Healthcare Policies from the Perspective of the Theory of the Second Best

Public Policy: The Second Best, Political Compromise, and Social Welfare (Chapter 6), Amazon Kindle, 2019.

30 Pages Posted: 15 Jun 2018 Last revised: 2 Jan 2021

Date Written: May 31, 2018

Abstract

The theory of the second best implies that policymakers should address all relevant issues in a comprehensive manner to improve social welfare. Since most components in the economy are interconnected, a policy focusing narrowly on particular aspects of a broad issue often produces serious side effects, making the overall outcome unclear. Healthcare involves extraordinarily complex analytical and political issues. Analytical complexities and political motives severely limit the ability and the willingness of policymakers to look at healthcare issues in a comprehensive manner. In this circumstance, a rushed policy could do more harm than good. Health Savings Accounts led by Republicans narrowly focuses on consumer incentives, and the Patient Protection and Affordable Care Act led by Democrats narrowly focuses on universal insurance coverage. As a result, those policies have many shortcomings. As an example of addressing healthcare issues in a comprehensive manner, this paper presents a two-tiered system which separate the market's roles and the government's roles. The main idea is to assign market forces and policy tools to right tasks: unleashing those market forces that should work effectively, fortifying those market forces that have good potential to work effectively, and using direct policy tools in areas where market forces are ineffective. This approach should largely avoid side effects. Serious side effects stem from failures to recognize limitations of the market and attempts to impose ideology-driven missions on the market.

Keywords: healthcare policies, health insurance, affordable care act, theory of the second best

JEL Classification: I11, I13, I14, I18

Suggested Citation

Park, Sangkyun, Healthcare Policies from the Perspective of the Theory of the Second Best (May 31, 2018). Public Policy: The Second Best, Political Compromise, and Social Welfare (Chapter 6), Amazon Kindle, 2019., Available at SSRN: https://ssrn.com/abstract=3188040 or http://dx.doi.org/10.2139/ssrn.3188040

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