Wednesday, April 8, 2009

Arnold Kling does not understand the concept of insurance

Arnold Kling reacting to a piece by Ezra Kline writes:

My view of the American health care system is that it hardly rations health care at all. That is why we spend so much more than other countries. I wish we put more responsibility on individuals. Instead, we have this delusion that we cannot possibly afford health care if we pay for it individually, but of course we can afford it if we pay for it collectively.
What's the fallacy in Kling's logic? The fallacy, quite simply, is that Kling does not understand the idea of shared risk. He does not understand the purpose of insurance. He does not understand why the collective might want to pay for services that are rendered, at any given time, only to a subset of that collective.

Medical treatment is expensive, and in many cases, treatments may prove too expensive for any one individual to afford. But accidents and illnesses are also somewhat random in their distribution across a population. Therefore, by creating a risk pool and having all members of that pool pay into it, society can ensure that the unlucky few who are stricken by disease or who are injured in an accident can pay for the medical treatment they need.

The question is not whether a "collective" can afford medical treatments that individuals cannot (this issue has been settled beyond dispute, and it is embarrassing to have to explain a concept so basic and trivial as "insurance" to an economist like Kling) the issue is whether a scheme of private, non-mandatory insurance coverage can do the job more effectively than a public, government-run, single-payer system.

(Note: This piece has been cross-posted to Stinque).


manuelg said...

I will not defend the totality of Arnold Kling's views on health care. It is indefensible. A single payer has more leverage to attempt to reduce prices, and no market-magic-mumbo-jumbo can deny that fact. That is why a company of several hundred employees does not have every employee buy their own desk at Ikea or Staples, and then reimburse them by adding to next month's paycheck. Kling cannot address this simple issue because then he would lose valuable "Going-Galt" points with his friends at the Libertarian Cato. (To be fair, itt is also true that single payer is not a magic solution either. If there is no accountability for incompetence or graft with the legislated single payer, a market solution can look pretty good.)

Back to the post. I read Kling's point here as more nuanced. It is transparently true that Americans, as a nation, consume health care with some personal irresponsibility. Consider health care costs as percentage of GDP. How much could be saved by personal lifestyle changes with regards to health, like diet or eschewing a sedentary lifestyle? How much could be saved by people, as individuals, choosing less expensive treatments, treatments that are less expensive but still effective. Without a component in a nationwide health-care plan that rewards for using less expensive treatments over the course of a lifetime, we could have functional single payer, but still with the tragedy of America, as a whole, paying much more for health-care and getting much less for it. Co-payments can be an effective incentive. Co-payment rates based on evidence of healthy lifestyle choices can be effective.

manuelg said...

Unfortunately, Kling wrote more on health care, and it has gotten worse.

He puts his faith in nonesuch medical charities to materialize, fully-formed, from thin air. Embarrassing.

Patriot's Quill said...

You may be right. I may have misinterpreted Kling's comments. He may have been speaking of lowering aggregate health care spending and wondering why this could be accomplished better through a universal system than by having "individuals" bear more "responsibility" (vis. cost).

The problem with these libertarian approaches to health care is that they assume an unreasonable degree of demand elasticity: If people had to pay for their own health care they'd use it less. In fact, what happens is that people put off necessary treatment until their illnesses have progressed to a state where they can no longer ignore and where treatment is generally much more expensive, and since they still can't afford it, it must be provided by the state, or they must be allowed to simply die. Of course, since society as a whole isn't as heartless as libertarians, the net result is that care is provided by the state and we end up spending more than if we'd just paid for the initial treatment (i.e. through universal health care insurance).

The basic problem with libertarians like Kling is that they approach things from the "how can we lower health care spending" perspective as opposed to the "how can we deliver care to everyone who needs it in the most efficient way possible" perspective. The libertarian solution is basically to tell people "You're on your own. If you can afford it, good. If not, tough titties." Invariably that means that some people won't get the care they need because they simply can't afford it.

And as you show in that second link, the proposed "solution" to the problem of the uninsured is ridiculous. Private charity is the Deus Ex Machina that Libertarians propose whenever they don't have a reasonable solution to the sorts of market failure that their ideas naturally generate.

Levon said...

People may have different opinions about certain insights and hopefully by sorting things out, everything would turn out fine and would not lead to something drastic.