Market for Health Insurance, Essay Example

What effect will up to 30 million new mandatorily enrolled customers have on the market for health insurance? Consider the problem of moral hazard and adverse selection.

Medical spending will increase all around, first because many of those 30 million new customers actually will be needing the health insurance they have been ordered to buy. But there will be other effects too: healthy people who have been ordered to pay will try to get their money’s worth. Before, when they came down with a bad cold or the flu, they might just stay in bed. Now, more of them will demand medical treatment and prescription drugs. Also, since they are now covered, moral hazard will come into play: they will take greater risks, such as smoking, drinking, using recreational drugs, and neglecting their diet and weight because they think their new insurance will pay for the medical problems arising from that behavior. Spending will also increase because of  adverse selection, which will happen because many of those 30 million new customers have significant preexisting medical conditions. In a totally free market, insurance companies avoid adverse selection through high premiums or by disqualifying such applicants.

In what sense are the rapid increases in healthcare spending unsustainable?

 Government spending on healthcare is increasing, but personal spending is declining. Eventually, healthcare expenses will threaten to outpace tax receipts and cut into other governmental programs. Future borrowing costs also will rise unsustainably when lenders begin to realize that the U.S.’s will to significantly curtail its medical spending is not politically sustainable.