Is Private Health Insurance Impossible?
Mark Thoma channels Paul Krugman.
It’s nice to have Paul Krugman discuss a question that has been addressed repeatedly at this site, market failure in the provision of health and social insurance due to moral hazard and adverse selection
This moral-hazard-and-adverse selection story is one of those ideas that strikes economists as so clever that it simply must be true. Tim Harford tells the same tale in his Undercover Economist book, which is going to make it difficult for me to give a favorable review.
Mark Pauly and Bradley Herring have dared to do somethin that Krugman, Harford, Thoma, and similar “experts” have not done. Pauly and Herring examined the way insurance companies actually behave! It turns out that they don’t adversely select. Individual health insurance is expensive because of poor scale economies–there are very few consumers in the individual market–and not because of the factors near and dear to the theoreticians.
Rather than focus on fears of risk-segmentation, the authors suggest that political energy should be directed towards the non-group market’s major problems: high loading costs, lack of persistence in purchasing, and mistaken choices.
There is no direct evidence that private health insurance markets break down. Instead, the empirical argument made against private health insurance boils down to the usual litany that the U.S. spends more on health care than other countries, yet our longevity is worse than that in many countries that spend less. That is an interesting fact, but it is just as true of the over-65 population in the U.S., which has the national health insurance that Krugman thinks all of us need, as it is for the under-65 population, which Krugman sees as the victim of the cruelty of private health insurance.
On Monday, Wednesday, and Friday, when Krugman talks about health care, he tells us that Medicare works great. On Tuesday and Thursday, when he argues that Social Security’s shortfall is relatively small, he tells us that Medicare is the real fiscal time bomb. His Tuesday-Thursday outlook on Medicare is more realistic.