Um, economists have known for 45 years â€” ever since Kenneth Arrow’s seminal paper â€” 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.
A few brief comments in response to The Exalted One (in his own mind, anyways):
- Krugman falls victim to the Nirvana fallacy. Any analysis of alternative institutions and organizations for delivering a particular good or service must be a comparative one. It could be that, as Churchill said of democracy, that “the free market is the worst system of health care, except for all others that have been tried from time to time.” You need to compare real world alternatives. Just shouting “market failure” (i.e., moral hazard, adverse selection) does not end the argument. It is only the beginning. You need to evaluate alternatives–especially since moral hazard and adverse selection, if they exist, are endemic to the nature of the good or service, and hence are likely to affect alternative means of supplying health care. These problems inhere in information asymmetries, and changing the system from “free market” to some alternative does not eliminate those information problems. It just deals with them in different ways. And those different ways can be inferior. As Krugman well knows, since he has written about it in his books on trade, there can be government failures too. An adult discussion of the issue should be about what set of institutions most effectively deals with the information problems inherent in health care. A ritual invocation of market failure with no follow up on the susceptibility of alternative systems to failures that could be more severe is the sign of a lazy mind, or of a partisan hack wanting to circumvent debate.
- Health care economists are skeptical that adverse selection explains the problems in the health care market. Krugman invokes Arrow, who wrote decades ago, and in a theoretical, general way. Arrow’s work started an immense literature on insurance generally, and health insurance in particular. And that literature does not strongly support the claim that the adverse selection model is the best explanation for the way the health care market has evolved, and the apparent dysfunctions therein.
- Relatedly, many of the dysfunctions in health care in the United States, and elsewhere, are arguably the result of specific policy interventions, including inter alia, the tax deductibility of insurance premia paid by employers, mandated coverage, licensing requirements, limits on entry into medicine, and tort rules. I don’t want to sound like one of those “socialism hasn’t failed because it has never been tried” types, but it is fair to say that health care has been the subject of political manipulation and regulation, and to blame all of the things we don’t like about it on the market is a misleading and tendentious diagnosis.