Health Care: Not so Fraught

Paul Krugman thinks that:

The standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough.

Mark Hodak's not impressed:

Whenever I see such nonsense, I have to keep reminding myself that the trade theories for which Krugman won his Nobel Prize were explanatory and predictive. Krugman did not win a prize for mechanism design; he could not have predicted E-bay.

The idea of people bidding for stuff they can’t really see from people that they’ve never met is fraught with adverse selection and moral hazard. Honest sellers could not hope to compete with liars selling competitive products. Honest bidders could not hope to competing with fraudulent bids that may not be honored. Such a market, according to the “standard competitive market model” could never exist.

Except that it does....

Krugman pretends that insurance plans are doomed by the existence of adverse selection and moral hazard. Yet we see thriving markets in insurance products of all sorts, including our huge private market in health insurance. One can argue their imperfections, and perhaps blame them on the “free market,” although a free market does not exist for most insurance products, least of all health insurance. But widely-used, competitive insurance products can clearly exist without government–something that ordinary people might one day forget some decades after our health care has become socialized. ...

Even real-world markets, unlike the straw man “free market” that Krugman attacks, deal with adverse selection and moral hazard in insuring for every conceivable risk. Mechanisms like deductibles or co-insurance go a long way toward rationalizing insurance economics. Other mechanisms could certainly be developed if the insurance markets weren’t so regulated as to severely curtail such innovation. Why does Krugman suppose that “free markets” cannot evolve more elaborate mechanisms? More importantly, why does he suppose that the government mechanisms will be any more efficient?

The simple fact is that we don't know what a free market in health care and health insurance would look like, because we've never had one. Since the 1940s, tax policies -- i.e., health benefits are deductible to the employer and not taxable income to the employee -- that eviscerated market forces. Consumers simply didn't have to make choices about health care that they had to make about everything else.

There's a very simple solution to all this. Mandate that individuals buy catastrophic health care insurance. Subsidize those who can't afford it. Let people save for health care costs using tax-advantaged individual health care savings accounts. Let people who want to buy more comprehensive policies do so, but using after tax dollars. Let employers who want to provide more comprehensive group plans do so, but using after tax dollars. Then let's see whether the market is really fraught with adverse selection and moral hazard.

Comments

[Johan Schoone]

This sounds like the Dutch health care insurance model, which has mandatory insurance for basic (not just catastrophic) care, group plans (not just by companies), subsidies for low-income households, additional coverage bought by after-tax money.

[save_the_rustbelt]

"Simple" and "politics" are not very compatible.

Bush had 8 years to head off this nightmare, but then Bush wasn't a real conservative.

Bad news headed our way.

[wcz]

"There's a very simple solution to all this. Mandate that individuals buy catastrophic health care insurance. Subsidize those who can't afford it. Let people save for health care costs using tax-advantaged individual health care savings accounts. Let people who want to buy more comprehensive policies do so, but using after tax dollars. Let employers who want to provide more comprehensive group plans do so, but using after tax dollars. Then let's see whether the market is really fraught with adverse selection and moral hazard."

I'm just sure that a regular joe like myself will come out smelling like a rose in your scenario. I trust that the insurance companies will make sure I come out ahead at the expense of their profits, and our government will make sure of it because of my personal all-powerful PAC. At least I won't have to worry about my family's health and financial well being while all of these titanic forces sort out what's "affordable" with the ever-stable free market.

[Allan]

There is a big problem comparing health insurance to other insurance: it costs more to insure higher risks.

With auto insurance, we recognize the problem, but you really don't have to drive. And people with medical conditions have to pay more for life insurance. OK.

But if it the cost for a pre-existing condition raises the price of health insurance, it sort of defeats the purpose. It might be ok for someone to have only liability for their car, but it does not make sense in the health care insurance setting.

[Cornellian]

"There is a big problem comparing health insurance to other insurance: it costs more to insure higher risks.

With auto insurance, we recognize the problem, but you really don't have to drive. And people with medical conditions have to pay more for life insurance. OK."

And if your car is a lemon, you can buy a new one and insure that. You can't get a new body to insure.

[Cornellian]

Personally I think the US health care system is a disaster, costing far too much money for far too little health care. But there is no perfect solution and I'm not wedded to a single payer solution, which has problems of its own. The idea of mandating catastrophic health insurance the way we mandate auto insurance is certainly worth looking at, but there are a lot of hard details to work out. What happens to people with pre-existing conditions that are expensive to treat? What happens when your chemo treatments burn through your coverage and you've still got 27 treatments to go at a cost of $25,000 each?

I just don't think the United States should be the only affluent democracy in the world where people face the choice of either bankrupting themselves and their families or dying for lack of ability to afford medical care because they don't have insurance, or their carrier denied coverage or their coverage hit its limit.