Tuesday, May 20, 2003

Intervention Revisited

Heading over to the Sideshow I re-read what I had recently written about a liberal view of state intervention in the economy. I noticed that I had left one major point of necessary intervention in the marketplace - insurance markets - in particular health and social/pension insurance.

We tend to see market failure in health insurance markets because, absent regulation, insurers will expensive coverage to sick/old patients and cheap coverage to young/healthy patients. Or, another way to look at this is to realize that once you get sick - say, coming down with MS, come policy renewal time they'll raise your rates too high and no more insurance for you. Now, in theory everyone could choose to enter into a lifetime contract for health insurance when young and healthy, and lock yourself into actuarially appropriate rates before you're diagnosed with the chronic disease. However, as we see repeatedly such contracts depend on the long-term solvency of any particular business entity - so, if the company goes bankrupt you're S.O.L.

It's important to note that even if, say, pre-existing conditions are not allowed to affect rates, insurance companies can segment the market by offering different rates and plans, knowing full well which group (sick/old vs. young/healthy) will purchase which policy. This is increasingly becoming a problem for businesses that offer multiple plans to their employees - the full range from full-service POS plans to cheap high co-payment and high nuisance HMO plans. Young healthy patients purchase the cheap HMO plans, and old sick patients purchase the full coverage ones - causing the prices of the full coverage ones to skyrocket as only risky - and expensive - patients purchase them. Because of this, it's quite possible such plans will cease to be offered at all, and then no one will have comprehensive coverage. This is why some of us laugh at the idea that there should be so much "choice" for insurance plans - such choice segments the risk pool, and tends to leave only the crappy coverage standing.

Insurance markets are filled with such problems. But, even without that the question remains - what do we do about sick and dying old people who are unable to pay for insurance? We either let them die or we take care of it as a society. If we know we're going to take care of them, we should make sure to try and make them pay for it before the problem arises. I believe we call that Medicare.