The picture is a photograph of President Barack Obama giving a speech on healthcare reform.
Figure 16.1 President Obama’s Health-Care Reform The Patient Protection and Affordable Care Act has become a controversial topic—one which relates strongly to the topic of this chapter. (Source: modification of work by Daniel Borman/Flickr Creative Commons)

Bring It Home

What’s the Big Deal With Obamacare?

In August 2009, members of the U.S. Congress used their summer recess to return to their home districts and hold town hall–style meetings to discuss President Obama’s proposed changes to the U.S. health-care system. This was officially known as the Patient Protection and Affordable Care Act (PPACA) or Affordable Care Act (ACA), but was more popularly known as Obamacare. The bill’s opponents’ claims ranged from the charge that the changes were unconstitutional and would add $750 billion to the deficit, to extreme claims about the inclusion of things such as the implantation of microchips, and the so-called death panels that decide which critically ill patients receive care and which do not.

Why did people react so strongly? After all, the intent of the law was to make health-care insurance more affordable, to allow more people to receive insurance, and to reduce the costs of health-care. For each year from 2000–2011, these costs grew at double the rate of inflation. In 2014, health-care spending accounted for around 24 percent of all federal government spending. In the United States, we spend more for our health-care than any other high-income nation. Yet in 2015, more than 32 million people in the United States, about 13.2 percent, were without insurance. Even today, however, after the Act was signed into law and after it was mostly upheld by the Supreme Court, a 2015 Kaiser Foundation poll found that 43 percent of likely voters viewed it unfavorably. Why is this?

The debate over the ACA and health-care reform could take an entire textbook, but what this chapter will do is introduce the basics of insurance and the problems insurance companies face. It is these problems, and how insurance companies respond to them that, in part, explain the ACA.

Introduction to Information, Risk, and Insurance

In this chapter, you will learn about the following:

  • The problem of imperfect information and asymmetric information
  • Insurance and imperfect information

Every purchase is based on a belief about the satisfaction that the good or service will provide. In turn, these beliefs are based on the information that the buyer has available. For many products, the information available to the buyer or the seller is imperfect or unclear, which can either make buyers regret past purchases or avoid making future ones.

This chapter discusses how imperfect and asymmetric information affects markets. The first module of the chapter discusses how asymmetric information affects markets for goods, labor, and financial capital. When buyers have less information about the quality of the good, (for example, a gemstone) than sellers do, sellers may be tempted to mislead buyers. If a buyer cannot have at least some confidence in the quality of what is being purchased, then he will be reluctant or unwilling to purchase the products. Thus, mechanisms are needed to bridge this information gap, so buyers and sellers can engage in a transaction.

The second module of the chapter discusses insurance markets, which also face similar problems of imperfect information. For example, a car insurance company would prefer to sell insurance only to those who are unlikely to have auto accidents, but it is hard for the firm to identify those perfectly safe drivers. Conversely, buyers of car insurance would like to persuade the auto insurance company that they are safe drivers and should pay only a low price for insurance. If insurance markets cannot find ways to grapple with these problems of imperfect information, then even people who have low or average risks of making claims may not be able to purchase insurance. The chapter on financial markets, which are markets for stocks and bonds, will show that the problems of imperfect information can be especially poignant. Imperfect information cannot be eliminated, but it can often be managed.