It is in the health insurer’s interest to have application fraud, not only because it saves time and expense on the front end, but also because it lets them get out of any policy that isn’t going well for them. If the health insurer had to verify the information – if, in essence the insurance company had to behave as an accredited investor with adequate expertise to make a decision without reliance – it wouldn’t have the opportunity to bail out. It would catch more genuine liars, but many of these liars would have turned out to be healthy, profitable customers, and what the carrier really wants is a population devoid of expensive claims, not devoid of liars.
A lot of people reflexively believe that the free-market system works for everything, and that it is fundamentally a good thing. Peggy Noonan wrote in the WSJ last week that a free-market health care system was intrinsically good; in other words, that, regardless of its efficacy, it was something we should strive for.
But the reality is that markets sometimes don't work. They work best when they are free from outside influence (in other words, they are actually free) and when people are able to make rational cost-benefit analysis using complete or nearly complete information.
These attributes are decidedly not to be found in the health care market. It is rife with political influence and rent-seeking. It is impossible to make rational cost-benefit analyses when it concerns your own health or even life, and most of the market participants simply have no chance of making informed choices, because they are not doctors.
This theoretical free-market in health care that we all want simply does not exist. But the health insurance companies are happy to indulge our fantasy that it does.
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