A Quick Note on Health Insurance and Free Markets

Having lived through the recent unpleasantness that was the public debate over health care reform in the US there are a lot of observations I could, and probably will, make. Number one on the list, and the focus of this post, is the bizarre level of blind faith a very large number people in the US place in the idea that just turning any economic problem over to "the market" will automatically fix it.

Before getting into why this idea is spectacularly wrong when it comes to things like health insurance, let me get something out of the way first.

1. No, I'm not a communist.

2. No, really, I'm not a communist.

3. I LIKE capitalism. It works really well for lots of things. If I got to build my very own custom-designed society from scratch and I had to figure out what system to put in place to keep its people supplied with basic commodities like food and clothing and transportation and books and televisions and little yellow rubber duckies for the bath, I'm going with the market. It's GREAT at that kind of thing.

Unfortunately, instead of treating it like the useful tool that it is and putting it to use doing things it's designed to do and then hanging it up on the wall when you're finished, there is this large segment of the US population (I'll call them... Republicans) that has decided to practically deify it and declare it's the right tool for ALL jobs economy related. And this is where we run into trouble. Because a free market *sucks* at handling insurance. Any insurance at all really... but especially something like health insurance. To illustrate why this is let's take a look at a very simple example of how market forces act on two different businesses.




The Market and Food

For example number one, let's say I sell vegetables. Now this is a fairly straight forward process. It costs me a certain amount to produce each vegetable, I need to sell enough of them at sufficient price to make up my costs and produce a suitable profit.

Now let's look at my ideal customer. Is it:

A) Uncle Joe who thinks vegetables are something you occasionally put on a hamburger, and only because Aunt Susan is making him.

B) The vegetarian buffet downtown.

I'll end the suspense and provide the answer. That would be "B". You want a customer who is going to use a LOT of your product, because the more they use the more they buy, and the more they buy, the more you make.

So what does this mean? It means I'm going to structure my business to meet the needs of people who want my product the most so that I will attract them as customers. I'm going to maintain sufficient quality of my product to make them want it, I'm going to price my product competitively so they don't choose my competition over me. In order to be able to keep those competitive prices low I'm going to maximize the efficiency of my operation to minimize my costs so I can afford to charge those lower competitive prices.

And nobody needs to force me to do any of this... the market simply pushes me to do it naturally. YAY! Hooray for markets.

The Market and Health Insurance

Now, let's say I sell health insurance. This is where things go terribly, terribly wrong.

Does it cost me a certain amount to provide each policy? No actually. How much it costs me depends almost entirely on how much the person uses it after they buy it. The more they use it, the more it costs me. So now let's go back to looking at ideal customers. Is my ideal customer:

A) Grandpa Bill, who is getting old, and has known heart issues, and has to see the doctor often for all kinds of procedures and prescriptions.

B) Cousin Mark, who is 25 years old, in perfect health, never does anything terribly physically risky, and whose only encounter with a doctor is when someone reminds him he should go in for a checkup because he hasn't been in a long time...

Option B again. Only this time for the OPPOSITE reason it was option B when I was selling vegetables. There, I wanted a customer who was going to use my product the most. Here, I want the customer who is going to use my product the least. I want the guy who will pay me for his policy, then go away and never, ever, EVER use the thing while I count his money.

So, how am I structuring my business if I'm obeying the forces of "the market"? Am I doing what I can to make my policies appealing to people who need them most? Hell no I am not. I don't want those people as customers. So is you just leave thing to the market is the market going to create an insurance industry that naturally takes care of the needs of society in this area?

NO.

It's going to create an industry that goes out of its way to AVOID meeting those needs. Because doing so is not profitable.

So why in the world would I want to turn health insurance over to the free market? So I can make sure the health insurance industry is doing everything in its power to make sure I can only get insurance when I don't really need it? Because that is what the market says is the best thing for an insurance company to do.

And that's before we even get into little things like the consequences of having the market acting on a commodity whose demand is as close to totally inelastic to pricing as it is possible to be in the real world... which can be the subject of another post some other time.