Steve Reads

I’ve started in on The Great Risk Shift, whose main idea is that the U.S. should move back to the kind of world embodied by the New Deal — an “insurance and opportunity society” where we protect one another from uncontrollable risks. I pay a little more in my health insurance, and you pay a little more in yours, so that our lives aren’t destroyed in the event that one of us gets sick. The Great Risk Shift is starting exceedingly well; it’s a good blend of scholarship and passion. Hacker is upset about the sort of world we’ve come to, but he’s not going to open a hole in his argument to let anyone label him a partisan hack.

It’s an exceptionally well-cited book, so I’ve been reading some of the articles he mentions. First up was Malcolm Gladwell’s “The Moral-Hazard Myth”. It’s a simple five-page argument that using moral hazard as the standard by which we construct health-insurance plans leads to exactly the world we have today: a world where

A country that displays an almost ruthless commitment to efficiency and performance in every aspect of its economy—a country that switched to Japanese cars the moment they were more reliable, and to Chinese T-shirts the moment they were five cents cheaper—has loyally stuck with a health-care system that leaves its citizenry pulling out their teeth with pliers.

It’s an excellent article, making the point as well as anyone could: we should stop worrying about moral hazard in the design of our national health-care system.

One of the economists in that article, though, makes me wonder what the actual upper bound on moral-hazard costs per person is:

“Moral hazard is overblown,” the Princeton economist Uwe Reinhardt says. “You always hear that the demand for health care is unlimited. This is just not true. People who are very well insured, who are very rich, do you see them check into the hospital because it’s free? Do people really like to go to the doctor? Do they check into the hospital instead of playing golf?”

So imagine a society where no one had to pay anything for health coverage, no matter how extensive. On average, how much would we expect each person to pay, above what he’d pay if insurance premia tracked risk?

I do feel some embarrassment at having ever supported premia that increase with risk. That demand seems connected with economic monomania: focus on the single goal of economic efficiency (i.e., maximum profits), then build a system that attains that goal. The resulting system is madness.

Up next are two papers on the economics of health care: Arrow’s “Uncertainty and the Welfare Economics of Medical Care” and Pauly’s “The Economics of Moral Hazard: Comment”.