2014-07-01

Hobby Lobby and Coase Theorem

In light of all this Hobby Lobby stuff people have been talking about, I think it’s worthwhile to remind ourselves of the Coase Theorem. Here’s an explanatory link from About.com: (http://economics.about.com/od/externalities/a/The-Coase-Theorem.htm).

A good way to think about this is to, as The Last Psychiatrist might say, “add up all the wants.” If the (monetary) value of Hobby Lobby’s paying for birth control is greater than not paying, the efficient solution would be for consumers to purchase their own supplemental birth control or pay for it with cash. If the value of Hobby Lobby’s paying for birth control is less than not paying, Hobby Lobby will pay.

The SCOTUS may have developed a legal rationale for their decision, but all we really needed to know in the very beginning is how much money things would cost in all scenarios.

Birth control is extremely inexpensive, relative to other types of covered health care expenses. Were an insurance company charged to pay this expense, the result would be high prices and deadweight loss. My insurance company, for example, charges a flat $20 fee for every prescription refill, regardless of its actual cost. So while that is a great deal for insulin, it is a terrible deal for birth control.

In short, many women whose insurance covers birth control are probably paying more in copayments + insurance premiums than they would pay if they simply bought birth control with cash. Note that under no circumstances would such an arrangement be good for poor women.

This is what we mean by an inefficient solution. We all pay the least amount of money for birth control when we cut out the middle men and foot the bill ourselves. Whatever the Supreme Court’s legal reasoning, they could by no means justify a decision that would subject consumers to higher average costs than they would be paying.

Finally, it would be equally as wasteful if the US government were to pay the cost of birth control instead of either consumers or Hobby Lobby. This is not because “government is bad,” but simply because middle men don’t reduce costs, period.