What's so special about health care?

Over the last six months, you have almost certainly heard or read a claim that, "We can't trust greedy insurance companies to act in the patient's best interest." Now, if this were coming from Karl Marx, I'd understand — he thought this about EVERY industry, not just health care.

But what confuses me is that most of the time, these people that distrust the profit motive in providing their health care completely trust it to provide their lunch! They walk into a Taco Bell and order a burrito without worrying that Taco Bell is only after their money, with no care for their personal interest. Where's the disconnect? What's the difference?

Put another way, why aren't we having a debate about universal food care, or a single-payer food insurance system?

First, be assured that you can trust the profit motive to provide your lunch, because Taco Bell only gets your money if you think the burrito is worth it. They have to deliver enough value to keep you coming. If they start skimping on quality without reducing price, they'll lose customers. Just recall how quickly they reacted to the E.coli problem back in 2006. (Have you seen a green onion in their restaurant since?) This was the central insight of Adam Smith: the individual pursuit of their own self-interest can actually leave everyone better off.

By the way, it's worth considering the other side of that transaction, too. It's not like you, the consumer, choose Taco Bell out of a sincere concern for their corporation or employees. You only go there if you think it is in your best interest. Your self-interested decisions are the mirror image of the profit motive.

Economists can attest that competitive markets do a great job providing the goods that consumers want. Our question, then, is how does selling health care differ from selling food?

Most people start by saying, "Health care is a matter of life and death." But so is food. In fact, you can suffer through many medical issues without health care; you'll die a lot sooner without food.

"Health care is expensive." So is food. The average family spends 11% of their income on food, but less than 5% on health care. (Check your own budget!)

"It's harder to know what health care you need." Now that is true; it's much easier to decide (by experience) what food is worth it. But this still has parallels to another well-functioning market: auto repairs. Most of us have no clue whether our brake pads need to be replaced (and that is just as life threatening as some medical issues!).

So are we at the mercy of the mechanic? No, because reputations matter. After moving into a new town, one of your first questions to neighbors is likely to be: "Do you know an honest mechanic?" The auto shop that tries to invent extra repairs usually doesn't survive very long, and the same would certainly apply to medical care.

"Health care has huge disparities." True; people in different socioeconomic situations have lamentably different experiences with health care. But the same is true in the market for food. You don't see poor families eating steak every night! I'm not saying that this inequality is okay (in fact, I regularly donate to help families in need), but that it is something true of all markets. Those with less money get less stuff. One can combat this by direct subsidies and by helping them increase their earning potential (i.e. education). This might be an argument for welfare (which will be addressed in future posts), but not an argument for seriously regulating the health care market while leaving other markets untouched.

Now, there is one significant distinction between health care and most other markets: certain health events are very costly and random. No one knows when cancer will strike, and when it does, the cost of treatment are enormous. It's hard for a family to absorb a sudden huge expense. This is why insurance plays a critical role in the health care market: you pay premiums even when you are healthy so that the insurer will pick up most of the additional expense when you are sick.

Insurance is valuable, since it allows us to smooth out some of those big lumpy expenses. And an insurer is able to offer that "smoothness" because they insure a lot of people, only a fraction of whom come down with cancer at the same time.

Unfortunately, insurance distorts some of our choices. If the insurance company picks up the tab every time we go to the doctor, we become less judicious about when to go to the doctor, what prescriptions to fill, or what procedures to do. We also become more reckless about caring for ourselves, less likely to exercise. And we don't shop around for the best doctor at the lowest price — we just look for the best doctor.

Yes, the health care market has unique problems — all of which are caused by the heavy presence of insurance. The White House has one thing right: what the health care market needs is health insurance reform. Unfortunately, as we will see in future posts, the proposed reforms will take us in the opposite direction: more coverage, less personal incentive, more reason to ask for more.

My future posts will dissect the problems of insurance, the effects of the current proposal, and real solutions to the problem. Let me just conclude by saying that I do understand the antipathy most people feel towards health insurers. Costs are high, exclusions are aggravating, and uncertainty is unnerving.

But these did not randomly spring up; they are the natural consequence of incentives that insurance has created. Moreover, this insurance structure is the natural consequence of incentives that government policy created! We will trace the problem to its roots. For now, I will say that if home owners insurance were structured the way health insurance is, we would be debating universal plumbing care right now.