When I debated Nobel Prize-winning economist Paul Krugman on health care reform, I asked him if he was familiar with the work of University of Pennsylvania economist Mark Pauly. Pauly is a leader in the economics of health insurance. He and his coauthors have shown that health insurance markets are way ahead of politicians — and way ahead of economists — in solving the problems that bedevil health insurance markets. I already knew the answer: only someone completely oblivious of Pauly’s work could have debated as Krugman did. (As Krugman himself demonstrated in that debate, you never want to ask a question to which you don’t already know the answer.)
Krugman’s column in today’s New York Times tells me that he still has not read Pauly.
Krugman addresses the 39-percent premium increases that insurer Wellpoint planned to impose on its California customers:
WellPoint claims … that it has been forced to raise premiums because of “challenging economic times”: cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans. Those retaining coverage tend to be people with high current medical expenses. And the result, says the company, is a drastically worsening risk pool: in effect, a death spiral.
Krugman then argues that if Wellpoint’s explanation is accurate, then that demonstrates that free-market reforms would cause private insurance markets to collapse, and demonstrates further the need for government to impose price controls on health insurance and to force healthy people to purchase it.
Yet there are at least two major problems with Wellpoint’s story.
- Healthy people dropping coverage would not lead to across-the-board premium increases in California, because California allows markets to set premiums. Only when the government imposes the kind of price controls that Krugman wants does an “adverse selection death spiral” follow.
- Krugman may be thinking, “Even with market prices, once the healthy people drop out, insurers must raise premiums to cover the future costs of the sick people who remain.” Yet Pauly and his colleagues show that insurers collect the money they need to cover those costs in advance by “front-loading” premiums.