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Health Care (Transaction) Costs

by Elaine Schwartz    •    Aug 22, 2011    •    349 Views

One of the first parts of the new health care plan to be implemented, the Pre-Existing Condition Insurance Plan (PCIP) surprised its administrators. 

North Carolina was ready for a “stampede” but initially only 674 people joined. Nationally, 375,000 people were expected but by April 30, the total was 21,454.

According to this Washington Post blog, logistics might be one problem. To increase enrollees in another federal/state implemented program, the Children’s Health Insurance Program (CHIP), certain states reduced red tape. The key was to eliminate personal interviews, implement a mail-in renewal form, and even partially fill in forms that were sent.

That takes us to the entire health care program. How will federal and state officials enroll more than 30 million people?

The Economic Lesson

Red tape represents a transaction cost. Defined economically, cost means sacrifice. Standing in line, filling out forms, listening to voice mail instructions, we are sacrificing what we otherwise might have been doing. Sometimes, the transaction costs of signing up for a health care insurance program are so daunting that they outweigh the long term benefit.

With lines reflecting the dysfunction of the former Soviet Union, the huge transaction costs helped to speed its demise.

An Economic Question: Which transaction costs did you experience today?

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