This paper by Finkelstein, Hendren, and Shepard finds that the uninsured have such a low willingness to pay for health insurance that they wouldn’t even cover the costs they impose on insurers:

But for our entire in-sample distribution – which spans the 6th to the 70th percentile of the WTP distribution – the WTP of marginal enrollees still lies far below their own expected costs imposed on insurers for either the H or L plans. For example, a median WTP individual imposes a cost of $340 on the insurer for the H plan, but is willing to pay only about $100 for the H plan. This suggests that textbook subsidies offsetting adverse selection would be insufficient for generating take-up for at least 70% of this low-income population. Coverage is low not simply because of adverse selection but because people are not willing to pay their own cost they impose on the insurer.

Large subsidies would be required to achieve universal coverage.  And this is not correcting a market failure, its paying for something that the uninsured are revealing it would be inefficient to provide.

Except when you look at the likely reason.

Individuals choosing to forego health insurance exercise the ability to utilize uncompensated care; this externality from insurance choice raises a potential Samaritan’s dilemma rationale (Buchanan, 1975) for providing health insurance subsidies by using government taxes to internalize the externality imposed on the providers of uncompensated care when individuals choose to remain uninsured.

They are going to emergency rooms, receiving charity, etc.  The low revealed willingness to pay comes from the fact that that formal health insurance would crowd out the informal health insurance they are receiving for “free”.  But of course the cost is borne by somebody and should be added to the welfare calculation.

Perhaps we should stop thinking of health insurance as solving a traditional market failure but instead think of it in the same terms as flood insurance.  Flood insurance is federally mandated for residences in flood plains.  The logic is very simple.  When there is a flood, those affected will receive assistance whether they have insurance or not.  Therefore the only way to get them to internalize any of these costs is to require them to pay in advance, in the form of flood insurance.

When politicians argue against health insurance mandates because they take freedoms away ask them to argue against mandatory flood insurance on the same terms.

Beanie bob:  MR

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