A fantastic summary of why there cannot be a free market in health insurance by mattsteinglass
August 3, 2009, 9:03 pm
Filed under: Health

I wrote this post on the health insurance/fire department analogy on Democracy in America, and in comments, someone who calls himself Navarchos wrote what may be the most pithy and concise explanation I’ve ever seen of why a free market in private health insurance doesn’t work. I can’t link directly to his comment, but it’s at 17:39 on August 3. An excerpt:

No sane insurer will sell a policy to a sick person, just as no life insurer will sell a policy to someone who’s already falling off a bridge. Forcing insurers to cover everyone with preexisting conditions without enacting myriad other reforms creates perverse incentives to reduce coverage and raise rates across the board (to avoid looking attractive to unattractive subscribers).

Finally, since a health insurance policy can be called upon by choice, rather than catastrophe, moral hazard is rampant. To limit this, where life and auto insurance have simple deductibles and limitations, health insurance has ridiculously complex deductibles and limitations as well as co-insurance and co-payment structures that are more or less incomprehensible to individual subscribers. This prevents any meaningful measure of informed choice by subscribers, particularly as it’s impossible to gauge how cynically litigious an insurer will prove to be until after you’re sick. The asymmetry always favors the insurer, since the insurer can cancel a policy if the subscriber withholds information, whereas a subscriber just gets to die while his claim is held up in arbitration if the insurer reneges on its obligation. Oh, and most people don’t buy their health insurance; they get what their employers are pleased to give them in lieu of wages.

In short, y’all should quit pretending there’s a free market in health insurance, or that it’s possible to have one without deleterious effects on public health.

Read his whole comment. It’s great. Oh, and read my blog post while you’re at it.


3 Comments so far
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I don’t really know that much about health care, but, notice that two of his points about why there *is* not a free market in health care are that regulation prevents one. 1) regulations prevent insurers from giving different rates to people with pre-existing conditions and 2) the feds subsidize employer provided health insurance. It’s a rather silly to suggest that a free market in health insurance could never exist. You might not like what that market would look like, but if you mean that, you should just say that.

Comment by jsalvati

Hey there — I think you’re missing the structure of his comment. The point is that there is not now a free market in health insurance (see your point 2 and many other points), AND FURTHERMORE such a market would be obviously undesirable to anyone if it were implemented, which is why there isn’t a free market in health insurance. One reason why a free market in health insurance is undesirable is that companies will never insure anyone who is sick, which is a problem if, for example, you’re born sick, or if you become sick and companies are allowed to kick you off; which is why you get government intervention to prevent companies from kicking you off if you get sick and, ultimately, as in the proposed health bill before Congress now, to bar companies from charging more money to people who get sick, since that vitiates the purpose of health insurance. (That’s your point 1 — a hypothetical change, not one that’s in the law now.) But then, once again, you’ve got regulations, not a free market. So, basically, there isn’t a free market, and there can’t be one unless you’re willing to eliminate the actual purpose of health insurance, which is to insure people in case they get sick.

Comment by mattsteinglass

Your site is very excellent. I will recommend and come back.

Comment by Thomas

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