Private health insurance?

by Russ Roberts on August 20, 2009

in Health

Tom, a reader with Hayekian sensibilities writes:

Imagine we had entirely private health insurance market – no Medicare or Medicaid.  If I live to be sixty-five, I will probably have a personal and/or family history that indicates a strong probability of developing an expensive chronic condition. I would wager that is true of almost all sixty-five year olds.

So here is my question: which insurer in their right mind would take on my risk?

I suspect none. Once philanthropy and savings were exhausted, I would surely risk a painful life and preventable death.

Do I want this? Does anyone? Isn’t “socialized” medicine for older people an unpleasant moral necessity for our wealthy society? Please note I am deeply suspicious of most arguments cast in moral terms in discussions of politics and economics. I ask these questions guardedly.

I encourage readers to ease Tom’s mind. Politely and thoughtfully, please. I think he is asking some very important questions.

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Anonymous August 21, 2009 at 2:16 pm

Silly because just the same you could say “Once you elevate “individual” above society rights, anything goes and anything may be justified.”

In the first place, there is no such thing as “society rights”. There is no such entity as “society”. All that actually exists in reality — and all that can actually possess rights — are discrete, individual, human beings.

In reality, the notion of “society rights” means the right of some individuals — usually those claiming to “represent society” or those who’ve been voted into power — to violate the rights of other individuals. But nothing justifies this notion. Nothing gives the majority the right to vote away the rights of the minority. The notion of a right to violate rights is worse than a contradiction in terms.

Secondly, the principle of individual rights — far from “justifying anything” — defines and limits what any one individual can do to another individual or what government can do to the individual. The right to life, liberty, property and the pursuit of happiness means that no one — including the government — can take your life away from you, that no one can interfere with your freedom to act (provided you don’t infringe anyone else’s freedom to act), that no one can take from you by force or fraud property you have created or rightfully earned, and that you are free to exist for your own sake, by means of your own honest effort, without having the power to force anyone else to sacrifice for your sake.

Now, please explain how that principle — the principle of individual rights as briefly stated above — can “justify anything”? All it can “justify” is exactly what it says: that all men possess equal rights which all other men must respect and which the government must protect (and never violate itself).

And yes, individual rights, as described above, necessarily means one has the freedom to associate with others — provided they wish to voluntarily associate with you. But it does not mean you have the right to “associate with others” the way an armed robber “associates” with his victims.

Anonymous August 22, 2009 at 12:15 am

Damn, Michael, you’re on fire!

Anonymous August 24, 2009 at 2:43 am

“But it does not mean you have the right to “associate with others” the way an armed robber “associates” with his victims.”

In short, a consistent set of rights cannot include the right to violate rights.

Anonymous August 21, 2009 at 2:48 pm

Tom Hastened to answer, but I see from the responses already posted most of my points. But taking a slightly different tack, your question poses the dilemma of a person finding themselves at 65, surely about to develop a disease, indisputably nearer their own death. If you avoid planning for health (or life) coverage until then, well my Hayekian/Friedman sense, would be that “free to choose” you chose badly. The other respondents have nicely covered the many options you would have had prior to 65 to ‘insure’ (inclusive of savings) yourself against the inevitable disease and death we know we shall experience. To posit that one can reasonably leave health and life financial planning until 65, at which point the Government is the only option is entirely non-Hayekian, it seems to me, and a false dilemma partially assumed by current proponents of greater federal involvement. As a point of disclosure I am not in the insurance business, but a doctor, and as such I rather imagine from my own experience and knowledge that a healthy (which your hypothetical suggests as only a healthy person could surely be so oblivious as to the need to finance one’s ‘health’ for 65 years) 65 year old could indeed have relatively low health care costs for many years (based on a low deductible for routine care, a few meds, annual physical with catastrophic coverage [if insurance companies could offer only that nationally without state regulations]). Indeed, a healthy 65 year old can purchase term life insurance for a price; I have no doubt the private market would provide health insurance (again the cost would be less if other options suggested by other respondents were adopted earlier in life).

Anonymous August 21, 2009 at 3:35 pm

I see two fundamental questions
What should be done about providing health care to those over 65 in general? and What should be done in your case under the current system?

The first one is actually easyer to answer. Going back to the Hayek Quote
“Nor is there any reason why the state should not assist the individuals in providing for the common hazards of life against which, because of their uncertainty, few individuals can make adequate provision.”

To me that reads “Hazards of like” are so unpredictable that “few individuals can” plan for it themselves. However, the very fact that we are having this conversation tells me that the cost of health care are in fact predictable. We all know that the cost ramp up over our lifetime and eventualy become problamatic past age 65. That seams pretty predictable to me. What I belive Hayek was refering to was the sudden health issues, like falling and breaking a leg, or such. Where you can’t predict with any reasonal amount of certainty when or were such an even twoudl happen. They same would apply to car crashes, being assalted, a tree limb falling on you or whatever. And infact the government already provides, through subsity and law, care for such events, via the Emergency Room system.

So we are left with high cost, long term care, durring the later stages of life. Sounds plannable to me. There fore I would support HSA’s, insurance contracts, or even a revamp of Medicare to behave more like a defined benift pension where it put money back into peoples pokets for medical services instead of paying the doctors directly. This would allow the market forces to drag down cost, and improve service. But with a bit of government guilded funding for the elderly. It’s not exactly a great plan, but the point would be to make sure the market is involved and people taken care of unlike currently where health insurance gets in the way of the market. Personally I favor geting rid of insurance for anythign but catastrophic care. We dont buy car insurance for oil changes and fill ups, so why does health insurance get involved for every single doctors visit and simpel test?

Ok second question, what can be doen about your situation and the current enviroment? first off be glad, very very glad you live today and not 50 years ago, or 100 years ago. The amount of advancment in medical practices is stagering. Cancer drugs, blood pressure medication, laser eye surgery, organ transplants have all been developed because of the need and the abily for someone to meet that need. Market at work. While there are some things to do about the system, yoru first priority is to look after yourself, are you eating right? getting enough physical activity? getting early screenings for tretable desises? I know that all sounds nice, and a blog poster is telling you this, but if you are worried about cost, prevenative messures are the best way to go about them.

To address the system I pose the question is medical caer so expensive because demand is up or supply is low? I’m 99% certain it is because demand is up. The insurance companies stand between people and doctors, so there is no need to avoid over use. We hear about this in the news, doctors are basicly CYA, “aww you bomped your head, get a cat scan” because they know they can be held liable if anything happens to you after seeing them. And we wonder why people who genuainly need a CAT scan have to pay so much for them? Supply – demand.

So here is my list of posible actions that could bring down medical cost in the short term.

1) remove the silly restriction on insurance companies only practicing in one state, who else has such a restiction? Microsoft? Fedex? (increase competition)

2) revise medical malpractice lawsuits, and I understand that any revision could go too far, but I don’t want a bloody cat scan if I walk into a low ceiling, I want some tylonal, hell I shoudlnt be at the doctor at all, but as long as my insurance is paying not me…. (reduce demand for expensive procedures)

3) lift restrictions on high deductable – catastrophic care insurance, does this seriously need a law preventing consumer coice. Likewise life the regulatiosn on minimun policy coverage, if i want a $50/month coverage, then let me get somethign appropriate, laws that maindate X Y and Z in all insurance policies, Floor the cost of insurance at what X Y and Z cost! (lower cost, drive competition)

4) massively expand the benifits and ease of enrollment in a HAS. Ok not nessasarly that short term, but with more money under people’s controll, expect cost to be driven down (eliminatign third party pay)

5) change Medicare from reimbursing suppliers to paying consumers. I’m nto 100% sure how this would take affect, but as long as its nto as terrible as my FSA it shoudl work. (decrease demand)

6) create a rival to the American Medical Association’s which recently stoped issuing new medical school accredations. and create a puply campain to increase medical school enrollment which is basicly stagnate now, becasue college’s have not expanded capacity, and applications per slot ratios have been rising, mean MCAT scorse are going up, and cost have skyrocketed. (increase supply in 11 years as these doctors get out of school)

Anonymous August 23, 2009 at 7:29 am

You said: “To address the system I pose the question is medical caer so expensive because demand is up or supply is low? I’m 99% certain it is because demand is up.”
–It is clearly both, as your list of remedies suggests. Libertarians say do away with licensing, and I agree. More practitioners and different specialties and services would spring up.
–Why is med school enrollment stagnant? For the same reason doctors are working less and retiring younger–being a physician in America has been becoming gradually less and less attractive for decades as the cost of malpractice insurance, of complying with Medicare, the cost of med school has gone up, reimbursements have gone steadily, or quickly down. More headaches, less income. Obamacare only accelerates that process. I read that under the Public Plan an anaesthesiologist’s reimbursement would be cut immediately more than 50%. Something needs to be done.

Anonymous August 21, 2009 at 3:51 pm

In an April interview with David Leonhardt of the New York Times, Obama said this:

“The chronically ill and those toward the end of their lives are accounting for potentially 80 percent of the total health care bill out here. …there is going to have to be a conversation that is guided by doctors, scientists,… you have to have some independent group that can give you guidance.”

Please be “guarded” about ObamaCare, too.

Anonymous August 21, 2009 at 5:30 pm


Please allow me to respond to your question with one of my own, which simply turns your question around.

You ask: Isn’t “socialized” medicine for older people an unpleasant moral necessity for our wealthy society?

My retort: Why would you assume that “socialized” medicine for older people is a moral necessity for our wealthy society? What makes it morally right? If an elderly person threatens me with force and demands my money so that he can afford health insurance, am I morally obligated to meet his demand? If so, why? What is moral about government using its power of coercion to tax me to provide health insurance to someone else, particularly if doing so is unsustainable, leads to a misallocation of health care resource or takes money from my wallet that funds my family’s health care needs, education needs, etc?

Anonymous August 23, 2009 at 7:18 am

Well put. Why not make the Medicare fund voluntary? We would then see how much of a moral obligation Tom really feels, along with all other wage-earners. I’ll wager an awful lot of people find that in their mind the obligation belongs to everybody else.

Anonymous August 21, 2009 at 10:42 pm

In a truly free market, would health care be this expensive? One of the most important things a business must do is set the price of its goods and services at a level its customers can afford. If customers can’t afford it, they won’t buy and you are out of business. It is only when somebody other than the customer can be made to pay, including insurance companies, do prices get out of hand. Fixing a broken arm won’t be $2k if everybody is paying cash, perhaps saved in an HSA or like vehicle. Even expensive chemotherapy drugs get affordable in the long run. Who would be paying for that R&D, then? The rich. That is no different than most technological advances. Anybody else remember when quality CD players were $1k+ in 1985? The same thing is more like $99 now. No freedom is lost when the rich subsidize R&D by paying big bucks to be an early adopter, as compared to when we steal from them to pay for R&D.

Anonymous August 22, 2009 at 8:19 pm

In a free market, where individual consumers are able to express their unique trade-off decisions, you will likely see a wider variety of types of health care consumption available, with a wide variety of costs. You will see lower quality but lower cost health care as an option. You will also see much higher quality and more expensive options. But you will also see downward price pressures on current standard of care options.

Anonymous August 23, 2009 at 7:15 am

You are quite right. Regrettably, such a scenario will meet with implacable resistance from the levellers, who will object to ‘the rich’ receiving life-saving treatment for a condition which is terminal for the poor or the average Joe, only because he can’t afford the treatment. That is the single biggest obstacle, in my opinion, to truly free market medical care and health insurance: the deification of equality by the left, which is for some reason more intense vis a vis health care than anything else. It will be necessary to do a lot of educating in order to have most Americans realize the benefits of the rich early adopters, and even more to convince them that it is acceptable that the rest of us make do without until the treatment becomes affordable. I expect, though, that our job will have been made easier by the disintegration or conversion (to private) of the current nationalized health insurance programs in the interim.

Anonymous August 22, 2009 at 2:05 am

Here’s my take. The good professor Roberts began this whole conversation with the line “Tom, a reader with Hayekian sensiblities writes…”. Where in anything Tom said were the Hayekian sensibilites?

Anonymous August 22, 2009 at 5:06 am

I’m sorry Tom, because you seem like a decent guy; the board has voted, now curl up and die.

Anonymous August 22, 2009 at 5:58 am


What an excellent description of socialized medicine!

mfarmer August 22, 2009 at 12:52 pm

“Here’s my take. The good professor Roberts began this whole conversation with the line “Tom, a reader with Hayekian sensiblities writes…”. Where in anything Tom said were the Hayekian sensibilites?”

I think professor Roberts meant that in most economic matters Tom shows Hakeyian sensibility, but when Tom looks at the reality of his situation, he wonders what else can be done other than accept government help — so this brings up a dilemma which many libertarian-minded people find themselves facing when principles run up against reality. Our social imagination, after years of government regulation, can’t fathom, sometimes, how a totally free market could meet some of our most urgent needs, like healthcare in old age when sickness is most present.

This weakness in social imagination is what gives progressives an edge, so Professor Roberts is hoping that the readers can help Tom imagine how a free market could address this sticky dilemma. Until we can articulate how spontaneous order could develop solutions without central planning, the progressives will point to these situations and say “See — the state is needed when the market fails.” Tom is like many people who have faith in free markets — but only to a point. Is he right? Or can the free market answer Tom’s dilemma?

Anonymous August 22, 2009 at 9:33 pm

mfarmer, good reply! But how can “we” (the society?) develop free market solutions to Tom’s sticky dilemma? I would think Tom should be the one to solve his own dilemma. If “we” are required to develop solution’s to Tom’s dilemma, then how would it be a free market solution? “We” can offer advice, but beyond that how would “our” solution not resemble the solutions offered by all the statists? I don’t see our lack of social imagination as a weakness. I see the statist insistence on social imagination as a serious threat to individual liberty. What am I missing?

mfarmer August 22, 2009 at 11:22 pm

I didn’t mean we, like in you and I, although you and I are a part of the market, I meant solutions in the free market. I don’t think I wrote “we”, but referred to the market. I believe the market will develop solutions to meet needs, and what I was saying is that many people have never gained the faith and understanding (the ability to imagine the market working) of the market in order to trust it, to see that the answer to Tom’s question is in the market when it’s left free to respond with interference.

Anonymous August 23, 2009 at 5:53 am

Well, then I agree with you!

Anonymous August 22, 2009 at 3:42 pm

As a latecomer to this conversation, I will try to only add two points, while agreeing with much of what was written before.

1. Moral hazard. We currently live in a society in which people rationally expect Government to take care of them if something goes wrong. The need to take care, save for emergencies, or help your relatives and neighbors has been eroded.

In a free society, all of these will come back, drastically reducing any need for forced redistribution.

2. The morality of forces wealth redistribution. One problem with the moral argument is that it proves too much. Surely, the moral argument does not recognize national borders. If I live in Los Angeles, why am I more morally obligated to help a person in New York than a person in Tijuana? For that matter, why am I more obligated to help middle-class retirees than starving African children?

In a free society, anybody can help anybody else with his or her own money, and many many people will, just as many helped in the past.

3. The role of insurance. Current “insurance” practices mask an important distinction between expected cost and unanticipated costs. For a given 65 year old, an actuary could estimate the expected medical costs through the rest of their lives. That amount could never be insured in a free market – it has to be either saved or received through charity. Major expenses beyond that amount can be insured, but in that regard there is no difference between a 65 year old and a 25 year old.

In a free society, a responsible 65 year old person will have set aside enough savings to cover their expected health care costs (as well as any other living costs), and only insure deviations upwards. Private insurance companies will have no reason not to offer policies to cover those (random) deviations.

Anonymous August 22, 2009 at 8:12 pm

The best way for you to start is to recognize a few fallacies:


If a risk is sufficiently high, then cost effective insurance against it CANNOT exist. That is, if there is high enough risk, then it is not worth it TO YOU to purchase insurance against it. It is always worth it to an insurance company (if permitted by law), since they charge you the full cost plus their overhead.


If we Americans don’t already have the money to afford something, there is no way the government can do it for us. The government has no money that didn’t once belong to people like you. Uncle Sam is not sitting on a magical pot of gold.


Medicare and the Obama vision is for the government to finance EVERYONE’S health care. It is impossible that EVERYONE needs a government handout. Since government only has what it takes, it must be the case that most people can, and indeed DO through taxes, FUND THEMSELVES. That means for everyone to afford to buy something, you don’t need the government involved with everyone.


Medicare makes young people pay for old people. There is no reason why a young person TODAY can afford to pay for an old person TODAY, but a young person TODAY cannot afford to pay for an old person TOMORROW. That is, you still have young to old transfer if you have each young person fund his own old age. Of course the difference in incentives between having someone fund himself versus fund a complete stranger is significant. The difference in efficiency between simply keeping your earnings versus forcing your money to pass through the government before uncertain distribution, is also significant.


Third party payers can get volume discounts, but that does not control GROWTHS in costs. Costs grow because efficiency is not being sought in individual purchase decisions. You already prepaid for your health care (through premiums or taxes), so it makes little sense to waste your time shopping, negotiating, or taking less desirable lower cost measures.

But costs CANNOT grow without bound, so something must control their growth. Since it is the third-party payer facing the immediate burden, it is they who make those decisions. The easiest thing is to increase your premiums or your taxes–thereby deciding for you that your income will go toward health care rather than some other consumption.

Next they try to reduce what they pay out. But it is IMPOSSIBLE for a third-party to accurately reflect the trade-off decisions (TV, vacation, ballet-lessons, etc.) simultaneously for every one of their customers. Therefore what the third-party tells you that you can’t have, not only isn’t reflected in noticeable savings to you, but it also is unlikely to be your choice even if you could realize such savings.

And if a single entity, like the government, is making those choices, then everyone is legally denied the same kind of services, regardless of any unique trade-offs they as individuals may be willing to make.

The result of ANY third-party financing scheme (private or governmental) is that you find yourself paying more and more, and simultaneously get denied more and more of what you thought you already paid for.

Gil August 23, 2009 at 5:39 am

I still disagree with the notion that “everyone can find insurance”. Why would anyone want insure someone else when they know that someone else will billing them almost immediately? If they do the premiums would be so high as to dissuade the would-be insuree.

Inter-generational unfairness? How then did the oldies get any care before? Tales from Old Europe state the families care for their older members. In other words – the young are caring for the old who in turn will pass the costs onto younger generations. The yound are subsidising the old! Surprise! Surprise! If someone can’t care for themselves and are still living then someone else is caring for them. If Libertarians find this surprising then they should be one retailing euthansia pills.

Anonymous August 23, 2009 at 6:50 am

Who in the world believes that “everyone can find insurance”? But I think you are correct that in order for insurance to be profitable to an insurance company, the premiums have to be a function of risk times event cost. As risk goes to 1, insurance companies are usually just middlemen, or at best negotiators. But you will be giving them more than the full cost of your health care. Insurance is usually cheap, because true insurance is for high event cost items where the risk is so low that the product risk*cost is low.

I don’t get your bit about euthanasia.

Anonymous August 23, 2009 at 6:51 am

There is a world of difference between the individual family members of the elderly dependent providing the care and support, and “society” providing that support. In order for society to do it, coercion on a massive scale is required, including coerced giving to strangers, and some third party decides how much each taxpayer is “willing” and able to give. The extended retirements and free medical care most Western nations now support on the public dime are a luxury, not a necessity, and as such ought to be seen not as an entitlement but a transfer payment (aka welfare). If we were more parsimonious to our seniors–providing this welfare only to the truly needy–our productive citizens would change their behavior so as not to arrive at their early retirements depending on the state for support.

Anonymous August 23, 2009 at 6:39 am

In order for your premise to be economically plausible, we would have to expand the privatization of the health insurance market, primarily by eliminating the state regulations, especially mandated coverage, that make health insurance so expensive. Along with the competition among health care providers that would be a natural consequence of this liberalization, the dynamics of the truly free marketplace would come up with an affordable solution to your problem. It could easily be something nobody has thought of yet. What it certainly would not do are things like “insure” you against the “loss” of the cost of a routine doctor visit. We are now chained by the government to a limited spectrum of methods and practices of providing care and insurance. Innovation and competition would drive down overall costs just like they do in any market. So, there would be an insurance product you could afford, and your care would likely still be more expensive than it is today, but not nearly as much as today’s projections suggest.

Ken August 24, 2009 at 1:39 am

How do I afford to have good term life insurance coverage at a reasonable price in my 60′s with several common conditions of that age? It’s fairly simple. I simply purchased guaranteed premium term insurance when I was about 40 and perfectly healthy. Why should health insurance be any more complicated?

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