33 3.10 – CASE STUDY: HEALTH CARE AS A MARKET FAILURE
- CASE STUDY: HEALTH CARE AS A MARKET FAILURE
Healthcare, or the lack thereof, is a market failure that many argue requires government intervention (Mankiw, 2017). Two indicators of market failure, according to Mankiw, are the prevalence of externalities and market imperfection. Mankiw notes two exemplary externalities: vaccinations and medical research. Vaccines are critical in preventing the spread of disease and the market cannot ensure equal coverage. In an economic sense, preventing disease is a positive externality of healthcare coverage. Similarly, money funneled into healthcare is a positive externality, as it enables research and development which could ultimately lead to medical breakthroughs (e.g., a cure for cancer).
Market imperfections, on the other hand, discourage market intervention, particularly moral hazards and adverse selections. Moral hazards occur when a person engages in a behavior that they would not otherwise participate in if they did not have the protection offered. For example, most people would not jump out of an airplane, but some would if they were offered a parachute. Regarding healthcare coverage, insured individuals may go to the doctor more often than those without insurance because it is available. The coverage (parachute) allows them to visit the doctor for minor needs (jump out of plane) when a lack of coverage would likely induce them to stay home (stay in the plane). Conversely, those without insurance may not seek medical help at all until the problem becomes unbearable. Khullar (2017) reported 20% of uninsured adults admitted going without needed care compared to 3% of insured adults. Waiting to see a doctor delays much needed medical care and results in longer hospital stays, poorer health outcomes, and increased costs for care (Weissman et al., 1991).
Adverse selection, the second market imperfection listed by Mankiw (2017), stems from information asymmetry. The insurer, unaware of which individuals have a chronic illness and which illness it may be, must charge a premium based on unknowns. Naturally, in an effort to protect their bottom line, the insurer is going to charge a higher rate than might be required. This will result in higher premiums, thus pushing healthier people (or people believing they do not need insurance) out of the market. This practice results in a higher proportion of sick people which, in turn, leads to higher premiums, and the process begins again.
Taken together, externalities and market imperfections result in market failure. The government intervened in 2010 with the Affordable Care Act. The law, by providing low or no cost healthcare, should have enhanced positive externalities while minimizing negative externalities. Similarly, the law mandated that everyone have insurance, thus eliminating the problem of adverse selection. However, results were mixed and after lengthy court battles and legislative changes to the way in which the ACA was implemented, many argue that healthcare in the U.S. is still an example of market failure.
