What's Different about Health Care?

Arrow and Stiglitz are clever but off base

When it comes to health care policy, you can try to sound sophisticated by citing “asymmetric information” as an explanation for why government intervention is appropriate. But I think that those rationalizations are off base.

The reason that we have government intervention in health care is that we have an instinct that making an individual pay for health care is immoral. It is taking advantage of the individual’s misfortune.

When someone is desperately poor and needs to borrow money to keep from starving, charging interest is regarded as immoral. Back in the day, that is what made usury a sin and made Shylock a villain.

When someone is suffering from illness, making them pay for treatment is analogous to usury. Still, we understand that health care providers deserve to get paid. So we turn payment for treatment into a collective problem, to be dealt with by insurance or, ultimately, by socialism (government).

I think that the moral intuition that an individual suffering from a health problem should not have to pay for treatment is something that we need to re-think. In the 21st century, the array of medical services is so vast and so varied that it is no longer appropriate to take away the individual’s responsibility for paying. As an individual, you think you have “good” health insurance if it pays for eyeglasses and teeth cleaning and for every precautionary MRI. But for society as a whole, it is not good.

I have pointed out that with typical insurance, such as homeowner’s insurance, premiums are modest, you rarely make claims, and you are protected against large losses. In the case of health coverage, it is the opposite. So I argue that health insurance is not really insurance.

The alternative I propose is high-deductible long-term insurance. The term of a policy would be, say, five years. Only if you have a lot of medical expenses over five years would insurance kick in.

I could also discuss other ways to provide genuine insurance regarding health care. But instead the point of this essay is to debunk the Nobel Laureates’ (notably Kenneth Arrow and Joseph Stiglitz) clever rationalizations for extensive provision of health care spending by government.

One rationalization is relative ignorance on the part of the consumer. The strongest case is that you get into a car accident and are wheeled unconscious into the operating room.

I have two points to make about that. First, cases in which the patient is completely unable to make a choice account for only a tiny portion of medical procedures. Second, we could address the problem using laws that keep health care providers from exploiting patients who are not in a position to make conscious decisions.

But even when a patient is conscious, the doctor knows more than the patient about how treatment should take place. This information asymmetry makes the health care market “imperfect.” I say, so what? Why is government the solution? Government knows even less than the consumer about what treatment is appropriate.

As a consumer, I am not perfectly informed about anything that I buy. Do I know that I am getting the right laptop,, the right smart phone, or the right car? Do I know that I should be getting my roof replaced this year? All we can do is research these questions as best we can. The same is true for medical treatments.

The other information asymmetry goes the other way. The consumer knows more than the insurance company about the consumer’s medical condition. An insurance company that charges an average premium will find that healthy customers go elsewhere, leaving it stuck with customers with chronic conditions that cost more than the premiums cover. If it raises its premiums, it just ends up selecting a set of customers that are even sicker. So the insurance market breaks down.

But in fact this information asymmetry does not preclude an insurance market from operating. As John Cochrane has suggested, the insurance that healthy people want is insurance against developing an illness that makes them costly to cover. My idea of long-term high-deductible insurance also can be adapted to eliminate the incentive problem that deters the healthy person from buying insurance.

Contra Arrow and Stiglitz, the problems inherent in a health care market do not require government intervention. People who cite these economists to justify the huge amounts of government spending on health care that we see are misguided.