Monday, October 07, 2013

[mnptuuva] Market failures of the healthcare system

The following economic problems with the American health care system cannot simply be solved with a freer market; regulation is required:

  1. Health insurance is a natural monopoly because of economies of scale.
  2. Health insurance which people can opt-out of suffers from adverse selection.
  3. Because emergency rooms cannot turn people away even if they cannot pay, it is a de-facto insurance system, which suffers from moral hazard.
  4. There are economies of scale in providing healthcare, so natural monopolies will form.
  5. Licensing required to become a healthcare provider is a barrier to entry into the industry.
  6. A patent on a drug or medical device gives a monopoly to the patent holder.
  7. A patient's healthcare decisions and consequent health affect more than just the person himself or herself. This is an externality. (The canonical example is communicable diseases.)
  8. Patients exhibit systematic irrationality in healthcare decisions which have major but low-probability consequences or consequences only in the very far future.
  9. Patients exhibit systematic irrationality when choosing among extremely complicated health insurance plans.

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