And because of this imperfect information, the whole healthcare arena is characterized by several dilemmas. Several tensions and trying to understand how we're going to resolve these tensions through public policy. Is at the heart of why this issue is such a challenge to deal with. The first one is called agency. One party is contracting of another party to perform services on the first parties behalf. You want to know is my doctor taking good care of me or giving me treatments I don't really need. Now this is not this particular problem is not unique to healthcare. After all when you take your car into the shop we also have a agency problem. We don't know necessarily if your car repair man is going to do the appropriate interventions for your car. And we worry about that, we worry that perhaps. You will be getting unnecessary repairs. Or stuck with bills that are inappropriate. And so this agency problem the fact that we don't necessarily think that the free market will work perfectly to ensure that people receive the correct treatment can be addressed through various mechanisms. Such as professionalism. We expect doctors to accord themselves with of professional behavior or detailed purchasing agreements or even government regulation. A second dilemma of medical finance another big problem that we face in the health care area is called moral hazard. And that is people have health insurance of course all of us pretty much want health insurance because we're fearful that if something terrible happens to us. We could be stuck with extremely large bills, even face the risk of bankruptcy. And because of that desire to avoid the risk of economic calamity if something bad happened to you, people want health insurance. But once people are insured against bad events, ironically it encourages bad behavior. Because medicine is expensive and the need for treatments are unpredictable risk adverse patients want insurance. But once people are insured the price barrier to consumption of healthcare is removed in all their part. And what does that do? It leads people to take risk. If you know that you have health insurance. Other things equal, maybe you're not going to take as good care of yourself. Maybe you'll eat less healthy than you should. Maybe you'll exercise less. You'll say, pass the fries, or I'll go to the gym tomorrow. Or maybe you will have a tendency to consume more health care than you really need. Maybe you will go get that extra test at the doctors office because you are not paying for it directly. Your insurance is paying for it. When you go to the GAP and buy the shirt it is coming directly out of your wallet. And so you will not buy the shirt presumably unless you really think you want the shirt, and it's worth the cost. But if the insurance company is paying for your health care you might not have an incentive to consume the efficient level of health care services. And then the third dilemma is called adverse selection. I mentioned earlier that the health care market is characterized by what we call imperfect information. And here is a particular instance of that. The insured individual knows more about his or her risk level than the insurer. And so what does this mean? People have a sense of their own health. They know their own genetics, their own family background better than the insurance company would know. Most people have a better sense of their risk profile than the insurance company. And what might this do, well, who's most likely therefore to want to go get insurance. It's presumably the people who believe they are most likely to be sick in the future. People who have just been diagnosed with a bad illness, or people who know they have a family history of heart disease or cancer. The very people who are most likely to get sick are most likely to seek insurance. And that would lead insurers to lose money if they offer insurance. So insurers then this is kind of a game. This is kind of a struggle between the public that wants insurance. Particularly, if they're most likely to need it, and insurance companies that want to maximize profits. So, what do insurance companies do? Well, they want to, what's called experience rate. They want to charge differential rates based on expected risks. If they believe you're a patient who has a bad family history, who's not very healthy, who's a smoker, who may be overweight or any number of reasons. Their desire, other things equal, is to charge such patients more. And yet, if they do that, which is very rational from the insurance companies' perspective, this can cause insurance rates to go up. Because the people who are getting insurance are the people who are the sickest. This raises rates. And that will lead people who are healthier to not want to buy insurance. And as a result, it becomes more expensive for those people to obtain coverage. And the result can be what's called a death spiral as the only people who voluntarily buy insurance are the people who are most likely to need it, the people who are most likely to be sick. And what does this mean? It suggests that we might not expect the free market in the area of health care to provide an efficient insurance system. And, in fact, in virtually no country is there a perfectly free market, no advanced country is there a perfectly free market for health insurance. But the responses vary greatly across nations. All nations, every nation in the world, in Europe, in France, in England, face these tri dilemmas of agency, moral hazard, and adverse selection. But how each nation responds to those dilemmas is importantly shaped by culture, by politics, by history, by public opinion, by leadership, by all the factors I'm sure you've been talking about over the last couple of months. And we can think about a variety of different kinds of models of health care.
