Free markets and insurance

by Henry Farrell on July 27, 2009

I’m not writing about the debates over health insurance (as, indeed, I am not writing about most policy debates), because I simply don’t think I’m informed enough to say anything very useful about the pros and cons of the specific options under discussion. Still, “this”: by Alex Tabarrok struck me as a bit odd.

In his recent post on health care and insurance Paul Krugman writes:

bq. [Insurance companies] try to avoid covering people who are actually likely to need care.

If insurance companies do avoid covering people who are “likely to need care,” this suggests that the uninsured are unhealthy. But 60% of the uninsured are in excellent health (Table 10) (In fact, overall the uninsured are only slightly less healthy than the insured).

To be sure, this doesn’t mean that being uninsured is not a problem but, contra Paul, it does mean that insurance companies would be willing to cover most of the uninsured at the same rates as the insured if the uninsured could or would pay those rates. In Paul’s story there is a market failure, in the latter story health insurance is expensive and some people don’t buy it. The difference matters because the wrong diagnosis will almost surely lead to the wrong treatment.

But the statement ‘[Insurance companies] try to avoid covering people who are actually likely to need care’ very obviously does not imply the statement ‘All uninsured people are being refused coverage because they have expensive conditions.’ The logical connection between the two implied by the ‘contra Paul’ bit is not, to put it mildly, clear to me. As a result, I am not sure what Alex’s actual point is. Is he suggesting that the incentive problems that Paul identifies are in some sense unimportant? This seems to be the most likely implication of his suggestions: if so, I would like rather more evidence than he is willing to provide, at least in this post. Or is it he believes that efforts to remedy these incentive problems would be counter-productive? Again, evidence (and indeed an actual argument to this effect) would be nice. Or is it that he believes that there _is_ some way to realign the relevant incentives and solve the underlying commitment problems and information asymmetries via pure market mechanisms? I don’t think so – but I find it impossible to discern Alex’s underlying position on this, so I may be wrong. I wrote “a couple of years ago”: about a debate between Alex and Dani Rodrik:

If your starting point is that markets are necessarily optimal, you never even get to the question that Cosma identifies of their relative efficiency for specific tasks, and thus can’t begin to participate in the debates that Dani would like to see happening. There’s no doubt in my mind that some libertarians (of the _Economist_ leader writing variety) believe this most of the time, or purport to believe this in public. I don’t think that Alex is this unsophisticated – I imagine that he would agree in principle that markets are likely to be inefficient in the real world. However, I’m not sure what kinds of empirical evidence might lead him to concede that government may be better than the market at solving a particular problem in the real world, apart perhaps from the very minimal problems of protecting private property etc where most libertarians agree that the state can play an important role. This isn’t to say that there mightn’t be be such evidence; rather that after a few years of reading his blog posts, I’m not sure what it would be (I would be very interested in finding out if he’s willing to respond), and that I think that an explicit openness to having one’s mind changed, even on very important priors, by evidence, is an important pre-requisite to real debate.

The argument that Krugman makes here seems to me to be a useful opportunity for people like Alex to respond either by mounting an unqualified defense of markets for healthcare (suggesting that Krugman, Arrow etc are flat-out wrong and saying why), or a qualified one (talking to the strengths and weaknesses of market governance for specific aspects of healthcare). Either of those could potentially be a useful exercise if it provided some opportunity for pragmatic learning and all of that good stuff. This kind of game-playing; not so much.



Donald A. Coffin 07.27.09 at 4:24 pm

I also found Tabarrok’s comment difficult to take.

Consider the universe of people without health insurance. Krugman says (and I paraphrase), “Insurance companies refuse to cover some people because of pre-existing conditions or other risk factors. This tells us that some people, who may value health insurance highly, cannot buy insurance because of the behavior of sellers.”

Tabarrok says (again, I paraphrase), “Some people, presumably relatively healthy, decline to purchase health insurance because such insurance is, for them, not a “good buy.” In fact, the health profiles of insured and of uninsured people are simmilar. Therefore, insurance companies are not the cause of people lacking helath insurance. People lack health insurance because they decline to buy it.”

Nothing in Tabarrok’s argument makes Krugman’s argument wrong. An equally plausible conclusion is that some people who are covered by employer-paid health insurance would not buy such insurance voluntarily. Taking that into account, the similarity of helath profiles among insured and uninsured tells us next-to-nothing.


chrismealy 07.27.09 at 4:36 pm

That game-playing is precisely what the Koch people are paying for.


br 07.27.09 at 4:45 pm

For evidence supporting the Tabbarok position, turn to a slightly earlier post by Tyler Cowen responding to Krugman entitled “Examples of Free Market Health Care”, click through the link to a Brian Caplin piece and then click through another link from there to a Healthcare Economist blog post entitled “Insurance Markets and Advantageous Selection”. From there you can, if you want, click through to a couple of NBER/AER papers that (apparently, since I haven’t yet read them) provide evidence that turns the Arrow adverse selection result upside down in application to healthcare. Or simply go to the Healthcare Economist post here:

Hopefully this starts to meet your call for “some opportunity for pragmatic learning and all of that good stuff” ?


tom s. 07.27.09 at 4:51 pm

I agree that he probably is arguing that “the incentive problems that Paul identifies are in some sense unimportant”. See here for a previous Alex T. post on adverse selection.


Substance McGravitas 07.27.09 at 4:52 pm

For evidence supporting the Tabbarok position

The position that the Krugman sentence has something to do with what he wrote?


Alex Tabarrok 07.27.09 at 4:58 pm


Paul was making a very big claim in his post that markets cannot provide health insurance. Thus, I take his argument that “[Insurance companies] try to avoid covering people who are actually likely to need care,” as not simply a claim that this happens sometimes (hard to disagree) but as a claim that this is a big reason why we have many uninsured people in the United States. In anycase, I have shown that the latter claim is false, most of the uninsured could be insured at going rates.



Henry 07.27.09 at 5:26 pm

Alex: when I read the (to me relevant – perhaps you are relying on another part that I have failed to read?) bit of “Paul’s post”: I see:

bq. This problem is made worse by the fact that actually paying for your health care is a loss from an insurers’ point of view — they actually refer to it as “medical costs.” This means both that insurers try to deny as many claims as possible, and that they try to avoid covering people who are actually likely to need care. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs than single-payer systems. And since there’s a widespread sense that our fellow citizens should get the care we need — not everyone agrees, but most do — this means that private insurance basically spends a lot of money on socially destructive activities.

This is a claim about (1) efficiency, and (2) ethics. I don’t see even the hint of a claim that most people in the US who don’t have health insurance don’t have it because insurance companies don’t want to pay for their expensive conditions. That seems to be your own personal contribution to the debate, unless there is some other language in the post that is somehow more suggestive? ??

And your clarification simply does not make logical sense. If I say that policy approach _x_ doesn’t work for reasons _a_ and _b_,’ and you reply ‘No! Your claims are refuted because reason _c_ is flat out wrong!’ then the problem, rather obviously, does not lie with my argument.


Alex Tabarrok 07.27.09 at 5:35 pm

Henry the title of Paul’s post is “Why markets can’t cure healthcare.” Please explain how Paul’s arguments contribute to this big claim if not in the way I suggest. If Paul is simply making the typical efficiency/inefficiency argument fine, but then modest regulations would be an appropriate response.


Alex Tabarrok 07.27.09 at 5:38 pm

Here’s another way of putting it. A very important question is why do the uninsured not have health insurance. If you read Paul’s piece I think he suggests an adverse selection/efficiency argument with which I disagree. You are saying that Paul wasn’t trying to answer this important question. If so then my bad but then what is the real point of his post?


Substance McGravitas 07.27.09 at 5:40 pm

as not simply a claim that this happens sometimes (hard to disagree)

Therefore markets can’t cure healthcare.


Tim Wilkinson 07.27.09 at 5:45 pm

Have the specifics of the policies and exclusions been taken into account? Insurance cos may be keen to avoid insuring the very-probably-sick (at an affordable premium), but they definitely like to take the premium and then not pay out.

Slightly off-topic: if genetics turns out to have strong prognostic value, the known unknowns (risk) on which all (non-fraudulent) insurance is based might be eliminated sufficiently that medical insurance will become marginal and the veil of ignorance will have to be invoked, or the poor sick allowed to die. Alternatively, eugenics a la the film Gattaca – recommended, btw – H’wood schmaltz is limited to a tolerable level.


Alex 07.27.09 at 6:38 pm

Surely, if the uninsured population are no sicker and therefore no more expensive to insure than the insured, the existence of a substantial uninsured population implies that the price of insurance should fall, unless the insurance industry is already operating with zero economic profit at the margin? And if it is, how on earth do other insurers manage in countries with lower per capita spending on health insurance? Either it’s hugely productively inefficient, or it’s a cartel.

Further, there is an obvious problem in trying to draw conclusions from the relative health or sickness of people before they get sick. It is unlikely that being insured would make you even healthier than healthy; you can’t revel in the lack of an extra heart attack. Wouldn’t it be more interesting to know what happens to insured and uninsured sick people?


jme 07.27.09 at 6:46 pm

“Paul was making a very big claim in his post that markets cannot provide health insurance.”

Alex: I think perhaps it is better (and clearer) to say that Krugman was making the claim that markets, alone, cannot provide health insurance at a level of quality and access that some people consider (perhaps for ethical reasons) a bare minimum.

I think a lot of the progressive health reformer types (myself included) tend to start from the belief that there is a minimum level/quality of health insurance that ought to be available to everyone, regardless of the wealth or health of the person. And arguments that markets “cannot provide health insurance” exist in this context.

In this sense, to say that “…health insurance is expensive and so some people [who might otherwise want it] don’t buy it…” is itself a failure of the market to provide what some believe to be a bare minimum for a “health insurance system”.


Mitchell Rowe 07.27.09 at 6:57 pm

Alex Tabarrok.
The uninsured do not have health insurancefor a number of reasons, one of these reasons is that they simply cannot afford it. Some on these people who cannot afford health insurance cannot afford it because of pre-existing medical conditions which make the insurance rates they are charged extremely high. This is a pretty hard statement to argue with Alex.



marcel 07.27.09 at 7:29 pm

Krugman writes:

“By regulation I mean the nationwide imposition of rules that would prevent insurance companies from denying coverage based on your medical history, or dropping your coverage when you get sick. This would stop insurers from gaming the system by covering only healthy people.

On the other side, individuals would also be prevented from gaming the system: Americans would be required to buy insurance even if they’re currently healthy, rather than signing up only when they need care. ”

Some of the uninsured are denied because they are unhealthy. Others are healthy and choose not to have insurance because they judge it to be too expensive, given (a) their income, and their evaluation of both (b) the risks of needing the insurance and (c) the costs in case they have an accident or their health declines. Point (a) may well relate to affordability, including working for an employer who does not pay for it. Point (c) involves a public bad – i.e., they may end up in the ER, uninsured, and the rest of us all end up paying for whatever care they get. Also, presumably they don’t get much in the way of preventive medicine, including immunizations, both of which have costs for the rest of us.

Judging from the above excerpt of Tabarrok’s post, it seems to me that he is only taking account of the first part of the Krugman excerpt that I included.

Another way of stating Krugman’s argument is that both insurance companies and individuals are playing the adverse selection game, and this raises costs for all the rest of us. Premiums are higher since the insurance companies have to price policies to cover both a customer base that is sicker than it would be if all were covered and paying, as well as the higher administrative costs that come from responding adverse selection behavior of those customers. Medical costs to cover those of the uninsured, whose access to care includes, as we’ve been hearing for many months from Republican politicians, going to the ER whenever necessary have to be paid somehow, and a major way is from cost shifting, from the uninsured to the insured.


Henry 07.27.09 at 7:42 pm

Alex – the introduction of Paul’s post:

Judging both from comments on this blog and from some of my mail, a significant number of Americans believe that the answer to our health care problems — indeed, the only answer — is to rely on the free market. Quite a few seem to believe that this view reflects the lessons of economic theory. Not so.

That seems to me to be entirely straightforward and unambiguous. A number of people suggest that the answer to our current problems is more markets, and that economic theory supports that proposition. Paul disagrees, and provides some reasons why. In other words, the question he is answering is very evidently _not_ ‘Why do we have so many uninsured Americans?’ It is ‘Does economic theory tell us that more yummy market deliciousness will solve our problems?’ Very different questions.

Also see this “more recent post”:

DeMint offered the usual line on health care: free markets will solve all. And he pushed especially hard for letting insurance companies sell across state lines, which he claimed would make insurance affordable for everyone. … California — which has more people than many countries — has a non-community-rating insurance system: … And what are the results of competition there? The answer is that insurers compete by doing their best to deny coverage to anyone who might actually need medical care. So when you hear people like DeMint — or conservative economists — preach the wonders of a market-based health care system, bear in mind that this is what it would look like: an America in which nobody who has ever had a major health problem, or had a minor health problem that for some reason bothers the insurance company, can get coverage. Believing that it would turn out otherwise is the triumph of ideology over experience.

You may not consider the unwillingness of insurance companies to provide coverage to people who need substantial amounts of medical care to be a significant problem. That’s your prerogative. But Paul clearly disagrees – and it’s quite silly to keep on maintaining that his post was about something that it didn’t talk about at all.


Fr. 07.27.09 at 8:22 pm

The most efficient closure to this debate is for one party to recognise that his argument contains a non sequitur, which I believe to be the affirmation of a disjunct in the present case: Paul says A, Alex says B, Alex thinks he has proven B and therefore concludes A is wrong.


Anon 07.27.09 at 8:40 pm

McArdle initially thought Henry was correct but thinks it through and concludes Tabarrok is right.


Rob 07.27.09 at 8:46 pm

I was under the impression that large numbers of Americans particularly vulnerable to illness of various sorts already had been taken out of the free market for healthcare precisely on the grounds that no health insurance company would cover them. Even if Tabarok’s point stood against Krugman’s argument, which it doesn’t, presumably the relative numbers of healthy uninsured and insured people are skewed by the fact that old people are insured, but by the state.


Chris 07.27.09 at 9:18 pm

Different uninsured people are uninsured for different reasons. By definition, the price that they are *willing and able* to pay for insurance is lower than the price the insurance companies collectively are willing to offer them, but there’s several variables in that inequality, so there’s several scenarios that can satisfy it. Let’s look at a few case by case:

1) The healthy. Very healthy (usually young) people whose expected future costs really are lower than the average premium. These people rationally (in the economic sense) don’t want to join the risk pool and therefore the market can’t make them. Risk pooling is to some extent built on this group implicitly subsidizing the higher-risk groups, which may be fine from a Rawlsian (etc.) perspective, but for damn sure isn’t a market mechanism. Individual mandates are designed to get this group into the pool, but since they really don’t receive as much as they’d pay, it would be an implicit tax on them.

2) The sick. People with preexisting conditions or other high risk factors who are charged much higher than average premiums, which they cannot afford. The market is already doing all it can by producing a Hayekian collective estimate of how much health insurance for them should cost, which may well be actuarially accurate. But they can’t afford that cost, so either someone else pays it or they go without. Community rating allows them to free-ride risk pools composed mostly of average-risk people, but again, it’s not a market solution. The market already produced its answer (come up with this much money or go away) and some people just want a second opinion.

I think this group is primarily what Krugman is talking about. Most people that are concerned about the health care system are either in this group already, know someone who is, are afraid of being there in the future after they develop a chronic condition (or just because of improvements in risk estimation), or think that government/society is ethically obligated to help this group.

3) The poor. People with low income (including the unemployed) who can’t afford even an average premium. Theoretically Medicaid should cover most of this group, I think, but of course Medicaid isn’t a market solution either. The market won’t help them because the market only provides for the needs of people with money. Fear, social networks, and compassion make the number of people seeking a solution for this group larger than the group itself, in the same way as for group 2. Rising unemployment focuses attention here temporarily, but even in the long term it seems likely that there will still be some low-income people.

Mandates won’t affect this group because their uninsuredness isn’t voluntary, but community rating won’t help them because they can’t afford even the community rate. They need an outright transfer subsidy.

4) The irrational. People whose estimate of their expected future costs is lower than the insurance companies’ estimate. It doesn’t even really matter whose estimate is right – either way, what the consumers in this group are willing to buy coverage for is less than the companies are willing to sell it for. This group might actually benefit from being forced to buy insurance at prevailing market rates, even though they won’t do so voluntarily; but that coercion is also not a market solution. I think this kind of voluntary uninsuredness is what Alex focuses on, but that means his criticism is really not on point to Krugman’s argument.

This group isn’t hurt (economically) by individual mandates, but they believe they are, so they could be part of the political resistance to the idea.

If you believe incomes are also set by the free market based on productivity, the real underlying reason groups 2 and 3 can’t afford health insurance is that the expected cost to keep them alive exceeds their expected productivity (counting in their other expenses like food, lodging, transportation, etc.) Therefore the efficient solution is to euthanize (or allow to die of untreated medical problems) the members of these groups who incur a tail health-care event, and conserve resources for more productive people. This is where the ethical considerations come in. The idea that people only deserve to live if they produce value equivalent to the cost of keeping them alive is, um, not widely accepted.

Also note that if you support community rating, individual mandates, and/or subsidies to keep the poor from being priced out of the market, those are things that the status quo doesn’t have, so from the perspective of the immediate political fight, you need to be on the pro-reform side if you want to see even that much change.


John 07.27.09 at 9:22 pm

I find Alex’s analysis inadequate for the task he sets it to.

Just because someone’s insured doesn’t mean they’re covered for the types of illnesses the insurance companies think they are likely to get. Also, premium levels vary. Looking at “insurance – yes or no” is a very incomplete way of evaluating whether the sick have policies which have a) higher premiums, b) lower percent of cost of illnesses paid than relatively healthy people.

And merely noting that relatively-likely-to-be-healthy people may opt out of the insurance market while relatively-likely-to-be-sick people may be forced out, resulting in both healthy and sick uninsured, in no way implies that a) adverse selection isn’t at work, or b) that applying more free markets to this situation will result in the coverage of both rltb-healthy and the rltb-sick.


Bruce Wilder 07.27.09 at 11:26 pm

The adverse selection/moral hazard problem afflicting insurance markets is an iconic problem in market price theory, a classic example of a systematic and common “market failure”.

A straightforward appreciation for the basics of economic theory in this area would lead to these general normative and policy observations:
1.) Insurance tends to be under-provided in a market economy, absent government intervention, and economic efficiency can be enhanced by increasing the provision of insurance;
2.) Government can play a useful role in overcoming market failures in insurance markets, either by public provision or regulation;
3.) Underprovision of insurance will tend to be associated with a more unequal distribution of income, as well as inefficiency expressed as under-production and under-investment.

Much of conservative and conservative libertarian political ideology centers on opposition to government provision of insurance. Much of the insistence on “small government” or “fiscal responsibility” — especially when you consider its selectiveness — seems to be a cover story for opposition to government provision of insurance. Ultimately, this may be related to a desire to protect the ability to market private wealth profitably in insurance schemes, made more profitable by the shortcomings imposed by market failures and general under-provision of insurance in the economy.

Although progressives generally advocate social security and national health care and similar schemes, the general insight that arguments over the distribution of risk and insurance (and, by implication, income, because the distribution of risk and income are intimately related), constitute a fundamental political division doesn’t seem to get much attention.

Maybe, everyone understands that a “winner-take-all” society would be one with too little insurance, and therefore poor incentives, with too many making suboptimal, variously risk-averse or desperate choices. That would be the straightforward implication of economic theory. And, one in direct contradiction to the oft-repeated conservative claim that government provision of more insurance will slow economic growth.


roy belmont 07.27.09 at 11:48 pm

One of the strongest claims to humanity’s ethical transecendence of the animal kingdom so-called is that we take care of each other, as distinct from the Darwinian crush of the left behind losers in the brutal war of all-against-all waged in the natural world.
But this is exactly that.
If you’re sick you’re screwed, unless you can heal yourself.
If you fall too far down the financial hierarchy you’ll be picked off by predators, including predacious middlemen in the health “care” industry.
This is exactly Darwinian selection but from within the economic system.


c.l. ball 07.28.09 at 12:31 am

The question is what is the question. If it is “Why are the uninsured uninsured?” then Krugman’s answer appears to be “because insurance companies deny coverage to people who are sick or are likely to be sick.” If so, we would expect that the uninsured are much sicker or likely to be than the insured. Tabarrok’s answer appears to be “because insurance is expensive.” In this case, the uninsured would not be much sicker or likely to be than the insured. The latter case was the Obama position during the primary: he said that mandates for adults would not be effective if adults could not afford the insurance. Clinton’s position was that too many healthy people didn’t buy insurance because they didn’t think they needed it. I think Obama is right. We would expect to find that the uninsured are less wealthy on average than the insured. Indeed, the data Tabarrok cites shows that the 34% of workers earning less than $20k are uninsured v. 6.7% of those earning over $40k.

The latter does not imply that “more markets” will solve the problem. If the market failure is due to the high cost of market-provided insurance, as it seems to be, then “more markets” is not likely to solve the problem alone. By the same token, any government-based solution must confront the same problem: “mandating” coverage will not help the uninsured purchase coverage. Generous subsidies would. But what is driving much of the debate is the cost of medical insurance, not its extent. And that’s the underlying problem: we’re having a healthcare debate in the US because its expensive, not because care is inadequate.


kth 07.28.09 at 1:45 am

To refute Krugman, it does not suffice to show that most of the uninsured are healthy. To refute Krugman, you must show (if you can) that the unhealthy are insured at just as high of a rate as the healthy are.

I.e., not that the uninsured are disproportionately unhealthy, but that the unhealthy are disproportionately uninsured.

Moreover, the large number of healthy, uninsured-by-choice isn’t a refutation of Krugman but the flip-side of his argument.


Tim Wilkinson 07.28.09 at 1:49 am

Both Tabarrok and McArdle (ref @18) refer to adverse selection but isn’t that usually meant to signify the opposite phenomenon – i.e. those who are more at risk being more likely to take out insurance (McArdle does indeed gloss it that way before changing the subject)? If so it’s not really the issue here except very tenuously, or as a countervailing factor. I suppose it can be used the other way round but if so it’s perhaps a bit confusing – it seems to have been for McArdle anyway. It would also imply that assymetric knowledge now favours the insurer – it definitely soon will once genetic prognostication is better developed and testing becomes mandatory…perfect price discrimination in insurance markets, anyone? (Sorry to repeat myself, but it is a real issue for the nearish future.)

More importantly, the use of stats is pretty suspect.

McArdle says the percentage of the uninsured* who are in “fair” or “poor” health really isn’t much larger than the percentage of the insured in those categories: 10.3% of the uninsured, versus 8.4% of the insured. [the asterisk appears to lead nowhere].
That’s just wrong (or rather not known to be right). The 8.4 figure refers to the total nonelderly adult population, including both insured and uninsured – and in particular those on public insurance who are by far the least healthy according to these data. (A bit of simple arithmetic – using the rounded data – gives a figure of 7.99% for ‘all insured’ – but McArdle clearly didn’t know that).

And Tabarrok gives us – 60% of the uninsured are in excellent health as though that alone tells us anything useful. Not much comfort for the other 20m people, is it. And it’s not ‘excellent’, but ‘excellent or very good’ – the latter presumably being significantly unhealthier.

I’m not sure that table 10, even with the arithmetic which giving Tabarrok the benefit of the doubt we assume was applied – really shows that overall the uninsured are only slightly less healthy than the insured, either. It certainly can do so only given some clear idea of what counts as ‘slightly’. And even then, why are the publicly insured being counted with the private?

(As an aside, a survey asking for subjective assessment of one’s own health (if that’s what was done) has some obvious problems relating to expectations and adaptation levels, which may or may not have been corrected for somehow, but I suppose one takes the rough with the smooth in preference to eternal stat wars?)

And if any conclusions are supposed to be derived from such data, then among other factors like traditional adverse selection, the effects on health of having had insurance in the past would have to be factored in too.

Anyway, a quick bit of sheetspreading (and a slightly-slower-than-I-had-bargained-for bit of formatting) produced this derived data, probably more useful for these purposes despite some rounding issues:

. . . . . . .employer . indiv . . .m/aid. . . other. . . none
. . . . . . . . . . . . . . . . . . . . . . . public
% dist by coverage type
. . . . . . . . . . . .
Exc/VG . . . 69.80% . . 6.80% . . . 4.50% . . 1.50% . . 17.40%
Good . . . . 58.20% . . 4.80% . . . 9.10% . . 3.20% . . 24.80%
Fair/Poor. . 36.30% . . 3.70% . . .25.80% . . 11.90% . . 22.20%
. . . . . . . . . . . .
Exc/VG . . 126.8266 . .12.3556 . . 8.1765 . . 2.7255 . . 31.6158
Good . . . .33.6396 . . 2.7744 . . 5.2598 . . 1.8496 . . 14.3344
Fair/Poor. . 7.9497 . . 0.8103 . . 5.6502 . . 2.6061 . . .4.8618
All . . . .168.4159 . .15.9403 . .19.0865 . . 7.1812 . . 50.8120
% dist by health status
. . . . . . . . . . . .
Exc/VG . . . 75.31% . . .77.51% .. 42.84% . . 37.95% . . 62.22%
Good . . . . 19.97% . . .17.40% .. 27.56% . . 25.76% . . 28.21%
Fair/Poor . . 4.72% . . . 5.08% .. 29.60% . . 36.29% . . .9.57%
All . . . . 100.00% . . 100.00% . 100.00% . .100.00% . .100.00%

Perhaps more useful groupings below. I suggest looking at the third block and comparing ‘private’ to ‘none’ (or even to ‘public + none’), bearing in mind that ‘Good’ presumably actually stands for ‘moderately unhealthy’, as well as potential self-assessment issues mentioned above:

. . . . . . .all. . . . all . . . private. . public. . . none
. . . . . . . . . . . . insured . . . . . . + none
% dist by coverage type
. . . . . . . . . . . .
Exc/VG . . . 100.00%. . 82.60%. . 78.10%. . . 23.40%. . .17.40%
Good . . . . 100.10%. . 75.30%. . 66.20%. . . 37.10%. . .24.80%
Fair/Poor. . .99.90%. . 77.70%. . 51.90%. . . 59.90%. . .22.20%
. . . . . . . . . . . .
Exc/VG . . . 181.7. . .150.0842. .141.9077. . 42.5178. . 31.6158
Good . . . . .57.8. . . 43.5234. . 38.2636. . 21.4438. . 14.3344
Fair/Poor. . .21.9. . . 17.0163. . 11.3661. . 13.1181. . .4.8618
All . . . . .261.4. . .210.6239. .191.5374. . 77.0797. . 50.8120
% dist by health status
. . . . . . . . . . . .
Exc/VG . . . .69.51%. . 71.26%. . . 74.09%. . .55.16%. . 62.22%
Good . . . . .22.11%. . 20.66%. . . 19.98%. . .27.82%. . 28.21%
Fair/Poor . . .8.38%. . .8.08%. . . .5.93%. . .17.02%. . .9.57%
All . . . . .100.00%. .100.00%. . .100.00%. . 100.00%. .100.00%

(BTW the word ‘spreadsheeting’ does not, contrary to initial perception, occur above.)


Tim Wilkinson 07.28.09 at 1:56 am

Hmm, looked OK in preview but server decided to insert paragraph marks between successive monodots and therefore terminate [code] tags prematurely. And I actually can, but for some reason rarely do, spell asymmetry correctly.


Mike Huben 07.28.09 at 2:03 am

Tabarrok has two major problems.

First, his gross logical error of reasoning with a converse: If insurance companies do avoid covering people who are “likely to need care,” this suggests that the uninsured are unhealthy. Numerous people have shown by real world example why this is unsound.

But the second, and far worse problem is the libertarian ideological viewpoint that won’t let him understand Krugman’s liberal statement.

As a liberal, Krugman looks at the desired results: high quality health care for the nation as a whole. The kind of statistics that would let us compete with the other industrialized nations in terms of costs and outcomes. As a liberal, Krugman is willing to employ diverse methods to achieve this goal: whatever tools will work best singly or in combination. And if a solution isn’t working well, he’s willing to try another. This is the classical liberal pragmatism that has been employed in the US since even before its founding.

As a libertarian ideologue, Tabarrok cares less about what the result is, and more about how the result is achieved. Hence his incessant focus on markets and rejection of government. A perfectly efficient market result could have radically different health results for rich and poor, and libertarians would find little reason to criticize it. Markets enfranchise one dollar as one vote, which grossly disenfranchises the poor compared to the liberal one person one vote system.

Libertarians confuse the means (markets) with the desired ends (in this case universal health of the populace — not any particular health care program.) If we let their hired propagandists keep misdirecting us away from what we want (good health care for all) with incessant claims that markets will give us everything we want AND A PONY, then we fall prey to the great conservative goal: preserving the rights of people who own property at the cost of decent lives for everyone else in the world.


MQ 07.28.09 at 2:18 am

cross-posted from McArdleland, and probably way too long, but not covered above. Refers to the data that Tabarrok cites in Table 10 here .

First, this is junky data, although you’d have to be pretty deep into health care wonkery to know that. The CPS is not a health care survey, even though it’s frequently used because it’s easy access and big enough to give state results. The question asking for self-reported “health status — excellent/good-fair/poor” is not a precise indicator of health status. (The insurance questions on the CPS are also way too crude and give answers that are significantly off from almost every specialized health care survey).

But anyway, taking the data at face value, just look at the actual numbers in the chart. Almost 70 percent of the total population says they are in excellent/very good health. So taking yourself out of the top “excellent/very good” category is an indicator that you are in poor health — in the bottom 30 percent of the non-elderly population in terms of health status. These are the people who cost money (the healthiest 50-60 percent of the nonelderly population has basically no costs).

This bottom 30 percent are a lot, not a little, more likely to be uninsured — specifically, the uninsurance rate among the bottom 30 percent in self-identified health status is 18.3 percent, while it’s 13 percent among the top 70 percent. That means that people in the bottom two categories for health status are a whopping 40 percent more likely to be uninsured than people in the most healthy 70 percent! Not a small difference.

Megan obscures this by just glancing at the fair/poor category, where the populations are so small that the absolute percentage point differences don’t look so great. The true percentage differences are a little smaller when you look at only this category, but not that much smaller — the “fair/poor” people have an uninsurance rate of 17.4 percent, which is still fully one-third higher than the healthy folks. (The slight difference may be because of William’s point if you’re actively sick, which this category probably is, you get signed up for Medicaid at the hospital).

Then add on to that that these differences have to be adjusted for the large chunk of people who work at big/prosperous or public sector firms and therefore can get covered by good insurance even when unhealthy. My guess is that the gap would be much greater among those working for smaller firms or the self-employed. You also have to adjust for the flaws in using a 1/0 indicator of insurance, which is all that the CPS gives you. What is needed is a measure of real coverage, not insurance status. The individual insurance market is notorious for selling policies that count as “insurance” but don’t really cover you when you get sick, because of pre-existing condition clauses, annual or treatment limits, or a refusal to renew when you get sick. This is well known in health policy circles.

Anyway, all of this is conflated about nine different ways because income and health status are so deeply connected, and health status also gives you a greater incentive to sign up for insurance. So you have biases going both ways. But there is basically no evidence in this simple tabulation that Krugman is wrong.


MQ 07.28.09 at 2:21 am

Whoops, Tim Wilkinson got to what looks like my point earlier in comment 26 above, but I think I sort of explicated it more simply than he did.


Joshua Holmes 07.28.09 at 4:19 am

The US is not going to get a well-designed public health care system. Although I oppose such a system on ideological grounds, I accept that it might produce better outcomes than the current system. I hasten to add I’m not ideologically committed to the system we have, either, as it’s nothing like a free market.

Instead, we’re going to get a really poorly-designed public health care system, which will be substantially worse than what we’ve got. We’re going to keep the system that we have, subsidized a little more around the edges, with heavily-regulated-and-mandated employer-connected insurance as the continued norm. Efficiency and monetary savings are extremely unlikely, as every CBO and OMB study has hammered away at.

If I thought a good public system was in the offering, I think it might be worth supporting it, in order to stave off the bad. But if the choice is between the current system and a bad public one, well, that choice is ridiculously easy.


Ceri B. 07.28.09 at 10:55 am

One of the stock ploys is to argue that we don’t now have a free market in X (in this case, insurance) and therefore can’t judge what would happen if we seriously committed to one. The first part of that is true, too. But even in regulated markets there are degrees of freedom and spheres of action that are largely unconstrained by government action, and we can see what actually existing companies are now doing with their freedom in those areas, and say “We could expect more of the same.”

Industrial-strength recision is not a thing forced on insurers by the state. Nothing in the structure of insurance regulations compels firms to pursue every last opportunity to deny every scrap of coverage or simply negate as many policies as possible. (Someone’s going to bring up the whole “fiduciary responsibility” thing. Just for starters, a business that really felt it was being constrained unwisely by that could challenge it in court or seek legislation or just make a PR push, even while abiding by it in the short term. But businesses use it as cover, not as something they actually have any problem with.) And it’s in the area of greatest discretion that we find insurers trying to make most money by providing least coverage.

So the advocates of freeing insurers have, at a minimum, an obligation to demonstrate why these firms, that ones that do exist and would be selling policies in a freer market, would suddenly retract the views they’ve been expressing in testimony to Congress. They say they want to keep screwing us. I believe them. People who don’t need to explain what they know that the insurers themselves either don’t know or are hiding.


ogmb 07.28.09 at 11:08 am

Shorter Tabarrok: If 90% of the population are right-handed and 50% of them hold insurance, seeing 80% of the uninsured be right-handed shows (oops, “suggests”) that insurances don’t discriminate against left-handers. Black is white and P(A|B) ≡ P(B|A).

And that’s the intelligent part of his post. Before he starts ignoring the little fact that ceteris paribus those who suffer from poor health will demand more healthcare than those in excellent health. (That’s what the word “need” in “likely to need care” means. Need, when endowed with purchasing power, creates demand. Econ 1.) So not only doesn’t he understand conditional probabilities, can’t do the numbers (21% of those in poor health uninsured vs. 15% in the general population makes for a 40% difference), he also can’t apply simple supply and demand to realize that absent major differences in purchasing power by health class (refuted in Table 15) the only explanation why we see significant less insurance among the poor/fair category than in the general population is that insurers price them out of the market. Iow, they “try to avoid” them.



dsquared 07.29.09 at 7:38 am

I must say I find it quite hard to come up with a reading of Alex’s post under which it isn’t an example of the fallacy OGMB identifies above. The key categories in Tim’s crosstab which haven’t been discussed, by the way, are the fair/poor health people with Medicare/aid or employer provided health insurance. These are people who almost certainly couldn’t get health insurance on an individual basis from an insurer and are relying on a non-market (or at least, non-spot market) solution.

Finally, the term “adverse selection” refers to a problem of information asymmetry. When talking about an insurer’s willingness to provide insurance to the already sick, no such asymmetry exists.


ogmb 07.29.09 at 8:25 am

In #33, “15% in the general population” s.r. “15% in the excellent/very good health category”.

Re #34, the asymmetry exists if insurers price-discriminate by demographic factors. If you belong to a demographic that, according to the insurance’s reckoning, will require high levels of healthcare due to poor habits, it doesn’t matter that you yourself follow a healthy lifestyle. You will still be charged at the poor-habits price. That’s a simple lemons market.

Of course Tabarrok also misinterprets Krugman’s claim that “health care can’t be marketed like bread or TVs” as a story of market failure in health insurance. Healthcare is not health insurance, and the inability to reach a social goal with purely private ordering is quite distinct from market failure. We don’t consider the legal system a market failure just because we decided it is better run as a public institution, but we would consider an efficiently run health insurance market a social failure if it doesn’t approach the social goals of universal coverage and affordability.


Chris 07.30.09 at 8:35 pm

we would consider an efficiently run health insurance market a social failure if it doesn’t approach the social goals of universal coverage and affordability.

But those goals aren’t ones that a market can sensibly be expected to meet. A market only serves those who come to market with something to trade, and it only serves them to the extent of the value they bring to it. If you want some members of society to be able to receive health care whose market value exceeds their economic productivity, you want something that no market can possibly provide because providing that thing is not the sort of thing that markets do. The market solution to a poor person with cancer is euthanasia – the cost of keeping them alive exceeds the value of doing so.

You can reduce the need for outright redistribution to some extent by describing health care as a matter of insurance and paying today for a right to treatment tomorrow, hiding the division between people who need expensive treatment and people who don’t behind a veil of ignorance. (They all pay, and then find out who needs more treatment and who needs less.) But insurance companies have proven rather good at tearing apart this veil and separating the different groups from each other to the extent that many members of the high-risk group can’t afford to pay for even the actuarial prediction of how much health care they will need. (They’ve also gotten rather good at selling the expectation of coverage without, technically, in the fine print, selling the actual coverage. This is obviously profitable, but I don’t think anyone even on the right would describe it as socially desirable.)

Ultimately, either you believe that all members of society have a moral right to draw on the public purse (i.e. draw on all other members of society, willing and otherwise, via the tax mechanism) for some level of legitimate health care expenses, or you don’t. In the former case, markets are obviously going to be inadequate to distribute the massive financial burden of very bad health events over broader shoulders than the patient’s (since that goal cannot be accomplished by an exchange of equal values), and in the latter, markets can do just fine at providing individuals with however much health care they can individually afford, so if you think that’s all they should get, then there is no problem.

Tabarrok, oddly for an otherwise intelligent person who is presumably aware that Krugman is a liberal, doesn’t perceive the essentially *normative* disagreement underlying the different points of view he and Krugman bring to the problem. Whether markets are good enough at delivering health care depends greatly on how you measure good, and how good is good enough.


Chris 07.30.09 at 8:40 pm

P.S. In my first paragraph above, the last sentence should say “exceeds the *economic* value of doing so”. The debate on this issue is, of course, driven partially by the idea that non-economic values should take precedence in cases like this and that’s why (in the liberal view) the market’s solution to people who can’t afford the care they need (i.e. they don’t get it) is inadequate.


ogmb 07.31.09 at 10:18 am

But those goals aren’t ones that a market can sensibly be expected to meet.

You’re re-stating my (and Krugman’s) point. Insurances have an issue with market failure based on asymmetric information, but, as dsquared points out, that issue only arises as long as the insurances cannot divine a client’s future need for healthcare. But insurances have gotten pretty good at forecasting by now, and to the extent that they can price-discriminate on the expected expenditure stream the health insurance market should approach efficiency for all those who participate in it, at least on that count. (Public health also creates an externality problem, but let’s ignore that for a second.) But such a market will be nowhere near universal, especially because the fee structure doesn’t come close to meeting our universal affordability goal. Krugman makes exactly that point but Tabarrok in typical econbot mode cannot distinguish between this kind of failure and the textbook efficiency-driven market failure, hence his ongoing argument that oh but health insurance could be efficient if’n for all that regulation. Except it would be like health insurance for pets: a luxury good for those who can afford it, with the alternative of euthanasia for those who can’t.

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