In this chapter, I examine sources of market failure in both health insurance markets and health care service markets so as to be clear as to where government intervention is necessary from the perspective of efficiency. I also explore the extent to which government intervention in health insurance and health care services markets is required on the grounds of a theory of distributive justice. Going back to first principles at this juncture will assist in analyzing reform proposals in subsequent chapters. It is impossible to evaluate the benefits and costs of health care reform without first identifying what the objectives of the health care system are or should be.
Commencing with an economic analysis of the sources of market failure can be criticized as importing the implicit assumption that less government is, all other things being equal, better than more and that distributional concerns are of less consequence than efficiency considerations. This criticism has validity and by commencing with an economic analysis I do not wish to discount distributive and other non-economic goals. I strive to document distributional considerations throughout the economic analysis. There is a need to understand the source of market failures in a system to better predict what will be the systemic effects of measures designed to achieve distributional goals. Moreover, although economics has relatively little value in terms of formulating social objectives, it has greater legitimacy as a tool of design. In other words, it makes sense to try to achieve social objectives in the most efficient way possible. This is because the fewer resources deployed to realize a particular social or non-economic objective the more resources there are available to achieve other valued objectives. It is possible that efficient regulatory solutions may be rejected as contrary to other values we have, e.g. the use of vouchers may be criticized as diminishing the dignity and autonomy of recipients. However, generating models that should efficiently achieve social justice goals will, at a minimum, help in selecting the best regulatory design balancing all these considerations.