Loading Costs and the Uninsured

Loading Costs and the Uninsured

The analysis of loading costs provides one avenue for addressing the problem of those who cannot get
insurance. Health insurance in the United States has been largely available through participation in the
labor market. Those who do not participate in the labor market, and many of those who are employed
by small businesses, self-employed, or sporadically employed have found it difficult to get insurance.
Many explanations have been proposed, but it is apparent that the per-person costs of processing
information and claims of those individuals who are outside larger organizations (either companies
or unions) are higher. This results in an increase in the firms’ marginal costs relative to the
consumer’s marginal benefits and can reduce or eliminate the range of services that may be offered.
The analysis also helps address the impacts of entry and exit in the insurance market. More
efficient processing and information handling presumably will lower the premiums that must be paid by
customers in the market. If we look again at Figure 11-1B, we recognize that improved information handling
and processing would not only lead to lower marginal costs and hence lower prices, but also would
permit firms to offer services (based on probability of occurrence) that had not previously been offered.
Consider points C or D, where the expected marginal benefit was previously just equal to (or
possibly just below) the marginal cost. An insurer who lowers costs can offer coverage for types of
events that previously were uncovered. Conversely, increased costs, due either to market forces or to
mandated coverage, would force firms to cut back coverage on events for which they could not (due
to limited consumer surplus) pass along the increased costs on to the customers.