This is “End-of-Chapter Material”, section 15.4 from the book Theory and Applications of Microeconomics (v. 1.0).
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The debates that we have introduced in this chapter are far from settled. The issue of health-care policy is one that is not likely to be quickly resolved in the United States or elsewhere in the world. At the moment, we see many different ways in which health care is provided in different countries.
There is enormous pressure within the United States to deal with the perceived problem of uninsured households. As we have seen, this is a key element of the health-care bill that was signed into law in 2010. In addition, there are unsolved problems associated with Medicare and Medicaid. These government programs are in need of reform to deal with the escalating costs of medical care. According to the General Accounting Office, the current level of Medicare and Medicaid spending is about 4 percent of the gross domestic product (GDP). If there are no changes in current programs, this fraction is expected to increase to about 11 percent by 2050.This draws the discussion of the US budget through 2075: “A 125-Year Picture of the Federal Government’s Share of the Economy, 1950 to 2075,” Congressional Budget Office, July 3, 2002, accessed February 1, 2011, http://www.cbo.gov/ftpdoc.cfm?index=3521. Also see David M. Walker, “U.S. Financial Condition and Fiscal Future Briefing,” US Government Accountability Office, January 2, 2008, accessed February 1, 2011, http://www.gao.gov/cghome/d08395cg.pdf. To put this in perspective, government outlays as a fraction of GDP have typically been about 20 percent of GDP over the past 40 or so years. This number is forecast to increase to nearly 27 percent by 2050, with a significant fraction of this driven by Medicare and Medicaid programs.
There are two overarching lessons to be drawn from this chapter.
The nature of adverse selection is heavily influenced by technology. Recently, the US Congress has been considering legislation, HR 493,Govtrack.us, “Text of H.R. 493 [110th]: Genetic Information Nondiscrimination Act of 2008,” accessed March 14, 2011, http://www.govtrack.us/congress/billtext.xpd?bill=h110-493&show-changes=0&page-command=print. which limits the ability of insurance companies to use genetic information. If insurance companies have more information about individual health risks, then they can design more targeted insurance contracts. From the perspective of efficiency, this might seem to be a good thing because it eliminates some adverse selection problems. Imagine that technology were to reach a point where all your major health risks could be identified from your genetic code at birth. Almost all the uncertainty over your health would disappear, and there would be almost no role for health insurance. (There could, of course, still be insurance for accident risk.) Although this world might be more efficient, it would also be much more unequal. People with genetic predispositions to certain illnesses would face steep medical bills, while healthy people would not.
In this world people would want insurance before they were born, while there was still uncertainty about their genetic makeup, which takes us back to the Rawlsian thought experiment that we discussed earlier. It might be that, paradoxically, one of the most compelling arguments for government-provided universal health care will turn out to be the gradual elimination of market failures from adverse selection.