Health Economics 101
By Paul Krugman
The New York Times
November 14, 2005
Several readers have asked me a good question: we rely on free markets to deliver most goods and services, so why shouldn’t we do the same thing for health care? Some correspondents were belligerent, others honestly curious.
Either way, they deserve an answer.
It comes down to three things: risk, selection and social justice.
…about risk: in any given year, a small fraction of the population accounts for the bulk of medical expenses.
…private markets for health insurance suffer from a severe case of the economic problem known as “adverse selection,” in which bad risks drive out good.
Citizens of advanced countries – the United States included – don’t believe that their fellow citizens should be denied essential health care because they can’t afford it. And this belief in social justice gets translated into action, however imperfectly. …we have a huge private health care bureaucracy whose main purpose is, in effect, to pass the buck to taxpayers.
I’m not an opponent of markets. On the contrary, I’ve spent a lot of my career defending their virtues. But the fact is that the free market doesn’t work for health insurance, and never did. All we ever had was a patchwork, semiprivate system supported by large government subsidies.
That system is now failing. And a rigid belief that markets are always superior to government programs – a belief that ignores basic economics as well as experience – stands in the way of rational thinking about what should replace it.
http://select.nytimes.com/2005/11/14/opinion/14krugman.html?hp
Comment: When 60% of health care in the United States is already funded through the tax system, how can we even pretend that we have a free market in health care? Much of the free market rhetoric is directed toward our employer-sponsored plans, but these plans fund only one-fifth of health care in America, and employer selected plans don’t manifest the characteristics of free markets anyway.
Now the advocates of consumer-directed health care are foisting off on us the “free market choices” rhetoric. But there is no choice with the 80% of health care that is consumed by 20% of our population. People who need a lot of care don’t have the option of shopping for plans with low premiums since those plans won’t begin to provide them with financial security.
By pretending that we have a free market in health care, we tolerate the perpetuation of the tragic inequities that characterize our system. As one small example of these inequities, only in the United States would Wal-Mart employees without health insurance be forced to help purchase coverage for retired millionaires (through Medicare payroll taxes).
Bon fide risk pooling, elimination of adverse selection, and health care justice will never be products of the free market. We need our own public national health insurance program; but that won’t happen until we decide that the people who we choose to run our government are people who actually believe in government.