The inevitable future of the health care system

Stephen Cecchetti, 7 July 2007



Economists believe in markets. Market-determined prices allocate scarce resources efficiently, encouraging individuals to put them to their best possible uses. This improves everyone’s welfare. But there are times when private markets break down, and insurance is one of them.  When markets fail, the government inevitably has to step in and provide insurance.  That’s the case with deposit insurance as well as with insurance against the devastation from natural disasters.  The future is one in which health care will fall into this same category.  Even in countries like the United States, the government, not the market, will ultimately control the level and cost of the medical care we will receive.


A single-payer, publicly run, health-care system is the inevitable consequence of the nearly continuous scientific revolution in molecular genetics that began a half century ago.  One day it is James Watson, one of the discoverers of the structure of DNA, being handed the complete genetic code inside his own cells.  The next day, researchers tie yet another chronic disease to the presence of specific patterns on individual chromosomes.  And then, a few days after that, we learn that scientists are learning to make stem cells from skin cells.

The time is fast approaching when we will have an inexpensive test that is capable of revealing a person’s genetic propensity to contract a broad array of chronic diseases.  That means that we will be able to accurately assess the cost of medical treatment over their lifetime.

I grant that there are a number of things about my medical future that I would rather not know. For example, I am not anxious to learn about my genetic predisposition to develop Alzheimer’s disease or my propensity to contract heart disease or type 2 diabetes.

While I may shy away from knowing the details, I am interested in the medical equivalent of my credit score – call this my “health score.”  Without revealing the specifics of any future diseases I am likely to contract, a health score will summarise my overall health-care risks.  And, each year, with new information on my weight, blood-pressure, and the like, my score will be refined.

The fact that we will all have health scores has profound implication for insurance; or, more accurately, for the failure of market-based insurance.


  If I have the information revealing that I am likely to be healthy, living a long and low-medical-care-cost life, this knowledge alone will create adverse selection, causing me to forgo insurance for everything except treatments arising from accidents, which can never be forecasted.

To understand the problem, think about a simple case in which there are only two kinds of people, those with high and low expected future medical-care-costs lives. Imagine that the insurance company can’t distinguish the two types, so it charges all comers the average cost across the entire population.  For the healthy people, the cost of the insurance will look very high, so they won’t buy it.  That means that the only people who will buy the insurance are the unhealthy.  Realising this, the insurance company will have to raise their price further to compensate for the fact that only the high cost people are willing to buy insurance.  This is the classic “lemons” problem that causes markets to fail and was first described by George Akerlof.


Alternatively, if my insurance company can obtain my health score, then, in the same way that lenders use my credit score to calibrate the interest rate they offer on a loan, they will adjust my health insurance premium based on their precise estimate of the cost of my future medical care. And, importantly, a clever insurance company that is precluded from learning my health score directly will find a pricing scheme that leads me to reveal it to them through the choices that I make.


The fact that private insurers can accurately compute customer premiums to reflect expected future payouts means that the insurance market will break down. Insurance is about shifting risk, pooling large groups of undifferentiated individuals.  When either the insurer or the insured can forecast future events, and accurately distinguish one person from another, the rationale for insurance disappears.

In thinking about the provision of medical care, it is important to realise that we view it differently from other goods and services.  When it comes to housing, cars, vacations, and the like, we are fairly tolerant of disparities between rich and poor.  Our focus is on equal opportunities, not equal outcomes.

Granted, Americans accept greater inequality than the citizens of many other countries do.  Not so for health care.  Members of wealthy societies share the view that their members are entitled to high quality medical care.  Social justice demands that the rich and poor among all of us receive roughly comparable treatment.

Over the past decade, there have been several attempts to reform the American health care system.  The US spends nearly 15½% percent of our GDP on medical care, roughly 50% more than countries like France, Germany and the Netherlands.  And, as measured by life expectancy and infant mortality, Americans’ health outcomes are worse than those in much of the industrialised world.  Something has to change. But change is politically and socially difficult, so in designing the new system we should make changes that are likely to last.

Looking into the future, we see that technology will force private health insurance to disappear at the same time that the social pressure to provide equal access to care will remain.   This makes it inevitable that health care systems everywhere will provide universal coverage and be publicly run.  Governments will replace markets, insuring that the poor and uninsurable receive medical treatment at the same time that the healthy are forced to participate in a comprehensive system.

Unfortunately, we will be forced to restrict access to the most expensive treatments, but even so, everyone is going to receive adequate health care. The operation replacing my disintegrating brain and over-worked liver with the new ones grown from my skin cells may not be covered; but then again, maybe it will.  Regardless, I’m off to my wine cellar to ponder the best way to design a publicly run, single-payer health care system.




For a description of how the U.S. health care system operates today see Jonathan Gruber, “Health Insurance I:  Health Economics and Private Health Insurance,” Chapter 15 in Public Finance and Public Policy, New York, N.Y.:  Worth Publishing, 2005.


Insurance problems are discussed in most intermediate microeconomics textbooks. One example is Robert Frank’s Microeconomics and Behavior, 6th edition, New York, N.Y., 2006, pages 208—214.


See “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics (August 1970).


Insurance companies can create pricing schemes in which differing individuals signal their type through the choice of what they choose to purchase. 


Topics: Politics and economics
Tags: Health care, insurance


Genetic Basis of Disease

I am not sure that "The time is fast approaching when we will have an inexpensive test that is capable of revealing a person’s genetic propensity to contract a broad array of chronic diseases. That means that we will be able to accurately assess the cost of medical treatment over their lifetime." reflects current thinking on the impact of genes on health.

For example, see GENOMICS AND MEDICINE: Dissecting Human Disease in the Postgenomic Era. To quote a bit:

Many human diseases, such as hypertension, coronary artery disease, and even some psychiatric disorders, represent quantitative traits that are caused by interactions among genes and between genes and the environment. For instance, QTL genes [quantitative trait locus -- they "are probably regulated by at least several genes" ] that contribute to elevated lipid levels in the blood may only be expressed if the individual eats a high-fat diet. Epidemiological study cohorts that carefully report and register environmental factors--such as smoking, type of diet, exercise habits, events during fetal life and early childhood (for example, infections)--will be of immense importance when combined with genetic risk profiling.

Or, to quote from the popular press, on the impact of environmental factors, How It Happens: It’s Not a ‘Plumbing Problem’:

Dr. Levy explains: Suppose a 50-year-old man does not have diabetes and does not smoke and keeps his cholesterol and blood pressure in the range recommended by national guidelines. Over the next 45 years, his chance of ever having a heart attack or symptoms of heart disease, like chest pain, is just 5 percent. The same goes for a 50-year-old woman with those risk factors under control. Her chance of symptomatic heart disease is 8 percent, slightly higher than the man’s because women live longer.

But only 5 percent of 50-year-olds have those risk factors under control. And give that man just one major risk factor, for example a high cholesterol level, and his chance of having symptomatic heart disease rises to 50 percent. The woman’s chance rises to 39 percent.

Thus, the story seems to be more complicated when both environment and genes influence disease. Since many of these factors are difficult or impossible to measure, it seems that genes or even genes and easily measured factors will not be terribly predictive.

headed down that road

You make some good points, however I think what Stephen is trying to say is that we are headed down the road that leads to a significant increase in the accuracy of actuarial predictions and risk profiling... so much to the point, that it will ultimately precipitate a national healthcare system in the U.S. Looking at CDC's information regarding what diseases are being predicted/identified via tests (see Table 2 in their article) leads me to believe that when I combine that data with the associated disease spend data (more importantly, the percentage of overall U.S. healthcare spend) it will tell a compelling story in that a large share of spend/costs can be accurately predicted using genetic testing/analysis. It comes down to a tipping point in that if enough costs can be accurately predicted, via accurate prediction of health issues, then the economic forces mentioned above will drive the market towards universal care.

Stephen Cecchetti

Economic Adviser and the Head of the Monetary and Economic Department at the Bank for International Settlements in Basel, Switzerland