Wednesday, May 6, 2009

Tell Me Where It Hurts: Fixing Healthcare in the U.S.

Let's see, stimulus, budget, what's left? Oh yeah, we have to fix the healthcare system. It's not clear to me whether or not the Obama cap & trade energy plan is dead, but it appears everyone has the appetite for taking on health care reform.

No doubt I won't be solving all problems related to healthcare with this single blog post, but why should that dissuade me. It may even be the case that I end up with more questions than answers.

Front and center in the debate over healthcare will be the question of a public versus a private health insurance system. While I generally favor market based approaches to issues over government based ones, it is not at all clear to me that the area of health insurance is one in which a functioning market, as that term is normally understood, can exist.

To Market To Market

I would say that any definition of a market, any market, would have to include the fact that buyers and sellers come together and make an exchange at an agreed upon price. So why can't this work for health insurance?

Take the case of generally younger, healthier people. These are exactly the types of people that insurance companies would like to have as customers. They are likely to pay more in premiums than they generate in claims. But this likelihood isn't a secret to the insurance buyers. They know they are unlikely to incur a lot of health related expenses. Therefore, they want low premiums and they may simply choose to go without insurance altogether if the price of premiums increases even slightly.

On the other hand, take the case of generally older, less healthy people. These are the types of people that insurance companies try to avoid. They are likely to generate more claims than premiums. Again, the insurance buyers know this as well. In this case, the older, less healthy people are not only willing to pay higher premiums, generally speaking, they should be willing to pay even dramatic increases in premiums as long as they are able; and as long as they believe the premiums are a bargain compared to the cost of the health care services they are likely to need.

Given these circumstances, you have sellers trying to attract the group of buyers that don't see their product as a necessity, while simultaneously trying to avoid the buyers that do.

This phenomenon is self-reinforcing. If buyers are particularly sensitive to price then insurance companies take that as a signal that they are generally healthy, exactly the kind of people they want to sign up, but keep losing even over small price increases.

While on the other hand, if buyers are willing to pay more, insurance companies take this as a sign that these people know they are likely to need medical care, exactly the kind of people that insurance companies want to avoid.

So sellers don't want to sell to the people that really want to buy; the people that sellers do want to sell to, don't want to buy.

Given this state of affairs, it is hard to see how any system that is even nominally a free market could provide for our health insurance needs.
No doubt this is not the last post on this topic. And, for the record, I do not think a bureaucratic approach will work either. I mean do we really want the Federal Department of Life & Death making these decisions?

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