Health Care

People are stupid when it comes to thinking about their own health. Try this quiz:

Part 1: There is some new SARS like disease that you have a 1 in 1 million chance of catching. If you get it, you will dies for sure as there is no cure, but they have developed a new vaccine. This vaccine has no bad side effects and will 100% prevent you from catching the disease. How much will you pay to get vaccinated?

Part 2: You are walking down the street and you see an ad looking for participants in a new medical trial at the local medical school. Unfortunately, the trial as a 1 in 1 million chance of killing you. How much would they have to offer for you to sign up?

Did you answer to Part 1 match you answer to Part 2? They should. You should be indifferent between the price you would pay to avoid a 1:1000000 chance of death as the price you would need to be paid to take on a 1:1000000 chance of death. But people usually say something like $5 to part 1 and $5M to part 2, which is crazy.

It is this irrationality that makes me beleived that government should, in the spirit of libertarian partneralism, provide catestrophic health insurance to everyone. This is not like regular health insurance -- you would have to pay all of your regular costs out of pocket -- but since people undervalue the value of avoiding risk, they would be covered for the most expensive procedures.

It turns out that this is a common problem, and Brad DeLong and Arnold Kling argue for something similar, but from two different angles. Both are worth reading.