Pissing Down Your Leg

Thoughts on Economics and Economic Policy

Why Don’t People Understand Health Insurance Markets?

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There’s been a minor debate in the blogs I read about the value of Medicare as opposed to a cash voucher. The basic idea is that if you’re 65 you could either sign up for Medicare or take the cash equivalent. Now, as someone who has received his fair share of stupid gifts from friends, family, and employers and has often thought, “Gee, could you just give me the cash instead?”, I understand the impetus to think that the cash might in fact be better.

So Ezra Klein points out the debate between Tyler Cowen and Matt Yglesias. He also points out that this is not the proposal in the Ryan plan which would simply cut benefits. The voucher in that plan could only be used to buy health insurance and would not, as far as I can see, be redeemable for cash. Klein says that the point is that we don’t want people to die in poverty on the street so we won’t deny them healthcare in their final days. He is, of course, right, and somebody will have to pay for that healthcare.

But Klein misses the larger point. Cowen points out that many people might in fact choose the cash as opposed to the health care. And that’s exactly the point! Healthy people will opt out of coverage, costs will increase, and pretty soon the market will fail to work. As Brad DeLong notes, we’ve known this since at least Arrow’s 1963 paper on health insurance markets.

I guess this is why it’s important to have a degree in economics. So you don’t make stupid mistakes. I suppose Klein and Yglesias can be forgiven since they lack such a distinction. I wonder what Cowen’s degree is in.


Written by Liam C Malloy

April 17, 2011 at 8:06 am

Posted in Healthcare, Policy

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