Bryan Caplan  

Great Questions, Matt

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Over at U.S. News and World Report, Matt Bandyk has a follow-up question for my last post on mandatory insurance and adverse selection:

Here's my question to Dr. Caplan: But far from being populist anti-intellectualism, isn't the objection that "poor people will not be able to afford health care in a free market and so the sick ones will die" a very real challenge that requires a response? Does the fact that, by Caplan's own admission, a free market in health insurance would underserve sick people show a real problem with the laissez-faire approach?

There are several layers of responses to this question.  I'll start with the textbook answer, then move on to successively more controversial observations:

1. The smart response to market failure varies sharply depending on what the market failure is supposed to be.  If the problem with free-market health care is just that poor people can't afford health care, then the smart response is simply to give poor people more money (or possibly a cash voucher), and leave insurance companies alone.  Think about how we usually handle hunger among the poor.  We don't set up byzantine regulations for grocery stores.  We give the poor welfare checks and/or food stamps, and leave the grocery stories alone.

2. On further reflection, the fact that health insurance is too expensive for the poor is actually an important argument for deregulation of the health industry in order to bring costs down.  For starters, there are many regulations on the books that specify what health insurance companies have to cover - mental health being the most notorious.  In a free market, insurance companies could offer more restrictive policies that the poor might actually be able to afford. 

More importantly, though, health insurance is expensive because regulation sharply raises the cost of health care itself.  Medical licensing regulations, for example, sharply raise the cost of medical labor.  Economists like Milton Friedman have been arguing for decades that mere certification, or even reputation, could give you the same protection at much lower cost.  And while you probably want an M.D. to do your brain surgery, licensed physicians are over-qualified for much, if not most, of the work they do - as you might have noticed if you ever saw a dermatologist for acne.

3. On top of all of this, almost everyone familiar with the data admits that at least in First World countries, the difference in health between rich and poor has little or nothing to do with access to medical care.* It's easy to find anecdotes of poor people who suffered or died because of inadequate medical care, but when you look at the big picture, you realize that these anecdotes must be quite rare.  So despite response #1, more redistribution wouldn't actually help the poor's health very much.

4. My most controversial point: While redistribution is the most logical response to the health market's performance, I still oppose it.  In the grand scheme of things, poor people in the First World are doing fine.  If they weren't, why would millions of people be delighted to immigrate here to take low-skilled jobs?  For thoughtful humanitarians, the quest to improve the health care of the U.S. poor is a red herring.  The crusade that deserves our support is open immigration.

Matt also asks me to reply to a point from Ezra Klein:

I would pose to Caplan a question that Ezra Klein, a good representative of the anti-free-market view on health care, asked on his blog recently:

Are we really sure we want a bustling market in how to cleverly revoke the insurance of people who prove to be sickly?
If you read Ezra's post, there are actually two distinct complaints about free-market health care.  The first is that insurers engage in near-fraud - rescinding coverage on flimsy pretexts when people get seriously (and expensively) ill.  If this were more than an anecdotal problem, which I doubt, I don't see why lawsuits or advertising couldn't handle it.

Ezra's second complaint, though, is "insurers rid themselves of unprofitable accounts by slapping them with intentionally unrealistic rate increases,'" a business practice known as "purging."  Frankly, this story makes no sense.  If a customer is expensive, a company might want to raise his rate so he'd be profitable to insure.  As long as there's competition, though, firms have no reason to raise the rate higher. 

Of course, if the problem is that you want to buy insurance against the possibility of becoming a high-risk customer, you should pick a company that lets you lock in your rate.  See e.g. life insurance, where you can get a fixed low rate for life if you buy your policy when you're young.

Any more questions, Matt?

* Start reading the link on p.181.


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/2026
The author at PointOfLaw Forum in a related article titled Adverse selection and insurance regulation writes:
    Regulation of sectors like health and auto insurance is often explained as an response to market failures arising from adverse selection, but, say Alex Tabarrok and Bryan Caplan, most of the real-world elements of regulation are hard to explain that... [Tracked on July 5, 2009 10:58 PM]
COMMENTS (30 to date)
Jonathan writes:

One of your best posts ever. Thanks for that lucid response.

Alex J. writes:

We can't have people dying for want of care in private hospitals, so we must have people dying for want of care in public hospitals.

drobviousso@gmail.com writes:

If a customer is expensive, a company might want to raise his rate so he'd be profitable to insure. As long as there's competition, though, firms have no reason to raise the rate higher.

If I understand it correctly, this is because many insurers specialize in a particular type of customer. Some pursue high cost, high risk customers. Some pursue low cost, low risk customers. If you have the second type and turn into a high risk customer, your rate might increase to force you out the door and to a high cost, high risk company. You are not longer a customer for the low cost companies' most profitable or only product, so they force you out by making themselves unattractive to the new, risky you.

At least, I understand that this is the case with car insurance. I don't know how it plays out with health insurance, especially when it's an employer and not the customer picking the company.

Matt writes:

Thorough and illuminating, thank you. (not the same Matt)

rcs writes:

RE: "I don't see why lawsuits or advertising couldn't handle it."

Is it because our courts tend to enforce contracts under the presumption that one party does not have a greater bargaining position. If I enter into an agreement with a health insurance company, and it later turns out to prove disastrous for me, then does it really matter that an argument could be made that this was a contract of adhesion? Seems like attacking a contract because it has an unconscionable term would be difficult.

So then, if we have a society in which contracts are enforced why would we expect lawsuits to undermine that policy?

Advertising? How much market power do carriers and provide? Why expect a change when profitability is not negatively affected?

BlackSheep writes:

drobviousso@gmail.com, sounds like you are talking about what economists mean by adverse selection. Lookup Bryan's previous entry:
http://econlog.econlib.org/archives/2009/07/a_closer_look_a.html

hacs writes:

There is a question more essential in that discussion: is health care coverage a right or a privilege? For me it should be institutionalized as a fundamental right. What would be the best mechanism to ensure that right is a subordinated point, despite its importance to turn that right affordable. It is pure nonsense to ensure life, liberty, and the pursuit of happiness as unalienable rights of man, and not to ensure health care coverage. Otherwise, the unalienable rights of man should be changed to liberty, and the pursuit of happiness, perhaps, only liberty.

Thomas DeMeo writes:

Poor people in the first world are doing fine primarily because of factors you argue should be eliminated.

Your first suggestion, simply to give poor people more money (or possibly a cash voucher), and leave insurance companies alone, is difficult to take seriously. Hunger is a need which can be dealt with in small, regular increments, with a highly accessible, diversified, healthy broader marketplace to draw on. Medical care has massive expense spikes and is inherently complex, with institutions which are downright hostile to cash customers.

Bill writes:

"For me it should be institutionalized as a fundamental right."

That is an interesting concept. Would this be the first time that a "positive right" is codified (i.e. a "right" where something has to be forcibly taken from one person to give it to another)? I can't think of any others, at least in the US Constitution.

Which leads to another question. If we are to start codifying positive rights, shouldn't we start with some higher order needs? Like the right to food? Or shelter? Or a living wage? If I was waving the gun of government around demanding that Smith has a right to take something that belongs to Jones, healthcare wouldn't be at the top of my list.

BlackSheep writes:

Thomas DeMeo wrote:
«Poor people in the first world are doing fine primarily because of factors you argue should be eliminated.»

Are you referring to medical licensing? How would its elimination hurt the poor?

«Your first suggestion, simply to give poor people more money (or possibly a cash voucher), and leave insurance companies alone, is difficult to take seriously. (...) Medical care has massive expense spikes and is inherently complex, with institutions which are downright hostile to cash customers.»

Why is that specific to welfare recipients? Couldn't they buy insurance like everybody else? (Or whatever institutions people decide to patronize in a free market.)

Thomas DeMeo writes:

BlackSheep- I was not referring to medical licensing, but to leaving the poor to deal with an unregulated free healthcare market.

It would not go well. Pose the theoretical question: What would happen if you just handed every poor person $10,000 per year? I'd be interested in the tone of the discussion. My guess is that there would be a significant number of libertarians who would surmise that much of the money would be squandered. Would anyone claim that no poor person would ever squander the money?

The core of the problem is that any market requires failure. You can't have capitalism without it. Some poor would screw up, some would get scammed, some would misallocate their resources. By definition, they are less likely to be successful actors in the marketplace. Does a civil society allow the people who inevitably fail to go without healthcare?

Neal W. writes:

Firstly, the poor already have plenty of access to the most important medical care of all: sanitation, adequate calories, and anti-biotics. These three things are the main culprits in extending life spans.

After that, most (but not all) health care is just a fix me up for poor food choices and lack of exercise. Something that the poor choose to partake in of their own free will.

hacs writes:

I cannot kill others, but can I let anyone die? That should be considered a kind of omission.

The Constitution is not the right place for that kind of "right" (as mentioned), but given health care coverage is not a right and "all human life is sacred and should be preserved", the right to life should be written as a prohibition to kill.

Eccentrically, the liberty in "life, liberty, and the pursuit of happiness" is not faced as only a prohibition to enslave, but much more "positively" (as well as democracy, mainly in its foreign policy).

Finally, a suggestion would be to change "life, liberty, and the pursuit of happiness" to "not to kill, not to enslave, not to...".

macquechoux writes:

Thomas DeMeo I don't believe any one seriously advocates a check or cash money to the poor for insurance. (There are not many examples of welfare that merely hands out checks to be spent willy- nilly. A voucher for insurance, yes. Just like food stamps, that can be only spent on food; in this case health insurance. I am an old man raised on a plantation deep in South Louisiana. I was around as an adult before food stamps and post food stamps. Don't sell poor people short; I believe they would do just fine with a health insurance voucher.

BlackSheep writes:

Thomas DeMeo wrote:
«I was not referring to medical licensing, but to leaving the poor to deal with an unregulated free healthcare market.»

Is it non-waivable regulation? If we assume that price equals cost, it just means those that don't value health care enough will drop out. If price is higher than cost, I suppose you could try to capture the producer surplus -- how will it work out in the long run though?

«It would not go well. Pose the theoretical question: What would happen if you just handed every poor person $10,000 per year? I'd be interested in the tone of the discussion. My guess is that there would be a significant number of libertarians who would surmise that much of the money would be squandered. Would anyone claim that no poor person would ever squander the money?»

I am not American. Surprised to know that the liberty leaning electorate has much of a voice in public policy. Either way, libertarians seem to favor voucher schemes. Milton Friedman was a big proponent of school vouchers.

«The core of the problem is that any market requires failure. You can't have capitalism without it. Some poor would screw up, some would get scammed, some would misallocate their resources. By definition, they are less likely to be successful actors in the marketplace. Does a civil society allow the people who inevitably fail to go without healthcare?»

Rich can just as easily be ripped off: consider Madoff. And sure, anyone understands what you say, which could apply such as well to banking, as with any other long-term gamble. If government wouldn't insure those firms, then they'll have an incentive to publicize to their noncomplacent customers how much they hold in liquid assets, how well regulated they are (by voluntary certification institutions), etc. People might even decide to have a light, worse case scenario insurance at the side, just in case.
Either way, economists too often brush off anarcho-communists views of a free society as absurd, but I do think, in the case of services like health care, we may see Peter Kropotkin's mutual aid societies emerge -- and there is the historical precedent when they ran 30% of the market in the 20s.

Thomas DeMeo writes:

macquechoux- I would agree that almost no one would advocate cash, but I was responding to the original posting by Bryan Caplan, and his exact words were "the smart response is simply to give poor people more money (or possibly a cash voucher), and leave insurance companies alone. "

I'll say it again; food is very different from health care. We can hand out help in small, regular, predictable doses. The poor can use the help in straightforward simple transactions that satisfy the help cycle immediately. And still there substantial fraud going on with food stamps. Healthcare is a far thornier set of issues.

Also recognize that the health insurance marketplace would be very different in a fully deregulated marketplace, where the government plays no role in defining the coverage or rules of availability or contract disclosures, or even verifies the credentials of health care providers.

BlackSheep writes:

Thomas DeMeo wrote:
«I'll say it again; food is very different from health care. We can hand out help in small, regular, predictable doses.»

Why can't they just convert the money into insurance? What about Milton Friedman's guaranteed minimum income / negative tax idea? You make X which is less than Y, then you get Y-X.

«And still there substantial fraud going on with food stamps.»

Sure, you'll always have fraud. But a smaller system should mitigate it, no?

«Also recognize that the health insurance marketplace would be very different in a fully deregulated marketplace, where the government plays no role in defining the coverage or rules of availability or contract disclosures, or even verifies the credentials of health care providers.»

I don't understand where the government gets its comparative advantage in certification. But sure, let it run a voluntary certification scheme then. Bryan is talking of regulation -- as in, you either choose the government insurance plan, or you go without insurance.

HispanicPundit writes:

One of your best posts ever and I've been reading you for a long time.

You really should post more fundamental economics like this...its a large void in the blogosphere that needs to be filled.

Benedict@Large writes:

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Max writes:

WEll, actually, I only have one problem with privatized health-care. And it doesn't necessarily belong to the poor of our world. What can we do to mitigate so-called disasters. An illness that is so expensive to fight that most families or individuals go bankrupt in the process or can't even afford the basic medical supplies. Whether the problem is caused by an accident or just by genetic chance is irrelevant, because medical costs going up to the hundred-thousands can ruin anyone who can't afford a full cover insurance.

This is the kind of problem, I see, where government subsidy can help..

BlackSheep writes:

Max wrote:
«An illness that is so expensive to fight that most families or individuals go bankrupt in the process or can't even afford the basic medical supplies.»

Sure, that's why Arnold Kling argues that under freedom, while you may have people paying in cashing for regular or small visits, people will likely organize risk pooling schemes because of the terror of being involved in a brutal car accident or giving birth to a baby that requires expensive attention.
If medical costs are too high for the average person that they feel they aren't worthy it, then government, by taxing them and subsidizing insurance policies, is not helping them, it's only trying to paternalistic guiding them.

Now, I know Bryan is a well read guy, it would be terrific to see him commenting on Kropotkin's mutual aid wrt health care. In essence, it might not seems like this more direct approach diverges much from the insurance acting as a middle layer, but it could mitigate moral hazards, and the bonds created could work out adverse selection problems, encourage prevention care, and incentive a frugal usage of the services.

Some Guy writes:

"If the problem with free-market health care is just that poor people can't afford health care,"

What if the problem is also that poor people haven't been able to afford health care (i.e. they are starting the game with a perhaps insurmountable debt)? What if the problem is also that poor people most likely won't be able to afford health care in the future?

Is the free-market answerable to those questions?


Kurbla writes:

"Does the fact that, by Caplan's own admission, a free market in health insurance would underserve sick people show a real problem with the laissez-faire approach?"

    1. The smart response to market failure varies sharply depending on what the market failure is supposed to be. If the problem with free-market health care is just that poor people can't afford health care, then the smart response is simply to give poor people more money.

Mabe, but it is still not free market.

    2. On further reflection, the fact that health insurance is too expensive for the poor is actually an important argument for deregulation of the health industry in order to bring costs down.

You cannot make lower price than free insurance non-market solutions offer.

    3. On top of all of this, almost everyone familiar with the data admits that at least in First World countries, the difference in health between rich and poor has little or nothing to do with access to medical care.

If poor have health problems due to some other reasons it doesn't mean they shouldn't be treated if treatment exist.

    4. My most controversial point: While redistribution is the most logical response to the health market's performance, I still oppose it. In the grand scheme of things, poor people in the First World are doing fine.

In the grand scheme of thing, average citizens of USA are doing even better. But you still want to improve that, right?

    For thoughtful humanitarians, the quest to improve the health care of the U.S. poor is a red herring. The crusade that deserves our support is open immigration.

We already discussed that. Immigration attracts poor, but relatively young, healthy, talented, educated, ambitious ... people from poor countries - and those in worse situation, old, sick, untalented ... stay at home. If you allow poor, but young and ambitious medical doctor from Chad to immigrate, you'll help him, but you'll harm his patients, who are even poorer, old and sick, and who might die due to lack of medical care. So, free immigration is really not the way to help the poorest.

hacs writes:

Regarding to the "studies" about racial and social differences of "IQ" (or g factor), etc., sorry, I do not discuss about Eugenics.

hacs writes:

See "Testing for Racial Differences in the Mental Ability of Young Children", Roland G. Fryer, Jr., Harvard University Society of Fellows and NBER and Steven D. Levitt, University of Chicago and American Bar Foundation, March 2006.

www.agi.harvard.edu/events/download.php?id=93

Daniel Lurker writes:

I agree with you generally, but immigrants self-select. It seems likely that the dumbest would be less likely to figure out the process for getting the US. And you rely on intelligence to explain the disparity between outcomes - I agree, but it makes me a lot more skeptical of the Shepard link you provided, since he is almost certainly brighter than the average poor person.

I think it likely that the least intelligent of the poor might be worse off than you claim, but not as bad off as people assume even the median poor person is.

michael pettengill writes:

Of course, if the problem is that you want to buy insurance against the possibility of becoming a high-risk customer, you should pick a company that lets you lock in your rate.

Can you name the insurer who offered such insurance in NH in 2003, so I wouldn't be paying almost double me premium then today?

Of course, the market in NH that merely requires insurers have the resources to pay claims under their contract terms on individual policies does offer much real choice in health insurance, and none that can be considered inexpensive compared to the cost to ERISA employers where insurance coverage is highly regulated.

Your theory sounds great, but insurers refuse to accept your reasoning when they set their rates.

Peter McCluskey writes:
If you read Ezra's post, there are actually two distinct complaints about free-market health care. The first is that insurers engage in near-fraud - rescinding coverage on flimsy pretexts

Flimsy pretexts? Have you tried filling out an application for individual health insurance? I tried that a couple of years ago, and decided to stick with the insurance I had gotten long ago via an employer partly because the efforts made via that application to avoid adverse selection created too much uncertainty about whether I had filled out the application in the manner that the insurance company intended. I don't think I could redesign the application to avoid reasonable disputes over whether it resulted in a valid contract without either increasing adverse selection or making it so complex that few people would take the time needed to understand it.

The rest of the post was quite good.

Dan Weber writes:
Have you tried filling out an application for individual health insurance? I tried that a couple of years ago, and decided to stick with the insurance I had gotten long ago via an employer partly because the efforts made via that application to avoid adverse selection created too much uncertainty about whether I had filled out the application in the manner that the insurance company intended.
I've filled out those applications, and boy are they stressful. Every doctor's visit over the past five years?

I took the time to write all that stuff down for me and my spouse so we could use it again. But I still have this haunting suspicion that I forgot something minor and that, should my kid come down with cystic fibrosis, I would find our insurance canceled because I didn't remember to tell them about acne.

I wouldn't mind some regulation that makes a standardized form or time limits on pre-existing conditions. I know they need to protect themselves against people waiting until they get sick to buy insurance, but if I get into a car wreck, I don't want to then rely on lawsuits to get the medical coverage I need. I'm going to have other things on my mind.

Cliff Styles writes:

"If the problem with free-market health care is just that poor people can't afford health care, then the smart response is simply to give poor people more money..."

The relatively free parts of our mixed system provide poor people with candy bars, fast food, cars, weapons, drugs, entertainment, cheap tshirts, an almost unlimited amount of free information, and a host of other things, all with continual technical improvement in quality and distribution and from sources all over the world.

Perhaps the smart thing to do is ask what's so different about the market for health care?

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