Jonathan Leviin: John Bates Clark Medalist
Why Oh Why Can't We Have a Better Press Corps?: Joe Nocera of the New York Times Edition

A Primer on Social Insurance

Ezra Klein writes:

Why can’t we just give seniors cash?: Tyler Cowen and Matt Yglesias are going back and forth on the appeal of converting Medicare into a straight cash grant.... As Matt writes, “If grandma wants to spend that money at the hospital, good for her. If she wants to spend it on heroin or a television, then that’s good for her, too.” Cowen concurs. “What would terrify the left,” he says, “is the likelihood that genuine privatized cash would actually win that competition.”

This... misses the problem.... As a society, we are not willing to let people die painfully in the street.... [W]hat terrifies all of us is what happens after someone takes the cash and then gets sick....

At age 65, grandma decides to purchase no health-care plan, as she figures she’ll just get one when she gets sick, or maybe just get one next year, or perhaps she just doesn’t want to spend money extending decrepitude. But then she has a stroke and gets rushed to the hospital. Someone is paying for that emergency care. It might be the hospital. It might be the taxpayers. But it’s someone: The paramedics aren’t going to refuse to lift her onto the gurney. And then she needs rehabilitation. Someone is going to end up paying for that, too. Or perhaps she gets leukemia and, in a display of consistency, doesn’t want heroic efforts made to fight it. But are we really prepared to deny her pain meds? Or hospice?...

This is why Medicare is universal and the health-care law has an individual mandate. If we were willing to let people simply live with the consequences of their decisions, we could have a very different health-care system than we do. But we’re not — and, as a compassionate, rich society, I don’t think that’s such a bad thing. This is why we, like every other developed nation, are moving toward insurance solutions that assume an eventual need for health care. If we can’t say no credibly, then we need to say yes responsibly, and in advance.

I think Ezra is completely correct. But Ezra misses a big point: adverse selection. Some seniors will cost Medicare zero. Some seniors will cost Medicare $2,000,000. The seniors know more about their health status than the insurance companies do.

When those seniors who rationally think that they could pay for their health care out of the cash take the cash, that means that the rest of the cash does not cover the cost of treating those who do want insurance. In Tyler Cowen's world, those who want to buy Medicare almost surely cannot. The market to sell and buy medical risk is unlikely to exist.

Tyler Cowan would probably say: tough. If you were born with a tendency toward high cholesterol you ought to have known that by age 20 and been busily saving all your life in order to pay the extra expected costs of treating your heart diseases. But I don't think the rest of us are willing to say that a bad dice roll in the genetic lottery plus an absence of foresight should doom you to an early, untreated death.

That is the point of Ken Arrow (1963), "Uncertainty and the Welfare Economics of Medical Care". That insight is one of many reasons he deserves his Nobel Prize.