Markets and the 90% Case
At Marginal Revolution, Alex Tabarrok argues that where laws permit it to do so, the medical insurance industry has been largely successful in overcoming adverse selection.
A few commenters object, pointing out that those with poor health are either denied coverage or required to pay above-average rates. They may be confused about what "adverse selection" is---it's when low-risk customers avoid buying insurance because they get charged the same rates as high-risk customers but are less likely to get their money's worth---but they do have a valid point. That people with congenital health problems face higher insurance rates isn't a market failure, because it's exactly how markets are supposed to work. But it is a problem. And it's a problem that will only get worse as the ability to screen for potentially costly genetic defects improves.
But the left-wing solution to the problem---nationalizing the health care and/or health insurance industries---is wrong. It's wrong not just because runs contrary to libertarian principles, but because, for the sake of a small minority for whom the market doesn't provide a satisfactory solution, it deprives the vast majority of the very real benefits of market-driven medicine.
I'm a software engineer by trade. When writing software, a simple, elegant solution will often work for the vast majority of users and scenarios. Much of the complexity in software comes from trying to handle obscure cases that many users will rarely or never need. At the company where I work, we refer to the simple solution as the 90% case, because it works (very) roughly 90% of the time. It's a variation on the Pareto Principle: A small minority of the problems cause most of the trouble.
Markets solve the 90% case in medicine. For the vast majority of us, they work, and they work well. I agree that it's unfair that some people should have to pay hundreds of thousands of dollars in medical bills just because they inherited the wrong genes. And I can certainly sympathize with the desire to lighten their load somehow. But destroying markets and nationalizing industries will do far more harm than good in the long run.
It pains me to say anything good about government handouts, but I do believe that direct assistance targeted to those who need it most is far more effective and less destructive than the market-distorting and -destroying measures generally proposed and implemented by the left. If some people can't get insurance because of genetic defects, then let the government pay their medical bills if you must, but don't (further) nationalize the health care system. Let the market work for the rest of us.
And the practice of using a flamethrower where a laser would do isn't confined to the medical industry. Take Social Security (please!). Most of us are perfectly capable of saving for our own retirements; aside from charity, the least disruptive way of helping those who can't would be means-tested transfer payments or subsidization of savings. But what we actually have is a $500 billion middle-class welfare program, inexplicably referred to as a "safety net," in which the government takes away money people could be saving, skims a bit off the top for expenses, and then returns it decades later with a small fraction of the interest a productive investment would have returned.
The minimum wage is similarly misguided. The vast majority of us have the skills necessary to earn enough money to support ourselves, and know better than to have children before we can afford them. Only a tiny minority of adult, full-time workers have families which they are not capable of earning enough to support. But the minimum wage, aside from being a poorly-targeted policy which affects primarily teenagers, childless adults, and secondary earners, distorts the labor market and creates unemployment. Here as well, it would be far better to target assistance, perhaps in the form of wage supplements, to the truly needy, while letting the market work for the 90% case.
When designing policies to help the needy, legislators should keep in mind the Hippocratic Oath taken by physicians, popularly summarized as "First do no harm." It is no less relevant to them. The first criterion for any such policy should be that it disrupts market processes as little as possible. As a corollary, the benefits should be targeted as narrowly as possible, allowing the desired goals to be achieved at the lowest possible cost.
None of this should be taken as an endorsement of government handouts. I would much prefer that all assistance to the needy take the form of private charity. However, that's unlikely to happen in our current political climate. But a more benign, more efficient form of government assistance is within our reach, and I think that its advantages over the status quo should be apparent to those on all points of the political spectrum.