Paul Krugman on the Current American Health Care System
In the coming decades, getting the economics of health care right will be central to the public health of the entire economy. Below, Krugman outlines the three central issues with America’s health care system and why the private health care market doesn’t work.
Potential collapse. Private health insurance markets are inherently vulnerable to collapse. In any given year, roughly 5% of people are responsible for roughly 50% of all health care costs. When a private insurer decides how much to charge for premiums, it has to figure out what its average customer is going to spend on health care that year. If the insurance company charges too low of a premium, it will not be able to cover the costs. If it charges too much, however, healthy people will decide to cancel their policies. When that happens, the percentage of insurance company’s customers who are sickly will go up and so will the average cost per patient. If that happens, the insurance company may still not take in enough in premiums to cover costs. This can create a death spiral. If the insurance company again raises their premiums to cover their increased average costs, even more patients will cancel their policies, driving average costs even higher. This process continues until only the sickest patients are willing to pay for insurance. To cover the cost, the premiums on that insurance will be at least equal to the cost of treating those patients, making it virtually unaffordable.
Asymmetric information. Consumers know more about their health than insurance companies do. This gives people an incentive to lie to insurance companies and tell them that they are more healthy than they actually are. In response, insurance companies employ investigators to not only research potential customers before they sign up, but to question the validity of an insurance claim once it’s filed. This arms race between customers and insurance companies over the disclosure of pre-existing conditions leads to enormous frustration and losses on both sides.
Moral hazard. Once people have insurance it is in both their interest and their doctor’s interest to buy any procedure even if it only has the slightest chance of working. These two factors are one reason why health care costs in the United States are higher than they are in most of the developed world. "
"The United States' health care system operates differently from many others in the world with high costs for the individual as a main, distinguishing characteristic. In fact, the higher prices mean the U.S. spends more on health care than other "developed countries," a 2019 Johns Hopkins report found.
