Greg Mankiw flags a new finding that might have significant public policy implications:
An article in the Wall Street Journal notes that scientists have identified genetic markers for the proclivity to live a long life. This raises a host of interesting economic questions:
* Will linsurance companies start offering better life-insurance rates to those with these markers?
* Will they require annuity purchasers to take this test and offer the long-lived worse rates?
* If insurance companies do not use these markers, perhaps because of regulation, will the availability of these tests cause the markets for life insurance and annuities to unravel because of increased adverse selection?
As you might expect, the questions continue. Mankiw’s discussion reminded me of economist Stephen Cecchetti’s argument that medical breakthroughs of this kind would doom private insurance:
The time is fast approaching when we will have an inexpensive test that is capable of revealing a person’s genetic propensity to contract a broad array of chronic diseases. That means that we will be able to accurately assess the cost of medical treatment over their lifetime. …
The fact that we will all have health scores has profound implication for insurance; or, more accurately, for the failure of market-based insurance. If I have the information revealing that I am likely to be healthy, living a long and low-medical-care-cost life, this knowledge alone will create adverse selection, causing me to forgo insurance for everything except treatments arising from accidents, which can never be forecasted.
To understand the problem, think about a simple case in which there are only two kinds of people, those with high and low expected future medical-care-costs lives. Imagine that the insurance company can’t distinguish the two types, so it charges all comers the average cost across the entire population. For the healthy people, the cost of the insurance will look very high, so they won’t buy it. That means that the only people who will buy the insurance are the unhealthy. Realising this, the insurance company will have to raise their price further to compensate for the fact that only the high cost people are willing to buy insurance. This is the classic “lemons” problem that causes markets to fail and was first described by George Akerlof.
Alternatively, if my insurance company can obtain my health score, then, in the same way that lenders use my credit score to calibrate the interest rate they offer on a loan, they will adjust my health insurance premium based on their precise estimate of the cost of my future medical care. And, importantly, a clever insurance company that is precluded from learning my health score directly will find a pricing scheme that leads me to reveal it to them through the choices that I make.
Cecchetti concludes that a single-payer, publicly-run health system will be the inevitable end result of this wave of innovation. Agree or disagree, it is an excellent and insightful discussion of the underlying issues shaping the private insurance market of the future.