- Adverse selection (pp. 340-344 in Stiglitz 4e, pp.227+ in McPake) -- The adverse selection issue in health insurance is one of the fundamental problems that our market-based system cannot address: some people choose to go without health insurance, and these people tend to be younger and healthier (Rhoades and Cohen, 2006), driving up the average risk of the pool of people left to insure, driving up premiums. This becomes a "death spiral" (or vicious cycle) as insurers keep raising premiums in order to keep profitability, creating more and more people choosing to walk away from the pool, as their view of the risk-benefit ratio in having insurance is not in their best interest anymore. So in effect, the unhealthiest people are the ones most desperate to pay (they have the highest marginal utility) but will be punished the most for being unhealthy by those making the decision (mostly young, healthy people) to go without insurance. Obviously, people who can no longer afford the premiums will go on government-provided insurance, which is why more of our current health care system bills are paid by the government than by the private insurance sector (46% govt, 42% private, 12% out-of-pocket). In addition, the government has the highest-risk individuals already subsidized: the elderly. So basically when insurance companies are able to purge high-risk individuals, they lower their average costs, boosting profits; to the expense of the rest of us, who have to make up for it through tax revenues. When they aren't, they raise premiums. This problem is fixed by making the risk pool larger. This is why conservatives who ask, "How is adding more people to the system going to make it cheaper?" are dumb. The majority of those added will pay in to the pool more than they remove through payments for service.
- Information/Search Problem -- Imperfect and/or incomplete information is available to consumers of health care services. Consider a typical person with chest pains: i) they don't know what the problem is (whether a heart attack or simple muscle cramps), ii) thus they don't know how to treat that problem, iii) thus they don't know what it will cost, iv) thus they can't call various service providers to compare costs and drive competition to keep prices low. Also, unlike other goods and services you buy, with health care you can't control the timing or the degree/expense of the service at all. If my car breaks down, or I'm involved in an accident, I have options other than immediately getting it completely fixed. If I need a heart transplant, I don't, and I have no idea when it will happen or how much it will cost. This means that consumers of the service (health care) have imperfect information, and thus cannot make rational self-interested decisions...which is why people buy health care insurance. But the problem then becomes that an insurance company agent is trying to manage your health care to keep the company's bottom line healthy, rather than looking out for your best interests. And this is where things like adverse selection come in to play: if you are costing the insurer more with payments to providers than you are paying in with premiums, they'll try to get rid of you. Which leads to...
- Regulation/Consumer protection -- In an ideal world, insurance companies would never do terrible things like deny coverage or drop your coverage during a sickness. This is called a "rescission" of insurance. Conservative economists may claim, for example, that doing that would hurt the company's reputation, which in turn would hurt its bottom line, so that companies would never behave this way. But this flies in the face of the facts: insurers commonly drop the sickest patients during the most expensive part of their care (e.g., cancer patients during chemo and surgery). Although these patients only represent a small sliver of the insurance pool, they represent the largest marginal cost for the insurer to bear, which is why they are dropped. This is obviously not fair to the insured, who buy plans for the exact reason that they may need them, and not fair for insurers, who aren't forced to play on a level field, and can thus make giant profits.
- Competition -- Conservatives want to exacerbate the problem of letting insurance companies "get away with" even more injustices, in an indirect way, by opening up insurance plan to "interstate competition". Well...competition sounds great...right? But how does it work when insurers have anti-trust exemptions and basic monopolies? It doesn't. As it stands, only the states have laws regulating insurance, and some states go further than others in protecting consumers and preventing egregious behavior by the corporations. It probably comes as no surprise that once certain states made it legal for credit card companies to fleece consumers, all the credit card companies moved their corporate HQ there. The exact same thing will happen with "interstate competition": it will be a race to the bottom. Both the GAO and CBO have looked at this and found that if all the insurance companies basically moved to the state that required the least coverage benefits and gave the most freedom to health insurance companies to fleece consumers, it would save at most 5%. Here's the funny thing: the only way to truly have a national health insurance program that competes across state lines, pools all its people together and has low administrative costs and is not-for-profit is to have Medicare. And doctors and hospitals complain because the reimbursements from Medicare are too low in some areas (but too high in others).
- prevent insurers from excluding people from their pool based on medical history
- require everyone to buy insurance
- provide subsidies to those who cannot afford insurance
"...the pieces of reform are interdependent. You can’t do one or two pieces on their own. Ban discrimination based on medical history, and you get an adverse-selection death spiral, in which healthy people opt out and premiums soar. You can’t solve that without both requiring that healthy people buy insurance and helping those with lower incomes afford the premiums. In short, you basically end up with the Senate bill.Some people are paying attention, and are cognizant of the reality of the situation. Others live in an ideological bubble that requires them to believe that certain things be true, and facts/reality be damned.
Hasn’t anyone been paying attention here?"
So these issues explain why you can't apply the principles of the Basic Competitive Model in a free market to health insurance. And therefore, all of the good things that competition and free markets provide simply don't apply to health insurance. And that's why the government has to play such a major role in regulating and maintaining health insurance markets, and why the government ends up paying out more than the private system to keep people insured.
...So explain why we should allow private companies to game the system by letting them just insure the young and healthy for a huge profit while shedding millions of "unprofitable" customers, making the government insure the poor and old at a huge loss?
