[FoRK] Adverse selection in insurance

J. Andrew Rogers andrew at ceruleansystems.com
Mon Oct 19 09:38:41 PDT 2009

On Oct 19, 2009, at 8:58 AM, Ken Ganshirt @ Yahoo wrote:
> --- On Mon, 10/19/09, J. Andrew Rogers <andrew at ceruleansystems.com>  
> wrote:
>> ...[snip]...
>> I'm sorry, you are going to have to accept the fact that
>> the industry is heavily regulated at multiple levels and
>> that the regulation has been an abject failure, very
>> arguably worse than minimal regulation.
> I'm not arguing or debating, just interested. "...the regulation has  
> been an abject failure" at what, exactly?

The nominal purpose of regulation is to create well-functioning  
markets. This usually requires a relatively minimal set of intelligent  
regulations.  Instead, we have hyper-regulated markets that are  
mediocre at best.

In practice, regulation is mostly about rent-seeking and political  
control.  If we end up with a reasonably well-functioning market, that  
is just a bonus.

> To this tiny reductive mind, looking in from the outside, it looks  
> like someone is trying to turn the health part of the US insurance  
> industry into socialized medicine. If that is the goal, the  
> regulation seems to be working to some extent, yes?

Heh, I suppose you could frame it that way.

>> Biomedical R&D is the elephant in the room being
>> vigorously ignored in the current debate. ...
> I don't understand. The current debate in this thread seems to be  
> about whether American health insurance is really insurance (it's  
> looking more and more like, probably not).

As a side-effect of the US market, most of the world's biomedical R&D  
happens in the US.  New medical treatments, devices, and drugs are  
developed and tested in the US first because there is a market where  
they are allowed to make a nice profit (about 10-15% profit for the  
biomedical tech industry).

There is something disconcerting about the fact that biomedical R&D  
has all but disappeared in the rest of the industrialized world.   
Since the biomedical R&D in the US is primarily funded and driven by  
profit motive, it generally follows that significantly reducing the  
average profits from biomedical R&D in the US will greatly reduce  
activity in that sector.  R&D dollars will go toward more profitable  
technology sectors.

No one can make the argument that socialized medicine coexists with  
continued strong biomedical R&D investment because the empirical  
evidence very strongly points in the opposite direction.

> But what does the method of paying for health care have to do with  
> biomedical R&D (potential for stagnation, you said)?

US companies heavily invest in biomedical R&D under the notion that  
can leverage that R&D for a profit.  If the government engages in  
price-fixing to reduce its own costs, that greatly reduces the  
probability of a profit from high-risk R&D.  The US government already  
improperly uses the FDA to get "free" stuff from the biomedical  
technology companies, and there is no reason to believe this type of  
behavior will not continue if they have more control of the system.

> Regardless how American health care gets paid for, won't the  
> biomedical R&D companies still have a market for all the stuff they  
> invent?

A market yes, but not a worthwhile profit.  In most industrialized  
countries, the allowed profit margins do not justify continued  
biomedical R&D.  If all industrialized countries have similar profit  
margins, biomedical R&D will wither because the aggregate return on  
investment will plummet.

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