Market Failure by http://www.anonymousliberal.com/

Saturday, July 11, 2009

Market Failure by http://www.anonymousliberal.com/

The other day, House Minority Whip Roy Blunt (R-Mo) said the following in a radio interview:

HOST MIKE FERGUSON: What is the proper role of government, and what are the potential impacts of the direction that we’re going right now?

BLUNT: Well, you could certainly argue that government should have never have gotten in the health care business, and that might have been the best argument of all, to figure out how people could have had more access to a competitive marketplace.

Government did get into the health care business in a big way in 1965 with Medicare, and later with Medicaid, and government already distorts the marketplace.

This is a sentiment commonly expressed by conservatives and libertarians. It's also totally ridiculous, an example of an almost childish kind of magical thinking. I am as big a believer in the power of the marketplace as anyone, but the market is not the Force. Its powers cannot be harnessed to achieve all policy goals. There are very obvious limits to what the free market is capable of producing. For instance, the market will NEVER lead to the provision of goods and services that are unprofitable. That's why you can't buy an Ipod for a dollar or be chauffeured across town in a limousine for 50 cents an hour. That's why you can't by private flood insurance if you live in flood plain or by auto insurance if you're legally blind. The market won't provide these goods and services to you because doing so makes no economic sense.

For some reason, though, conservatives and libertarians like to pretend that these basic rules don't exist when it comes to health care, that if we just did away with Medicare, Medicaid, and various regulations, the market would somehow magically produce affordable medical care and health insurance for everyone, including the elderly and those with pre-existing conditions. It is difficult to overstate how divorced from reality this fantasy is.

The free market had plenty of time to work its magic prior to the passage of Medicare, but for obvious reasons, it failed to provide the elderly with any affordable options. Because elderly people require much more in the way of medical services, on average, than younger people, it makes no economic sense to offer them health insurance, at least not a premium levels that most people can afford. The result was an epidemic of uninsured elderly Americans who were being bankrupted by medical bills. That's why Medicare was necessary. It was a response to a massive market failure.

There are plenty of legitimate criticisms that can be made about how Medicare is run and how its fee-for-service model creates unhealthy cost incentives. But make no mistake, something like Medicare is necessary. The market is simply incapable of providing the elderly with affordable access to medical care. So unless you want to live in a world were most old people can't afford to see doctors, the government has to play a major role.

And, of course, the problem is not limited to the elderly. When it comes to health care, market failures are pervasive. Unlike with auto or home insurance, where the risk of loss (getting in an accident, having a fire, etc.) is relatively even from person to person, health insurance companies have an enormous amount of risk-related information at their disposal. The short and long term costs associated with most medical conditions are relatively easy to estimate. Thus, someone with juvenile diabetes or a congenital heart condition provides a very different risk profile than someone without those conditions. Factors like race, gender, income-level, and lifestyle also significantly affect one's risk profile. As a result, there will always be a large percentage of people for whom it makes no economic sense for a profit-seeking company to insure, at least at affordable premium levels.

The bottom line is that, when it comes to health care, all the market is really capable of doing is providing reasonably affordable care to the young and healthy, people for whom the risk profile is essentially random and therefore the economic model more closely resembles that of other major types of insurance (car, home, life). But a system that only covers the young and the healthy is, by definition, a failure. That's why every other industrialized country has long since adopted some sort of government insurance system. Expecting the market to provide affordable health care to all is like expecting the market to provide everyone with an affordable personal chef. It's never gonna happen.