Free and Competitive Health Insurance Markets

H: What’s the ”free and competitive markets” approach that would provide insurance to Kendall Brown, a 26-year-old with Crohn’s Disease? And in what country does such an approach – or one like it – now exist? http://okc.net/2013/09/30/open-letter-lawmakers-human-cost/

This challenge came on Facebook Tuesday from my friend and former student Prof. Jon Isham of Middlebury College (all his class used to call me “H,” a favorite nickname).

He is responding to my Monday post, in which I refer to some of the “Software and Design Defects [that] Cripple [the] Health-Care Website” (Wall Street Journal, Oct. 5-6). In that post I ask,

In a free and competitive market, how would customers react who were faced with such problems and frustrations? They would drop the service provider offering lousy service and turn to one of its competitors. Or they would just do without the service. That’s the process by which market forces regulate quality.

Here follows my response to Prof. Isham’s challenge:

Jonny: I’ll take your second question first: In no country are there free and competitive markets for health insurance. That is unfortunate for all of us, but especially for people such as Kendall Brown.

If you are suggesting that some country would already be taking such an approach if it really made sense, I disagree with you, for the reasons I gave last June in response to your questions about why there are no libertarian countries. As I said then, “The intellectual battle for liberty is a hard fight. In my opinion the forces of light are gaining on the forces of darkness, but, no, they have not prevailed … yet.”

Now to your first question, “What’s the ‘free and competitive markets’ approach that would provide insurance to Kendall Brown, a 26-year-old with Crohn’s Disease?” The best answer I know of comes from the University of Chicago’s John Cochrane. Here is a bit from a Wall Street Journal op-ed he wrote in April, 2012 (for those who would like to dig into his work, here is a blog post with useful links):

The country can have a vibrant market for individual health insurance. Insurance proper is what pays for unplanned large expenses [such as Crohn’s Disease], not for regular, predictable expenses. Insurance policies should be “guaranteed renewable”: The policy should include a right to purchase insurance in the future, no matter if you get sick. And insurance should follow you from job to job, and if you move across state lines.

Why don’t we have such markets? Because the government has regulated them out of existence… . (my emphasis)

I emphasize “individual” because the government’s tragically wrong-headed decision to exempt from income tax employers’ payments for health insurance, but not to exempt from income tax individuals’ own payments for health insurance, has driven a majority of working Americans into employer-provided health insurance that goes away when one changes jobs. More from Cochrane’s op-ed:

If we had a deregulated, competitive market in individual catastrophic insurance, that market would be so much cheaper than what’s offered today that we would likely not even need the [PPACA’s] individual mandate.

In such a free-market setting Kendall Brown would probably have had an individual, guaranteed-renewable catastrophic health insurance policy from shortly after her birth, and she would be covered today.

I would add in closing that we can’t know what approach, or, more likely, approaches, “would provide insurance to Kendall Brown” and other tragic disease victims like her if we did have free and competitive markets. Maybe John Cochrane is correct that guaranteed-renewable health insurance and health status insurance would prevail. But it is equally likely, given the ingenuity and creativity of people who are free to innovate, that if health care and health insurance were freed of restraints and interference by government, other approaches would emerge that are significantly better than any of us can now imagine. In Cochrane’s words, with a little correction from me:

A deregulated health-care and health-insurance market [no, say rather a health-care and health-insurance market regulated by market forces] can work. We can at least start by removing the obvious elephants in the room: all the legislation, regulation and interventions that needlessly keep prices up, keep competition and innovation out, shelter people from the economic consequences of their decisions, and prevent the emergence of real insurance that follows you from job to job and from health to illness and back.

By the way, if you have not yet read Cochrane’s awesome essay on what we need not in health insurance but in health care, don’t miss it. I talk about it here.

Best regards,

H

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