actually mention the economics of the issue. To wit:

1. Health insurance and, indeed, many health expenditures in general are, for historical reasons, tax favored in the US. Put differently, the tax system distorts prices in favor of health care and away from other goods. This results in over-consumption of health care and a loss in welfare to society as a whole. A welfare-increasing policy would seek to reduce the number of price distortions, rather than increasing it.

2. More broadly, it makes little sense for "insurance" to cover small, predictable expenditures. No one does this with their car insurance. The reason they do it with health insurance is because of the tax favoring mentioned above, which overcomes the lost output due to the administrative overhead associated with the insurance system. We should be trying to move away from this equilibrium, not swimming further out into the seething ocean of bad policy design.

There is no reason to even wheel in moral concerns here. All you need is economics.

A different angle on the issue from Greg Mankiw.


Jason Kerwin said...

My impression (based on hearsay rather than actual facts) is that health insurance companies favor providing coverage for contraceptives because doing so reduces expected costs; pregnancies are covered events, and even cutting down on the probability of a pregnancy by a small amount would generate large savings since they are so costly.

LaurHoeds said...

Actually, doesn't it seem much more likely that higher contraceptive use will lead to more unplanned pregnancies, because of moral hazard?