In a recent post over at Capital Gains and Games, Andrew Samwick makes an important point about the debate over health insurance reform. As Andrew notes, many proponents of a public plan (aka public option aka government-run plan) blame the quest for profits for the ills they see in the private health insurance market.
This is one of those claims that is both true and false. What’s true, again echoing Andrew, is that the search for profits can lead to bad outcomes (e.g., efforts to cover the healthy while avoiding the sick) in our current system. That’s because we haven’t adequately addressed some key problems — most notably adverse selection — that arise in health insurance markets.
But that fact does not, of itself, demonstrate that the profit motive is itself the problem. If we can establish rules of the road that limit adverse selection (e.g., by prohibiting exclusions for pre-existing conditions), we may be able to direct the profit motive in the direction we want: finding ways to deliver greater value (i.e., better service and lower costs) to Americans with health insurance.
In Andrew’s words:
The solution to the problems in our health care sector is to make it look more like the retail sector or any other sector in which being voracious and profit-driven drives down costs. The problems of adverse selection and moral hazard in insurance markets are well known — they are what stands in the way of extending the benefits of competition to health care. Addressing them should be the central features of the reform, with a risk-adjustment mechanism to address the former and high-deductible plans to address the latter. All of this discussion of Medicare-for-all in a public option is at best premature, since we have not seen whether a competitive, private system can function under the right form of regulation.
To drive this point home, let me offer the following (admittedly imperfect) analogy: it turns out that the profit motive causes thousands of companies to emit millions upon millions of tons of carbon dioxide and other pollutants. That’s a bad thing. But it doesn’t imply that the solution is a “public option” for electricity production and gasoline refining. The right response is to establish rules that address the market failure — in this case the pollution — and then let the firms do their thing.
That’s what we should do with health insurance.