The death spiral of our current, fundamentally free-market-based, health care system is due to our focus on the individual, rather than the whole. Here are the reasons.

Adverse selection: Healthy people take the risk that they can do without insurance, leaving the less healthy in the system. Premiums rise and again the most healthy, as well as many who just can't afford it, drop out. The rising premiums and increasing dropouts of the healthiest is a reinforcing feedback that causes a death spiral.

Adverse selection causes havoc in a market economy because of asymmetric information, in this case because the buyers know their health situation better than the sellers. The understanding of this phenomenon is so important that those who developed it were awarded the Nobel Prize in 2001.

Unfortunately an awareness of its impacts has not sufficiently worked its way into the political realm. It explains why a privatized insurance-based prescription drug proposal would fail. People who know they don't have as much need for prescription drugs will drop out ... and the death spiral begins.

Though adverse selection is the fundamental driver of system failure, other effects accelerate it.

Dropouts get sick: Some take a risk, betting they won't get sick, and don't get insured. Others simply can't afford it. Some lose the bet and get sick. The logical outcome in a pure free market system would be to just let them sicken and die. Thankfully, for the most part, our society is unwilling to do so. They often get some kind of government-funded care with many going to emergency rooms for treatment. The costs, some excessive, are passed on to the public in higher taxes, and to businesses in higher premiums, as much as 15 percent higher.* The higher taxes and higher premiums to businesses cause even more people to drop, or be dropped from, coverage. This reinforces the death spiral.

Loss of positive externalities: We don't take advantage of them. For example, when you spend money on your heath care, it benefits me. First, because I'm less likely to get sick, and, second, because if we work together, I'm going to be more efficient when you're in good health. Therefore, the result is higher premiums, and less income to pay them, when everyone isn't covered.

Short-term orientation: Even though it's a lot more efficient to prevent health problems than it is to treat them once people get sick, all companies, including HMOs, find it difficult to spend now for lower costs in the future. It's much faster and easier to deny care, to save now by not spending on prevention. People denied care often sue, which drives up costs. And, according to a 1999 Institute of Medicine report, "To err is human," two studies show that between 44,000 and 98,000 hospitalized Americans die each year due to medical mistakes. This costs lives and also results in lawsuits. So instead of driving costs down by prevention and providing adequate care, our system now drives them up due to the higher costs of treating people after they get sick and legal expenses.

Unfortunately, there's a current push to cover up the root causes of the legal problems by taking the determination of lawsuit awards away from juries, who hear all the evidence, and impose one-size-fits-all caps on awards.

In summary, adverse selection, costs being passed on to the public in taxes and to businesses in higher premiums, not taking advantage of positive externalities of health care, a lack of emphasis on prevention, denying coverage, and medical mistakes are causing the death spiral of our health care system.

The market is a powerful mechanism and it works well to solve many, many problems. But there are problems for which only collective, government-based solutions will suffice and for which individualistic, market-based solutions are doomed to fail. Health care is just one example. Market solutions also fail for power production, fisheries, farming, and commons preservation (maintaining clean air and water).

Our society values radical individualism. Our greatest fear seems to be the collective. For example, the ultimate enemy in much science fiction is of a collective nature, as in the Borg of "Star Trek" being the best example, where the loss of individual identity is the equivalent of death. Similarly, we fear collective solutions; they smack of communism. But unless we want to stand by and watch many of our social and economic systems fail around us, we'd better get over it.

We can let go of extremes of ideology and design practical systems. Juveniles neglect responsibilities to the whole, adopting a foot-stomping "I want to do what I want to do" attitude. But maturity requires balancing between the extremes, as does a family that balances between individual needs and family needs.
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