Perils of a “Lightly Regulated” Insurance Market
What would George W. Bush do about health care? His former advisor, N. Gregory Mankiw, provides a clue in his article The Pitfalls of a Public Option. Like Bush assuring consumers that “you can go to an emergency room” if you need health care, Mankiw argues that no public option in insurance is necessary: “We don’t need government-run grocery stores or government-run gas stations to ensure that Americans can buy food and fuel at reasonable prices.” Here is Paul Krugman’s response:
Economists have known for 45 years — ever since Kenneth Arrow’s seminal paper — that the standard competitive market model just doesn’t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.
Krugman actually understates just how unconventional the economics of health care can be. Given these divergences from standard market models, Brad Delong may well be right to say that even Friedrich Hayek could approve the idea of a public plan: it’s a way “to use the market as an institutional discovery mechanism.”
Of course, most modern-day Hayekists are more likely to take Mankiw’s view than Delong’s; namely, that “private insurers, lightly regulated to ensure that the market works well, would offer Americans the best health care at the best prices.” We have a sense of how concentrated the private insurance industry and providers are. What exactly does “light regulation” look like in that context?
