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
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.
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
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
Insurance problems are discussed in most intermediate microeconomics textbooks. One example is Robert Frank’s Microeconomics and Behavior, 6th edition,
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.