Markets and Health Care

It's not at all clear what the "best" solution to the current health care problem is. Of course, if the market were competitive and well-functioning, the "most efficient" thing to do would be to just price it and let people choose whether or not they want it.

Sounds great, but that's problematic. People choosing whether or not to get health insurance might know somewhat more about their own health histories than the insurer does, and try to game the system. People who think they're healthy might try to go without health insurance, or maybe alternate their decision so that they get it one year and not the next and so on. (In fact, a lot of people do this with the optional vision or dental coverage in their current health plans.) This gaming of the system by "healthy" people would drive up the price of insurance for regular subscribers because the insurer would know that those people are less healthy on average (or have an informed guess to that effect). That's why as a compulsory subscriber to a group plan most folks "pay" (between themselves and the portion that their employers pay) about $10,000 for insurance, whereas the on the individual market prices run about 15,000. Also, when "healthy" non-subscribers get "unlucky" (which some inevitably will) their reliance on urgent care drives the costs up even more for everyone, including subscribers.Thus, since there is incomplete information, adverse selection, etc., markets don't do the job all that well.

The employer-based system we have now is pretty good, in the sense that it resolves most of the adverse-selection problem by pooling subscribers according to something roughly independent of the quality of their health (i.e. subscribing everyone according to where they work rather than whether they voluntarily enter the insurance market). This does reduce costs, but this system is flawed, too. It distorts labor markets (giving some firms an incentive to move operations to Canada, Mexico, or Asia) because health benefits can comprise up to 30% of the labor cost for some lower-skill occupations. Not only that, but if you can only find part-time work or lose your job, you become uninsured, too (or face the higher prices of the private insurance market discussed above). Mandates might resolve this (we do this for auto insurance, by the way), but people are afraid of this option because some folks are likely to not be able to afford the cost.

That sort of brings us to the current debate, which is more about income distribution than anything else. It represents the classic trade-off between equity and efficiency in drawing up economic policy. It also brings the issue of "public goods" and "merit goods" into the debate. While there is little argument that health care is really a "public good," it may be a "merit good." I'll think about the distributional effects of "reform" tomorrow.