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What Jim Hamilton Gets Wrong on Health Care Reform...

James Hamilton:

Econbrowser: Why reform health care?: I find it helpful... to consider two polar extremes.... In the first case, consider a group of people, all of whom are healthy at the moment, all of whom have the same risk of needing significant assistance with medical expenditures at some point in the future, and none of whom know whether they are the one who is going to need assistance.... Such health insurance is Pareto improving.... And precisely because it is Pareto improving, private insurance markets have no difficulty delivering this kind of financial product. Now consider the opposite extreme, namely a group of people each of whom already knows with perfect certainty who is going to need medical expenditures and who is not. In this case, if the funds of the group are pooled... those receiving the funds are better off and those supplying the funds are worse off... describing such an arrangement as "insurance" is mislabeling.... [T]he more fundamental argument in favor of assisting the needy in the second example is one of compassion...

There are actually two separate issues here:

  1. Does the fact that health insurance contain elements of the second greatly destroy the ability of the private health insurance market to provide the first? (Answer, yes.)
  2. Do we think that we want a society that provides the second--in which people with thin wallets are not left to die on the street of treatable diseases (Answer, yes.)

Jim thinks the hard questions all circle around (2). But (1) is a very important reason to reform our health insurance system as well...

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