When was the last time Tyler Cowen and I agreed? Let's just say it's been a while. But he's just hit the adverse selection nail on the head:
When I argue that adverse selection is not the key, I hear a common response: "*You* try getting insurance after you have been diagnosed with an advanced brain tumor," or something along those lines.
To be sure, this is a real point but it is not adverse selection. Adverse selection requires asymmetric information, namely that I know more about my brain tumor than does my potential insurance company. The more likely problem is that the tumor is common knowledge, or would be if I applied for insurance, and the company won't sell a policy for any price cheaper than the costs of treatment. There is no asymmetry of information, rather insurance simply is no longer possible. In the limiting case, imagine that a predictor-demon could forecast your lifetime medical expenditures with certainty, and then blog them by your social security number. Such a person, no matter how healthy, couldn't buy insurance either.
Economists often imagine that adverse selection arguments provide intellectual underpinings for populist resentment against the insurance industry. But the true lesson of adverse selection arguments should make populists cringe: In an efficient world, the link between risk and rates would be even
stronger than it already is.
Adverse selection is an issue when insurer is a guaranteed insurer. In my case, the group plan from Institute of Electrical and Electronics Engineers. Apparently plans like this must be open to all members of the affinity group who wish to join.
The second point is one you have mentioned or alluded to many times, we need a national risk pool for catastrophic medical insurance.
The problem with health insurance compared to house or auto-insurance is that claims are much less random. If a tornado destroys my house, the probability of it happening again is the same. If I have a heart attack, then the probability I will have another is much higher.
So, if the insurance company sells a policy for Cost of Treatment + insurance knowing that a more effective and inexpensive treatment will soon become available..?
Many people seem to believe that rich people won't join the risk pool, but I not so sure. I was thinking, it still makes sense for the rich to buy insurance so long as the cost is less than their expected return on investment of the pay-out amount.
Health insurance is odd because both the rich and the poor need approximately the same amount of "product" to be healthy and pain-free. It's hard to conceive how paying more for a more deluxe set of health benefits will really make one healthier. There's a natural ceiling. Having your own private doctor following you around will not make you that much healthier than having standard basic health care available, unless one is talking about "mental health" which, since Szasz, all sane people agree is a delusion.
Wrong! In an efficient world, no one would bother buying insurance because they would be better off simply paying their own bills.
Robert said:
"The problem with health insurance compared to house or auto-insurance is that claims are much less random. If a tornado destroys my house, the probability of it happening again is the same. If I have a heart attack, then the probability I will have another is much higher."
Your observation about heart attacks might be correct, but I can't see how its a problem, or that it makes things "less random". If the incidence of a loss increases the probability of a subsequent loss, then the loss cost is equal to the "basic" loss cost (in this case the cost of treatment for the heart attack) plus the cost of the increased risk. I don't see how this makes things "less random". All it shows is that the number of heart attacks (or whatever the loss with this characteristic is) somebody has over the course of their life is probably not poisson distributed, but possibly has a negative binomial distribution.
So, a Pareto optimal insurance outcome, one that would occur without adverse selection might not be humane? This is not surprising to anyone who has studied these matters reasonably closely. In a libertarian, Walrasian equilibrium, if you have no endowments or human capital to offer, you will die of starvation, and that will be efficient, because helping you would harm somebody else, maybe a very rich insurance company executive.
Given some other social goal than mere Pareto optimality, broad pooling has advantages in spreading risks and costs. I will not go further in where that leads as it is not a place you guys particularly like to go...
Charitable giving and medical care. One thing that people, especially critics of libertarianism, forget about is that givers of charity gain from charitable giving. What I mean is that they (the givers) find it worthwhile to give their money and time even though they get nothing back financially. Here is an anecdote that demonstrates that catastrophic heath problems can be addressed by charity. Linda Starck was recently diagnosed with lung cancer. Regular treatments have proven ineffective, but she found an alternative treatment that looked promising. Unfortunately her insurance wouldn't cover it. Linda is a member of the Boulder, CO Brewers Association. To date she has received enough money to get 2/3 of the alternative treatments, including $5000 from a bunch of total strangers that listen to a particular homebrewing podcast.