Laissez Faire Health Insurance is a Disaster

Freer markets aren't always the solution

Every so often, someone on the Right will claim that what we really need is "Free Market Healthcare.” How deeply unserious this position is becomes very apparent when you recognize how wildly dysfunctional healthcare markets without government intervention are.

The need for health services is very asymmetrically distributed across the population. While the average person may need to see the doctor a few times throughout the year, most spending goes to treating the very medical afflictions of a fraction of the population. For this reason, insurance is essential. 

Yet naturally, insurance markets in healthcare don't work.

Under a free market, every plan has different premiums, copays, deductibles, levels of coverage, and provider networks. They are also listed on separate websites and require individuals to first do a risk assessment before they can actually get a quote. So, even if a person was to attempt the gargantuan task of comparing all the nuances of the different health insurance policies across all their long list of variables, they would have to get assessed by each insurer before they could even know the prices!

This inordinate amount of complexity makes it nearly impossible for consumers to rationally pick the best plan for them, thereby giving little incentive for insurers to provide a better product for consumers. Even in systems that reduce the number of variables study after study after study has confirmed that when faced with a menu of options, consumers often choose objectively bad plans.

Furthermore, Premiums are naturally based on risk, meaning that women, the elderly, and those with preexisting conditions have to pay more; in the case of the latter, this price discrimination is so intense as to render insurance many times entirely unaffordable. To the extent that perfect risk rating isn't possible, a new failure emerges, adverse selection. Insurers sink or swim based on how successful they are in poaching healthy patients, not actually how good they are at providing a competitive product. Finally, as I have previously covered, consumers and insurers are incapable of setting prices at a reasonable level due to a variety of market failures (read more about that HERE). 

The case is open and shut; leaving the market to its own devices DOES NOT WORK in healthcare. While the Free Market types may be right that there are many regulations that harm our healthcare system, it is entirely possible for these harmful interventions to be ceased without us embracing a health insurance system that leaves those most in need to die.