Sherry Glied
Oct 1, 2001
Citations
0
Influential Citations
24
Citations
Journal
Journal of Health Politics, Policy and Law
Abstract
Illness is usually unexpected and often costly. Health insurance is a contingent claims contract that moves funds from the usual state of the world, when one is healthy, to the unexpected and costly state, when one is ill. In this sense, it is a market success: an institutional response to a natural feature of the demand for health care. Without such an institution, there would be no market to transfer funds between health states. In its operation, however, health insurance introduces its own set of market failures. The key features of the health insurance institutions we observe now are, in turn, responses to the existence of these market failures. This recursive relationship between institutions and market failure is a core organizing theme of Arrow’s article. Arrow described institutional arrangements in health care as responses to the market failures of his time. Strikingly, to a reader in 2001, Arrow gave health insurance relatively little airplay in his article. Instead, Arrow devoted the bulk of his essay to the training and organization of professionals and the nature of hospitals. Today, most writers would view the topics Arrow stressed as largely secondary in importance to the organization and nature of health insurance in explaining the functioning of the health care system as a whole. Health insurance, a source of market failure on its own, has now become a central force in addressing the other market failures Arrow identified throughout the health care market. The purpose of this article is to build on Arrow’s work in examining the evolution of insurance institutions in response to the market failures