Problems with the Market for Health Insurance
Paul Krugman writes:
Health economics 101: SEVERAL READERS have asked me a good question: we rely on free markets to deliver most goods and services, so why shouldn't we do the same thing for health care?.... It comes down to three things: risk, selection, and social justice....
In 2002 a mere 5 per cent of Americans incurred almost half of U.S. medical costs. If you find yourself one of the unlucky 5 per cent, your medical expenses will be crushing, unless you're very wealthy -- or you have good insurance. But good insurance is hard to come by, because private markets for health insurance suffer from a severe case of the economic problem known as "adverse selection," in which bad risks drive out good.... That's why insurance companies don't offer a standard health insurance policy, available to anyone willing to buy it. Instead, they devote a lot of effort and money to screening applicants, selling insurance only to those considered unlikely to have high costs, while rejecting those with pre-existing conditions or other indicators of high future expenses.... What happens to those denied coverage?... Some of those unable to get private health insurance are covered by Medicaid. Others receive "uncompensated" treatment, which ends up being paid for either by the government or by higher medical bills for the insured. So we have a huge private health care bureaucracy whose main purpose is, in effect, to pass the buck to taxpayers....
I'm not an opponent of markets. On the contrary, I've spent a lot of my career defending their virtues. But the fact is that the free market doesn't work for health insurance, and never did. All we ever had was a patchwork, semiprivate system supported by large government subsidies.
That system is now failing. And a rigid belief that markets are always superior to government programmes -- a belief that ignores basic economics as well as experience -- stands in the way of rational thinking about what should replace it.
