Would you characterize my inability to get from NY to London via airplane in 1886 a market failure? You might. After all, we had markets at that time, and the market did not “deliver” the goods. But that is no reason to call it a market failure. Why? Well, we had governments at that time, and they did not “deliver” that good either. And it would be wrong to say the government failed too. There was no market failure in 1886 because the costs of producing and delivering safe air travel far exceeded the potential benefits from it at that time. The existence of these costs is unfortunate, but it is no reason to say the market failed.
In what sense, then, can one make the claim that there are market failures in today’s health insurance industry? A good claim would have to argue that there are lots of people who value health insurance services more than it costs to provide those services, but for some reason they are prevented from acquiring them. In other words, given our current stock of knowledge and resources and people’s preferences, value creating transactions are possible, but something is preventing them from happening. But this does not (yet) mean the market has failed. Why? Well, we’d have to observe an actual market and its outcomes to see if that is the case. Of course, we have nothing resembling a market in health insurance today, and so we may never be able to settle this one.
I understand that such reasoning is unsatisfying. It’s sort of like the Communist sympathizers arguing that real communism was never tried. But one can indeed point very clearly to the prohibition on interstate insurance purchases, laws such as guaranteed issue, laws such as community rating, laws mandating particular coverages and laws providing favorable tax treatment to particular kinds of insurers over others as pretty intrusive.
The final point I’d like to make today is to suppose that someone else delivered health insurance to Americans, say the VA. In that case, would we automatically assume that everyone gets it? Perhaps nominally. Or imagine that churches provide health insurance or mutual aid societies provide health insurance and that some people who value it nonethless cannot secure it, even if the costs are lower than their values. Would those constitute market failures?