Most people think about the debate about health care reform and the debate about financial regulation reform as quite separate problems. But are they really? Every first-year derivatives textbook tells the student that derivatives are a form of insurance—a way of hedging against risks that are substantial and yet hard to quantify. From a societal point of view, the risk of illness, and the costs of care in old age are one of the largest such risks to the society and economy as a whole, and so health insurance serves a similar economic function as derivatives in providing a mechanism for society to spread large economic risks. For the average working family, both are part of the package of financial decisions that must be made, and trade-offs have to be made between, for example, purchasing a more expensive health plan with higher premiums but better coverage for high ticket health needs versus putting that money in a 401(k). These are different ways of providing for the uncertainties of the future. But they pose similar challenges to ordinary consumers/investors of evaluating complex products provided by retailers who have more knowledge than consumers about what the statistical odds of a payout in the consumer’s favor might be. Obviously costs in one area impact the other: if consumers find themselves facing catastrophic health care expenditures the first thing they will do is withdraw money from their 401(k) to cover those expenses, and they certainly will not have extra money to invest in financial products. So stability and predictability in the area of consumer health care costs also contributes to consumers’ ability to invest in financial products.
One difference of course is that health insurance is a financial product sold to ordinary retail investors. Derivatives in contrast are for the most part available only to what the law refers to as “sophisticated investors”. The good sense behind the insurance exchanges idea in the health care legislation is that the experience from finance clearly teaches us that retail investors are not in a position to sit across the bargaining table from large institutional market players with substantially greater information about the possible risks and rewards of certain financial transactions. Just as securities sold on an exchange are standardized and hence far easier for ordinary consumers to evaluate from the point of view of publicly accessible information, the same should be true of the investments all but the most sophisticated investors make in health insurance.
Some other lessons from the financial debacle may have implications for the health care issue. One lesson of the financial crisis concerned the sometimes unhealthy role played by investment banks, whose staff was motivated by inappropriate incentives, in the valuation of ordinary companies. We see similar problems in the way insurance companies’ mandates are often creating inappropriate pressures on health care providers.
Recently a conversation has begun between specialists in insurance regulation and specialists in financial regulation around these questions. A conference will be held at the Cornell Law School in April 2011 bringing together behavioral economists and institutional sociologists and anthropologists and also regulators and policy makers working in both fields. The conversation between behavioral economists and sociologists and anthropologists of markets has already yielded important insights about 1) the networks through which prices come to be set in the financial markets, 2) innovations in regulatory form and process that can lead to better compliance and more optimal behavior by market participants, 3) what paradigms might replace the neoclassical model and associated rational actor model of human behavior that has undergirded so much market law and policy over the last two decades. At the next conference, we plan to ask how the insights from this conversation might speak to current problems in health care policy design. Our starting premise is that markets are not rational in the sense assumed by neoclassical economics, but that through clever institutional design and the exploitation of cultural practices and social networks we can make significant progress toward market stability.
But the big picture is this: we have been talking about health care as a kind of welfare/wealth redistribution issue and for many, such issues should take a back seat to the problems relating to getting the economy back on track and especially bringing stability and predictability to the financial system. But maybe we should instead think of health insurance as an integral element of the financial stability package?