Economics, Ethics, and Health Insurance

Abstract

Evaluating health care institutions and policies should depend on understanding the economic complexities of health care provision and on our values of compassion, choice, efficiency, fairness, and solidarity. These values may conflict, so applying them is difficult. We must also understand the problems with health care allocation, including employing markets. Regulations are needed first because of asymmetric information: doctors know more about treatments than patients and can exploit them. Second, health insurance is a better bargain for those who expect to be sick. Consequently, health insurance policies attract purchasers more likely to make claims. This adverse selection makes claims and premiums skyrocket, healthy people drop out, and private health insurance markets collapse, unless everyone is forced to buy insurance or insurers deny insurance to those with pre-existing conditions. Third is moral hazard: if insurance pays for a health problem, there is less incentive to avoid it or to economize on treating it. Health care policies must be economically sound and morally defensible.