The Efficient society by Unknown

Author:Unknown
Language: eng
Format: epub
Published: 2020-03-01T16:00:00+00:00

This is moral hazard. Big-time moral hazard. People buy car insurance to protect themselves from financial catastrophe in the event that they have an accident. However, once they have bought the insurance, it decreases the incentive to drive carefully. As a result, the number of accidents will increase, and the amount paid out in damage claims will be higher. Health insurance works the same way. Big medical bills can be a financial catastrophe. But when people are fully insured, they have less incentive to avoid big medical bills. And so premiums go up and up.

In the case of car insurance, it is possible for the insurance company to conduct reasonable supervision of the claims that come in. This is because cars are fairly simple machines. It’s relatively easy for the company to tell whether or not certain repairs are actually necessary. If you have to get the air conditioning fixed in your car, and you send the bill to your insurance company, they will probably tell you to take a hike. In the case of medicine, however, the information asymmetries are often too high. The insurance company usually has no way of knowing whether a particular diagnostic test or surgical procedure is needed. And so often they will just pay out any claim that comes in. This leads to market failure.

One way in which the failure of private health insurance markets shows up is in escalating health care costs. The function of the price system is to ration scarce goods. But when doctors can charge almost anything they want, the rationing system starts to fail. To take one example, in 1990 there were more than 10,000 mammography machines in the United States. But only 5,132 machines were needed to give every woman in America all the recommended screenings. So the country as a whole had about twice as many of these machines as it could possibly use.

How can this happen? In a properly structured market, the price of mammography should be determined on the demand side by how much people are willing to pay for a screening, and on the supply side by the cost of the machine. If the machine costs $10,000 a year to own and operate, and people will pay up to one hundred dollars per screening, then a hospital or clinic would need to attract one hundred paying customers per year in order to break even. If there are too many machines in circulation, they will start to lose money on their investment and so will impose a moratorium on the purchase of any new mammography machines.

What happens in real life in the United States is that because people are not actually paying for these screenings out of their own pockets, they don’t really care how much they cost. And so hospitals can just jack the price of a mammogram up to $200, enabling them to break even with only fifty clients. The insurance company simply does not have the energy or resources to exercise adequate supervision and so often just accepts the bill.

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