Who Knows?

Health insurance companies spend enormous amounts on statisticians and experts to help them figure out just how sick you could get. If you're an elderly smoker than you'll probably cost the company a lot more money than a young healthy individual. Which is why smokers pay a lot higher premiums than everyone else. While smoking is an obvious indicator of potential expense, the insurance companies can't always predict how costly an individual will be. As a result, with every new customer comes extra risk.

Economists call this problem an "asymmetry of information," i.e. you know how likely you are to get sick but the insurance company doesn't. Insurance companies can get around this problem by including pricing schemes and co-pays that are designed to get people to reveal information about themselves. Nobel prize winning economist John Stiglitz called this process "screening" and said that it would lead to the inefficiencies in insurance markets if left unchecked.

New research at the National Bureau of Economic Research has shown that the now classic "Stiglitz Model" doesn't always hold for health insurance. Insurance companies can't rely on prices to differentiate types of customers, namely expensive vs. inexpensive. On a macro level this means that the market may not be able to reach what economists call a "competative equilibrium."

The NBER research as well as the "Stiglitz Modle" have a large impact on the health care debate. Both show that the free market which is essential to both the public option favored by Democrats and the counter-plan favored by Republicans can't guarantee an efficient outcome.