Health insurance market: a private fantasy

By Carter Bundy

You know who I love? Adam Smith. Yup. Father of modern capitalism, or at least of laissez-faire economic theory. It’s my dirty little secret, what with my being a union goon and all.

You know why I love Smith? Because he’s right. When markets flow freely, with competition/choice, transparency, perfect information, relatively equal bargaining strength and true allocation of costs, Smith’s invisible hand works quite nicely for consumers, business and even workers and society.

Some of Smith’s loudest followers have taken his work to mean that the private sector holds all of our answers, notably the late Milton Friedman.

So how can Friedman and someone like me who still believes that the private sector doesn’t always do it best admire the same giant? Easy. Friedman applies Smith’s principles to every market, regardless of conditions. Milty’s blanket ideology still tricks kids from the University of Chicago into their own private fantasy, in which the private sector alone cures all our ills. But markets do differ, both in design and execution. Here are two.

Adam Smith’s happy market: refreshing beverages

If your Coca-Cola tastes like it was made with special sauce from Portales or Blacksburg (cow towns both), your business goes to Pepsi. Or RC. Or Shasta. Knowing that, Coca-Cola has a big incentive to deliver a great product. Coke doesn’t make money off the first can; it makes it off repeat business. You’ve seen the cute polar bears sliding around drinking Coke, and Mean Joe Greene likes it, so you have all the information you need. You have ready competition from which to choose, and you, the consumer, bear (most) of the costs associated with the production of the beverage.

Here’s the refreshing beverage market in another setting: When you walk into the Kwik-E-Mart, you know what you need. A squishee. Apu is happy to provide it to you for a fee. You can usually guess your thirst level pretty well, and buy an appropriate amount of product. Even if you screw up and get too little, you can always buy more. Everybody wins. You’re also in a good bargaining position with Apu, because if his squishee isn’t satisfying, your next drink comes from Moe Szyslak, and Apu’s business suffers.

Milty Friedman’s fantasy market: health insurance

Not every market, however, has those same happy ingredients of competition/choice, transparency, information, equal bargaining strength and accurate allocation of costs. Take private health insurance. Please.

Is there good competition and choice? Many employers only offer one insurance company, so no choice there. Other employers offer plans from two or three companies, but the family doctor is in only one of them, or there are geographical restrictions that effectively eliminate choice.

But let’s say you find an insurance company that you think offers good, comprehensive insurance. You’ve purchased the product, but don’t use it for a while. Finally, eventually, you need health care. Great! That’s what you’ve been buying for years! So is there competition at the most important point in the health insurance transaction – the point when you need care?

No. That’s when competition is at its most non-existent in health insurance. Compare the markets: If Apu doesn’t fill up your squishee cup, you take your money, walk out, go to Moe’s, and Apu is holding a gross, unusable cup of blue goo. If your insurance company doesn’t satisfy you, where do you go? Competing insurers won’t touch you with a 10-foot catheter. You’ve got about as many options as the 2007 Cleveland Cavaliers.

Oh sure, you could scrounge up a couple hundred thousand dollars for a team of lawyers to match the insurance company lawyers deposition for deposition. Even then, you’d probably find out that another market flaw – lack of transparency in the initial contracting – does you in anyhow. You ever see one of those contracts they send you? Lawyers make millions trying to make them a) indecipherable and b) bulletproof. They owe it to the shareholders.

Many individuals in the world of private health insurance are caring, dedicated professionals – I met some of them on the Health Coverage for New Mexicans Committee – but the very nature of the health insurance market skews their companies’ actions against full, transparent coverage.

What about information? Well, in health insurance, that might be the most damning flaw of all. I’m young and healthy (just play along). Probably makes perfect actuarial sense to buy a plan with no catastrophic coverage. But not one of us really knows what we’ll need when it comes to health insurance. I’ve lost several close friends to cancer – one at 17, one at 35. Never saw it coming. Completely imperfect information. Lack of information is a major reason why the health insurance market isn’t rational even when each individual acts rationally.

Here’s the worst part: The insurance market doesn’t let you buy more product when you need it most. Apu and Moe would never do that to you. Maybe you can get emergency room treatment, which shifts the costs of your treatment onto the guy who is trying to get covered in the first place. That’s another major health insurance market flaw: We have uninsured and underinsured people whose costs – always higher because they only get care when they’re very ill – are transferred to the rest of us.

The health insurance market by its very nature lacks competition and choice, is rarely transparent, creates unequal bargaining power at the most crucial times, has an impossible information component, and irrationally transfers significant costs to others. Milton Friedman, as talented as he was, was wrong to assume the private sector was best for every market. Adam Smith would have called it a fantasy.

Bundy is the political and legislative director for AFSCME in New Mexico. The opinions in his column are personal and in no way reflect any official AFSCME position. You can learn more about him by clicking here. Contact him at carterbundy@yahoo.com.