Paul Krugman writes:
Um, economists have known for 45 years — ever since Kenneth Arrow’s seminal paper — that the standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.
Adverse selection is ostensibly problematic in that markets cannot accurately assess individual behavior, so an average charge is imposed on everyone in a given market where adverse selection is present. Because of the information uncertainty, only those who stand to benefit in excess of this average (i.e., the costliest for which to provide the good or service) remain, as the lower cost consumers exit the market.
Paul's concern is with health care, so his argument is that with insurance the healthy exit the market (the average premium exceeds what they expect to benefit in terms of health care consumption), leaving only the unhealthy to consume health care for which the insurance company is financially liable. This drives up insurance premiums, thus driving out the marginally healthy. Consequently, health insurance premiums have to rise further, again driving out the next marginal block of unhealthy people. And so on until there is no longer a health insurance market.
As Pete Boettke and I discussed in our paper on the Akerlof "lemons" model as part of this volume, this neoclassical view of markets removes any semblance of market competition. MARKETS EXIST BECAUSE OF INFORMATION PROBLEMS, NOT DESPITE THEM.
Even still, if Krugman's concern regarding health care is really about adverse selection, he should certainly be a proud and vocal proponent of genetic testing of everyone, and at least of those seeking to insure against medical problems.
I doubt that this is Paul's actual concern.
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