Cowen is in a provocative mood today, in a post on adverse selection and
health insurance:
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.
Scream all you want, but that is not inefficient per se. Covering
these people, by the use of government policy, is a transfer, not an efficiency
improvement.
Cowen’s commenters do find inefficiencies in the amount of work that insurance
companies do to sort insureds into ever-finer buckets. But my main issue with
Cowen here is that as the world becomes more dynamic, the chances of someone
having the same health insurance for years or decades becomes smaller and smaller.
And finite health insurance is no health insurance at all – because the
whole point of health insurance is that it insures you against unexpected large
future medical expenses. But if you incur some such expenses and then lose your
health insurance, then at that point you become de facto uninsurable,
and you end up bearing all your large future medical expenses yourself anyway.
In other words, what you thought was health insurance failed to insure you against
your large future medical expenses.
Now the correct economic term for this might not be "adverse selection".
But it’s certainly a suboptimal way of providing health care.
Health insurance is currently an insane system for all participants.
A healthy insured person will pay a greater overall cost for minimal treatment and preventative care (via co-pays + deductibles + premiums) than they would pay to fund their own health care. In that statement, I’ll assume that treatments for non-catastrophic illnesses or conditions to maintain quality-of-life status would probably skew to economically-efficient choices when the recipient is directly responsible for all costs. (The current system encourages abuse and inefficiency by the insured – healthy people insist on the best care that money can provide, even when much of the cost will be wasted on pricey treatments that have a negligible effect on the person’s long term health) Also, what’s the point of being insured for total-care if insurers will out-of-hand reject pioneering treatments (which possibly could be an investment toward lower future costs), and then engage in all the paperwork and billing hell that follows? Insurers enjoy the benefit of efficient and effective health care treatments when they’re not willing to be a part of the process that determines whether the treatments are efficient or effective in the first place. The costs of this rest on the insured, who are for practical purposes not insured in these cases (and who don’t find out until they’re strapped to a gurney).
An unhealthy insured person will be screwed, as mentioned above, when there is any transition of providers that legally allows an old insurer to scurry away and a new insurer to put up a brick wall.
And an uninsured person is as financially lucky as their current state of health. Most people could be very, very lucky without health insurance and a few select people would be very, very screwed. (same as with insurance)
I’d like to know, in numbers and surveys, what quality-of-life difference exists between the insured and the uninsured, so that we can see exactly what we’re paying for. Does our current health insurance economy raise life expectancy or patient comfort by a significant amount? Or are we paying tens or hundreds of thousands of dollars extra per insured individual to gain an extra year or two of health and keep the pharma-insurance cartel rich?