TW: Buiter makes a fairly simple point but one that has tremendous implications. As technology makes it increasingly feasible to forecast an individual's future health, the entire concept of health insurance will be turned on its head. Through genomics a person will no longer be a 25 year old who smokes but rather a 25 year old with DNA or other attributes that make her pre-disposed, in fact likely to suffer from, leukemia or breast cancer or heart disease or none of the above.
The reasons insuring a large group of folks rather than an individual has always been driven by the need to spread risk. Healthy folks who pay insurance inherently subsidize those less healthy or lucky folks. But as the ability to forecast who will be one or the other increases the insurance market will be transformed.
From Wim Buiter at Financial Times:
"Private insurance only works if there is risk. If the risk is eliminated, profitable insurance is impossible...When risk vanishes, insurance turns into redistribution. That’s a task for the state, whether through the tax payer or by mandated pooling in quasi-private insurance schemes of individuals with known heterogeneous health profiles.
The rise of genomics - the branch of genetics that studies organisms in terms of their full DNA sequences or genomes - will in the not too distant future kill off most private health insurance. That’s probably a good thing, for two reasons. First, because of asymmetric information, when there is risk and uncertainty about a person’s future health, health insurance markets are badly affected by adverse selection and moral hazard. Second, because the private health insurance industry is a monument to inefficiency everywhere and, especially in the US, a rent-seeking Leviathan whose ruthless lobbying efforts corrupt all it touches.
When it becomes possible early in life to map out a person’s future infirmities, illnesses, disabilities and eventual cause(s) of death (other than those due to accidents or violence), it becomes impossible to have health insurance based on market principles and the profit motive. With profitable health insurance impossible because you cannot insure a sure thing, there are but two options left. Either you leave those with poor health prospects to their own devices (the ‘tough luck’ approach) or you turn health insurance into interpersonal redistribution of income, that is, you socialise health care funding. This redistribution is from those with above-average health prospects to those with below-average health prospects.
Such a redistribution policy can either use general tax revenues (the way the British National Health Service is financed) or can involve subsidised health ‘insurance’ in a world with mandatory health insurance where those with below-average health prospects are pooled with the rest of the population and where individual health insurance premia do not reflect an individual’s health prospects - like the assigned-risk pool for car insurance in the US. Under either system there would be a minimum guaranteed quality of health care that everyone is entitled to, regardless of ability to pay, and that would be paid for either out of general tax revenues or out of the premia contributed by those with above-average health prospects.
I start from the proposition that health care, up to a collectively decided minimum standard, should be available to everyone. That is, it should be universal and mandatory.
...If health care is to be universal, it should be de-coupled from employment completely. The availability of health care should be a function of the condition of being alive, not of the condition of being employed. Here too, Obama’s health care plans, which retain tax advantages for employer-provided health insurance, fall down badly.
...Note that nothing I have said sheds any light on the best way to provide medical care - on whether health services should be supplied privately, cooperatively, by the state, with or without regulation etc. It only concerns who pays, and there the answer is clear: you and I as tax payers or you and I as mandated providers of subsidies in large assigned-risk pools."
http://blogs.ft.com/maverecon/2009/07/the-inevitable-socialisation-of-health-care-financing/
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