Health Insurance is Not Like Others

James Kwak has a good, short piece on why health insurance doesn't make sense as a free market instrument, as other forms of insurance do:

The analog in health insurance, however, quickly becomes unsupportable. Unfortunately, sick people (and, to a lesser extent, old people) have much higher expected health care costs than young, healthy people. In an actuarially fair health care system, their annual premiums should equal their expected annual health care costs. For someone with a serious illness, those expected costs would easily dwarf his expected income. There is no way to "buy a smaller house." So in an actuarially fair, free market system, he would be unable to get health insurance, would be unable to afford health care, and would . . . die.

Put another way, from the perspective of the insurer, the rational thing to do is charge people more than their expected health care costs, and the efficient outcome is to not insure very sick people. When we say that anyone should be able to get health insurance, we are saying that someone should be forced to lose money insuring sick people.

We've all heard these stories of patients with diabetes or cancer being turned down for coverage. I think this is yet another reason why health care bucks many assumptions we have about free market economics, and why people - including way too many doctors - think that health care is best delivered in a free market system. We're not cars, to start.