What do beer, American health care and the Magna Carta all have in common?

For most college students, the link between beer and health care is pretty obvious: consuming excessive amounts of the former tends to lead to needing more of the latter.

Adding the Magna Carta to the mix illustrates a core economic principle of functional markets. This principle, in turn, will help explain the need for Congress to pass major health care reforms. A well-regulated exchange protects consumers from dirty insurance company tricks and helps buyers save money.

But first, we have to go back to the 13th century.

The Magna Carta, or “Great Charter,” was an agreement signed in 1216 between the English King John I and a group of barons. The agreement affirmed the ancient rights of the nobility against the King’s attempt to centralize power. Some scholars regard it as a very early prototype for the constitutions of modern democracies.

Particularly interesting is the charter’s 25th clause, which mandates a standard measure of ale throughout the entire realm. Practically speaking, this means that when I order a pint of London Pride at the Turf Tavern in Oxford, I know it should have the same amount of beer as a pint of Green King served at the Boathouse in Cambridge.

That pint-size piece of information is critical for scholarly pursuits but it’s also an essential form of government regulation: setting standard weights and measures. Without a standard measure of ale or corn or gasoline policed by the government, a large amount of commerce would dry up.

Why? Enforcing standard measures by an outside neutral party provides trustworthy information. Ironically, government intervention helps facilitate a key assumption of the free market economy: parties in an exchange have “perfect” information, which makes it more difficult for, say, a cloth merchant to cheat his customer.

And these standards are what are needed in today’s health care reform.

Currently, individuals who don’t have insurance through their employer or aren’t eligible for Medicare have to search for health insurance plans in the free market. In addition to facing higher costs, they face a dizzying array of plans, choices and complicated language. This complexity creates a situation with asymmetrical information: consumers face reams of paper with confusing terms created by lawyers and specialists working for the insurance company.

It’s pretty clear consumers face a heavy disadvantage under this arrangement. Even if they can find a competing insurer – which in some regions they can’t, because a single company dominates the market – the information imbalance persists.

One major purpose of the health insurance exchanges is to provide a standardized set of health insurance policies for individuals and small businesses that need to buy insurance on the open market. Private insurers compete for customers on the exchange by offering plans that meet certain basic criteria, which are determined by law.

The upshot is that by regulating the types of coverage that can be offered and setting minimum standards, the government provides a set of standard measurements – akin to the standard measure of ale – that helps lower the information gulf between consumers and insurers, benefitting the consumer.

Second, government oversight of the exchanges ensures that an outside enforcer is at hand in case insurance companies attempt to break the rules. Instead of facing the remote possibility of an individual consumer suing, the government could kick the company out of the exchange and cut it off from tens of millions of customers.

Of course, the insurance exchange is only one important feature of health care reform efforts. Another is a mandate that requires individuals to buy health insurance. Not allowing healthy people to opt out of buying insurance spreads risk among a greater pool and lowers premiums for everyone. The final key feature is the much-debated public option, which would increase competitive pressures to lower prices by giving individuals and small businesses the option of choosing a government-run plan. (Medicare, the government-run insurance program for senior citizens, negotiates far lower prices for care and runs with much lower overhead costs than private insurance companies.)

Together, the exchanges, individual mandate and public option can combine to rein in health-care costs, expand coverage and create fewer headaches for consumers trying to sort through massive amounts of paperwork.

And all those things will help lower the cost of Ibuprofen, which may come in handy for anyone taking advantage of the standardized 24-ounce jars of Bell’s Oberon at Dominick’s after acing an English history midterm. Cheers!

Patrick O’Mahen can be reached at pomahen@umich.edu.

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