Selection and healthcare

Paul Krugman argues that private insurance markets in healthcare do not work because private companies work hard to screen out unhealthy applicants and only sell coverage to healthy applicants. This is called "adverse selection". By the same token, healthy people will shun insurance (because they don't need it), decreasing the quality of the applicant pool further.

Arnold Kling argues that the adverse selection argument, while logical, does not describe what is happening in health insurance markets. (Or, it may be a factor, but it is swamped out by other more important factors). Arnold links to this paper.

The uninsured in the US end up in emergency rooms. My wife's ER is filled with 1) people who are genuinely having emergencies (heart attacks, strokes, accidents, etc) and 2) people who are uninsured and use the ER as their primary source of healthcare. The folks who use the ER as their primary source of healthcare are generally irresponsible with their lives. They eat unhealthy foods, are often very overweight, have higher unemployment, and don't brush their teeth (a low cost, simple way to improve one's health). The irresponsibility that leads to these behaviors also makes them not try and buy health insurance. Irresponsible people are often unhealthy and uninsured not because they are unhealthy, but because they are irresponsible. Responsible people are healthy and insured because buying insurance, like staying healthy, is something responsible people do.

If the adverse selection story were true, we would expect healthy people to not buy health insurance. In fact, they are the people who do. We would also expect unhealthy people to actively seek out health insurance, and we find that they do not.