Several
readers have asked me a good question: we rely on free markets to deliver most
goods and services, so why shouldn't we do the same thing for health care? Some
correspondents were belligerent, others honestly curious. Either way, they
deserve an answer.
It comes down to three things: risk,
selection and social justice.
First, about risk: in
any given year, a small fraction of the population accounts for the bulk of
medical expenses. In 2002 a mere 5 percent of Americans incurred almost half of
U.S. medical costs. If you find yourself one of the unlucky 5 percent, your
medical expenses will be crushing, unless you're very wealthy -- or you have
good insurance.
But good insurance is hard to come by,
because private markets for health insurance suffer from a severe case of the
economic problem known as ''adverse selection,'' in which bad risks drive out
good.
To understand adverse selection, imagine what
would happen if there were only one health insurance company, and everyone was
required to buy the same insurance policy. In that case, the insurance company
could charge a price reflecting the medical costs of the average American, plus
a small extra charge for administrative expenses.
But
in the real insurance market, a company that offered such a policy to anyone who
wanted it would lose money hand over fist. Healthy people, who don't expect to
face high medical bills, would go elsewhere, or go without insurance. Meanwhile,
those who bought the policy would be a self-selected group of people likely to
have high medical costs. And if the company responded to this selection bias by
charging a higher price for insurance, it would drive away even more healthy
people.
That's why insurance companies don't offer a
standard health insurance policy, available to anyone willing to buy it.
Instead, they devote a lot of effort and money to screening applicants, selling
insurance only to those considered unlikely to have high costs, while rejecting
those with pre-existing conditions or other indicators of high future
expenses.
This screening process is the main reason
private health insurers spend a much higher share of their revenue on
administrative costs than do government insurance programs like Medicare, which
doesn't try to screen anyone out. That is, private insurance companies spend
large sums not on providing medical care, but on denying insurance to those who
need it most.
What happens to those denied coverage?
Citizens of advanced countries -- the United States included -- don't believe
that their fellow citizens should be denied essential health care because they
can't afford it. And this belief in social justice gets translated into action,
however imperfectly. Some of those unable to get private health insurance are
covered by Medicaid. Others receive ''uncompensated'' treatment, which ends up
being paid for either by the government or by higher medical bills for the
insured. So we have a huge private health care bureaucracy whose main purpose
is, in effect, to pass the buck to taxpayers.
At this
point some readers may object that I'm painting too dark a picture. After all,
most Americans too young to receive Medicare do have private health insurance.
So does the free market work better than I've suggested? No: to the extent that
we do have a working system of private health insurance, it's the result of huge
though hidden subsidies.
Private health insurance in
America comes almost entirely in the form of employment-based coverage:
insurance provided by corporations as part of their pay packages. The key to
this coverage is the fact that compensation in the form of health benefits, as
opposed to wages, isn't taxed. One recent study suggests that this tax subsidy
may be as large as $190 billion per year. And even with this subsidy,
employment-based coverage is in rapid decline.
I'm not
an opponent of markets. On the contrary, I've spent a lot of my career defending
their virtues. But the fact is that the free market doesn't work for health
insurance, and never did. All we ever had was a patchwork, semiprivate system
supported by large government subsidies.
That system
is now failing. And a rigid belief that markets are always superior to
government programs -- a belief that ignores basic economics as well as
experience -- stands in the way of rational thinking about what should replace
it.