Is it the unhealthy that need health insurance the most?
I on Krugman on Obama on health care

Via Economist's View, Paul Krugman (NYT, gated) discusses Barack Obama's health plan. I won't express an overall opinion (I couldn't read the whole piece, as I don't have access to the NYT online), but a particular sentence caught my eye:

[...] insurance companies won’t be allowed to deny people coverage or charge them higher premiums based on their medical history. Again, points for toughness.

First of all, do you really get toughness points for this one? I know precious little about the state of the health care debate raging in America, but from personal experience most voters love this sort of stuff. Here's the government standing up to big multinationals and sacrificing corporate profits to protect the sick. I bet you good money that if you ask a representative sample of voters who stands to lose out, the majority will fail to name the segment of the population with relatively good medical histories.

Secondly, I'm not so sure the proposal is such a good one. As is the case with any market in private goods government tampers with, designating relevant information off-limits generates inefficiency. Some healthy individuals, unable to enjoy a low 'good medical history' premium, will no longer find it worthwhile to insure. As per 'The Market for Lemons', the bad health risks stay in the market - and the average insurance premium goes up.

While these issues are certainly important in themselves, my main objection lies elsewhere.

Health insurance is a marvellous thing and I recommend it to everyone. However, it is not the unhealthy we should be subsidising: it's the poor.

The richer you are, the more insurance becomes a financial product like any other. At the extreme, no matter how risk averse Bill Gates is, it is not unlikely that health insurance has no place in his optimal investment portfolio. On the other hand, a poor person sharing Gates's risk profile would find it beneficial to invest a much larger proportion of her savings on health insurance. The reason is simple: potential health care costs represent a much greater risk to her 'heavy-on-health, light-on-other-assets' portfolio than they do to Gates's. Any government intervention on the health insurance market ought to have the poor as its main focus, not the unhealthy per se.

Beyond privacy, the only good argument I can think of for concealing medical information is the perverse incentive it generates for people to avoid medical examination that may reveal a high probability of future health problems. But there are better ways for public policy to tackle this.

Make insurance compulsory, allow medical histories to be seen by insurers to increase efficiency in the market, and have the government directly subsidise the poor that have adverse medical histories, for example by offering them insurance by the state on a public welfare rather than profit maximising basis.

To cut a long story short, it is important to realise that the poor and currently healthy need insurance as much as anyone - and it would be a mistake to make it more difficult for them to acquire it.