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In a recent post on health care, Krugman writes:
[E]conomists have known for 45 years -- ever since Kenneth Arrow's seminal paper -- that the standard competitive market model just doesn't work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough.  To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.
I guess that makes me nobody.  But despite my non-existence I can still somehow make two points:

1. On moral hazard: Government regulation does virtually nothing to solve these problems.  It doesn't even try.  Indeed, it often makes moral hazard worse by imposing regulations that make it harder for rates to reflect risk.

2. On adverse selection: As long as rates are legally allowed to reflect risk, there is a lot of evidence that selection is actually advantageous rather than adverse.  Despite its massive citation count, Arrow's paper is deeply wrong.  But even if Arrow were right about the empirical importance of adverse selection, government regulation doesn't do much about it.  In fact, it often creates adverse selection problems that wouldn't exist by imposing regulations that make it harder for rates to reflect risk.

Unlike Krugman, I not going to dismiss everyone who doesn't know these facts as "remarkably ignorant or simply disingenuous."  What I will say, though, is that if you don't know them, you have a lot to learn from nobody.
HT: Mankiw

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The author at Enemy of the State in a related article titled Bryan Caplan is a Nobody writes:
    According Paul Krugman, Caplan is nobody because[...] Clearly health care in this country is terrible. Like I have said before, Americans don\'t have insurance, they have insulation. It\'s amazing, however, that economists like Krugman can\'t see th... [Tracked on June 29, 2009 5:33 PM]
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david writes:

To provide some context, the Mankiw column which Krugman's post was replying to had this gem:

"[The] public plan would have to stand on its own financially, as private plans do, covering all expenses with premiums from those who signed up for it.

But if such a plan were desirable and feasible, nothing would stop someone from setting it up right now."

which is at least as eye-poppingly disingenuous and simplistic as Krugman's nobodies.

Who thinks that the existing healthcare industry is competitive? Existing regulations are substantial. Government spending is large - George Will's column (which Krugman linked to) cites 46%. Progressives also note massive misaligned incentives and regional monopolies.

Obviously, libertarians can make a good case against the likely efficiency of the public option, but Mankiw's argument based on existing perfect competition is bizarre.

Jason Brennan writes:

Quite a few arguments for government intervention in economics goes like this:

1. Markets can't solve big bad problem X.
2. Governments in principle can solve X and they are only things that can.
3. Therefore, we should give governments the power to solve X, ask governments to solve X, give governments control over issues related to X, etc.

Of course, 3 doesn't follow from 1 and 2. We need a supporting premises such as A or B:

A : ...and, by the way, if we give government to power to solve X, it will in fact solve it...
B: If we let government try to solve X, even if it doesn't solve X, it will do a significantly better job than if we don't let government try to solve X, and there won't be any other bad losses as a result of its attempts, etc...

It's surprising to me how rarely people try to supply evidence for these needed supporting premises. I haven't read Krugman's piece, so I'm not accusing him of this. But I would say that lots of people make this mistake.

libfree writes:

I don't think Mankiw was trying to say whether we had enough competition or not enough competition. Mankiw is simply stating, that if there is no government subsidy, we don't really need government involvement. In fact, several non-profit insurance groups already exist. They don't do any better than the for profits.

Paul Zrimsek writes:

It's David who is being disingenuous. Saying that it's possible to set up a non-profit insurance plan is not at all the same thing as saying that there's perfect competition in the market.

Walt French writes:

LibFree sez, In fact, several non-profit insurance groups already exist. They don't do any better than the for profits.

Mmmm, this seems to fly in the face of anecdotes or spotty data that I see... care to be more specific?

My personal experience is that my non-profit HMO has no trouble distinguishing between useful and useless tests, moves quickly to treat possible problems, and pro-actively works to involve clients in making smart, long-term choices (e.g., counseling and tighter follow-up testing for sub-critical blood sugar readings that suggest diabetes more likely a few years downstream. Seems like good decision-making all around, without any signals of perverse incentives (personal profit from sending to tests), cost-based rationing (e.g., failure to send clients to a specialist) or stripping money out of the system (stock buybacks that show excess -- above-market -- return to equity).

All of these support the notion of better outcome for a given expenditure, and perhaps smaller expenditure for similar outcome.

gnat writes:

Krugman should have cited Arrow's additional point about asymmetric information--consumers depend on their doctors for guidance. Also, we generally mean the well documented problem of adverse selection on the part of insurance providers, and not consumers as Dr. Kling references.

The underlying premise in Mankiw's column appears to be that the market is well defined but that physian's incomes are too high and he views the public option as a monopsony buyer. But the failure of the private market appears more complex. Have insurance options been properly designed? Have insurance companies provided incentives that reward best medical outcomes?

silvermine writes:

What private market?

Due to bizarre laws, I need to get health insurance from my employer. I get very little choice in what I get to pick from. The company picks what it thinks I like and what will make it's bottom line happier. I do not pick them.

Okay, fine, I could refuse the work health care -- but my pay does not increase in the amount that they would have paid. So I get to pay twice. I can't keep paying twice for everything.

Get health coverage away from my employer, and let me pick on an actual open market. Just like I pick my car insurance, renters insurance and all of the other insurances that the great and mighty government apparently thinks I'm capable of picking for myself.

Dan Weber writes:

Unfortunately, silvermine, we are unlikely to get away from the massive subsidy given to employer-based insurance. Democrats hated it when McCain proposed it last year and Republicans hated it when Obama hinted at it this year. It's probably too late.

Sophomore writes:

"On moral hazard: Government regulation does virtually nothing to solve these problems. It doesn't even try. Indeed, it often makes moral hazard worse by imposing regulations that make it harder for rates to reflect risk."

I don't follow. Which hazard are you talking about?

The big moral hazard in health insurance is that people will avoid getting insurance unless or until they think they might incur big medical expenses and then try to sneak into coverage. Government systems clearly and explicitly do try to solve these problems. In fact, it's probably what they'd be best at. Single payer systems put everyone in the system and collect funds for the pool via taxation. The system proposed in Congress contains mandates requiring people to have insurance. There'll be some slippage, of course, but it clearly cuts down on the number of healthy uninsured.

Possibly you mean the hazard of people ordering lots of treatments and tests only because they don't have to pay for them. But there are plenty of ways to use regulation to deal with that problem. You can adopt a public insurance plan that offers low premiums paired with high co-pays and deductibles, and require insurers to offer such a plan. You can (strongly) incentivize doctors to join group plans that pay them a salary for treatment. You can require the sharing of medical information to facilitate comparative effectiveness research and then build that knowledge into government bargaining with providers. You can also make that knowledge available to the market so they can make use of it. And I'm only scratching the surface here.

It's ironic, actually, if you are making the claim that regulation can't deal with this kind of hazard. The usual criticism of foreign systems in Europe, Canada and Britain is that they do *too much* to discourage the use of tests and procedures. They pay for many fewer of them and make patients wait a very long for the ones on offer - raising the cost of treatment and discouraging overuse. (You can certainly argue about whether this is an inefficient way to prevent overuse of treatment, but that's obviously a different argument.)

So, I'm left wondering what hazards you're talking about.

Ray Gardner writes:

I'm simply not of the mindset that we have a right to healthcare.

Regardless of its efficacy or sustainability, nationalized health care is for all intents and purposes creating a right to "free" health care.

Such a right only imposes duties on others to supply for that right, and thus it is not a right at all in the traditional sense that most people would think. (This is aside from what one may think of the idea of "natural" rights, but simply to say that imposing duties on one to support the rights of another is not a "right" at all.)

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