In the aftermath of the Obamacare ruling, the proponents of Obamacare are touting “Insurance Exchanges” as one of the cost drivers to save people money. As a person who was on the board of an exchange, and has traded markets for twenty five years, I think I know a little bit about exchanges-or at least enough to analyze the government run exchanges for health insurance.
There is a lot wrong with the Obamacare bill. But one of the unique parts of the bill was the creation of exchanges for health insurance. However, these aren’t exchanges like you might be imagining.
First, exchanges never guarantee to save you money. An exchange is an efficient marketplace where buyers and sellers can meet to create a transparent price that sends supply and demand signals to that marketplace. Exchanges have always been created to create that common place, with a standardized set of rules to conduct business by. Exchanges never create, or influence the price of the good that is being traded there.
Second, we know from basic Microeconomics 101 that if you subsidize or put a ceiling on a price, the market is less efficient. Those types of actions distort prices. For a real world example, check out the price of corn ($ZC_F) which is distorted to the upside because of the ethanol subsidy. Farmers now plant more grain than would otherwise be planted because of the subsidy. Price ceilings have a different effect in the market. Because a price cannot go above a certain level, if demand would naturally take it above that level the marketplace becomes very imbalanced. There won’t be enough goods to go around and they will become scarce. Certain people in the marketplace will begin to hoard the good if the demand is high enough and scarce enough.
Graphically, this is a subsidy
and this is a price ceiling
The other thing about exchanges is that they work really great when there is one centralized market. It is an aggregation of the most buyers and sellers and because you have more market participants, you get a more market driven price. One of the issues in the stock market today is the fragmentation that has taken place which gives less price transparency. This creates a lack of confidence in consumers, and less faith in the market.
Get the Market Movements in Advance: William's Edge Webinar for Wednesday, March 12th, 2014 | John Ransom