Health Care and Lemons

In a recent article on Moneywatch there was an analysis as to why mandatory health care was required. As one who has advocated for universal coverage, it just makes things simpler, I do not argue from economic grounds, rather from a more pragmatic basis, namely, it is simpler when the patient shows up.

Now the article proceeds:

Let’s start with used cars. “The Market for Lemons” by George Akerlof is a famous paper in economics demonstrating how markets can break down when buyers and sellers are differentially informed. For example, suppose that there are 1,001 used cars worth from $0 to $1,000, i.e. one car is worth $0, one is worth $1, the next is worth $2, and so on up to a car valued at $1,000. Assume that the car owners can assess the value of the cars they are selling accurately, but buyers can’t discern any difference in quality from examining the cars. That is, sellers are better informed than buyers about the car’s quality.

In such a market, a buyer would expect to receive a car of average quality, and the price would settle at $500 (the exact price doesn’t matter, all that’s required is that the market sets some price below $1,000). But at a price of $500, all the sellers with cars valued from $501 to $1,000 would withdraw their cars from the market since the price of $500 is less than their cars are worth.

At this point, the only cars left on the market are valued between $0 and $500, and with buyers once again expecting to receive a car of average quality, the price would fall to $250. At this price, all the people with cars valued from $251 to $500 would take their cars off the market, and the cars left on the market would now be valued between $0 and $250.

The process repeats itself, the price drops to $125, more cars drop out, and this continues until there is just one car on the market selling for $0, that is, the market for used cars breaks down.
Now health care is not so simple. We have the following:

Buyers, they really do not know what their ultimate costs will be. They may have a stroke, a brain tumor, MS, etc. If they present themselves as relatively health, that is not obese and not a smoker, and somewhat normal, then they do not know that they are going to be ill. As with most insurance the buyer is betting that they will get terribly sick!

Sellers, the insurance companies, do not want any obviously real sick people, and thus there is some screening, is the person fat, do they smoke, can they walk. As with most insurance the seller of it is betting that the buyer will remain well.

Unlike the lemon issue, no one really knows, except in those cases of a pre-existing condition. Even with a genetic "pre-disposition", it is still random, at least based on what we know now.

Thus I would argue that this lemon argument is specious at best since it does not match the lack of certainty on both buyer and seller side of the health care transaction.

Except for the pre-existing condition cases. If you have cancer, say breast cancer, most likely you may have a recurrence. Then what. Well there should be a high risk pool, and it should be loaded into everyone's price. Now for obesity, smokers, and other high risk life style folks, then they should pay. They chose the risk level and they should pay the fee, akin to sky-divers and life insurance.

This is why I find the economists approach all too often useless, they fail to understand even the very simple basics. This is a bit more complex transactions than an auto purchase. The solution seems at best still just being a pragmatic one.