Which way does adverse selection run?

Regarding Paul, Alex, Henry, and Megan,

I have to admit I'm confused. When people talk about adverse selection from the standpoint of patient action, they say that the healthy obviously will not sign up for insurance because it's a waste of their money. When they talk about it from the standpoint of healthcare companies, they say that they obviously will try to deny the unhealthy. So, do they cancel out?

Alex Tabarrok offers this paper (Table 10) as evidence that the uninsured are generally more rather than less healthy, which may be evidence that insurance companies are less than successful at getting unhealthy people out. Meh - given such facts as your insurance is tied to your employment, I am skeptical about Krugman's (and Kenneth Arrow's) theoretical arguments, and therefore also skeptical about whether that evidence refutes it.

I at once thought about the "2nd Best Economist" flap that arose between Dani Rodrik and Alex, as did apparently Henry Farrell. Once again, someone (Dani in the earlier episode, Krugman in the latest) uses a theoretical argument about market failure to justify the simplistic formula I have posted about repeatedly. As Megan McArdle seems to note, this episode follows the same logic as Akerlof's "The Market for Lemons" theory. Krugman swallows the bullet and asserts that Arrow's paper "demonstrated -- decisively, [Krugman] and many others believe --" that there can be no market in insurance, just as there are no Used Cars, Used Car Salesmen, Used Car Lots, or Used Car sections in the classified ads.

I am looking forward to future columns in which Paul will explain how turtles naturally migrate onto fenceposts. Also, on how he expects single-payer programs to expend significantly fewer resources on uncovering fraud and unnecessary expenses while simultaneously reducing the amount of money spent on health care and increasing the number of people covered. Wow, that single payer program must be impressively efficient!

And the more I think about this, the less impressive Krugman's argument is. He begins with an explanation of insurable events (low probability, high cost), and concludes with a diatribe on the profit motive:

The big bucks are in triple coronary bypass surgery, not routine visits to the doctor's office; and very, very few people can afford to pay major medical costs out of pocket.

This tells you right away that health care can't be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can't just trust insurance companies either -- they're not in business for their health, or yours.

This man won a Nobel? Shorter Krugman:

Insurable events happen, therefore health care is not a commodity, it is something whose purchase must be negotiated by someone else who is driven to screw you because of profit motivation.

I buy car insurance pretty much like a commodity. When something happens to my car, I go to any reputable body shop, and the insurance company cuts a check. That's pretty much the opposite of what Krugman is saying in the quoted passage. But it must be my imagination.

Okay, car insurance isn't like health care. Yes, that's the point: insurance is insurance, health care is insurance plus some attempt to insulate you from the cost of non-insurable events, like regular visits to the doctor's office or visits for colds and flu and medicine to treat such minor illnesses. Either Krugman doesn't know this (not good), or he does but does not want to mention it (also not good).