Congress is on the verge of passing a bill that will forbid employers to discriminate against employees (including applicants for employments) on the basis of the results of genetic tests, and forbid health insurers to deny insurance or charge higher premiums on the basis of such results. (Actually, the bill tightens up an existing law that was designed to do the same things but turned out to have loopholes.) The stated rationale of the bill is that it will encourage people to obtain such tests and use the results to seek treatment or make other decisions, such as deciding whether to have children. That rationale is dubious for several reasons. First, people who suspect they have a gene that causes or predisposes them to a serious disease have a strong incentive to be tested (especially if there are treatment options), an incentive that will often override the possible adverse effect of a positive test result on employment or insurance. Second, in the absence of the law, employers and insurers could make such testing a condition of employment or insurance. Third, persons who are confident that they do not have a genetic defect have an incentive to test voluntarily and disclose their negative results to employers or insurers--and some of these persons will be mistaken and discover that they indeed have such a defect.
So while some people are doubtless deterred from testing by concern with the effect on their employability or insurability, on balance it is unlikely that there will be more testing by virtue of the new law. In a strict efficiency analysis, moreover, even if more people who are likely to have genetic defects will test for them as a result of the law, this would not necessarily be an argument in favor of the law. There is no increase in efficiency when a person conceals information (or avoids obtaining information that he fears he would have to try conceal if he did obtain it) in order to obtain a benefit that he would not obtain if he disclosed it. This would be obvious if a person who knew he was deathly ill bought a huge life insurance policy, concealing his illness from the insurer. The situation is no different if the person knows he may be deathly ill and decides not to verify his suspicion lest the confirmation of it prevent him from obtaining the insurance policy. In either case he is shifting his own expected costs (whether reduced longevity or medical expenses) to unconsenting others.
Analysis is complicated, however, by the possibility that a failure to test brought about by fear of the consequences for insurance or employment would impose costs on other people. That would happen if a prompt diagnosis would enable treatment of a genetic defect at a lower cost, assuming that treatment expenses are paid for in part at least by third parties. Then those third parties would be better off if the person tested. Suppose for example that had the person tested positive, she would not have had a child; instead she had the child, and it is badly deformed, requiring enormous medical expenses paid largely by third parties.
That would be a genuine externality, whereas if the cost of a medical treatment is merely shifted from the individual to his employer or insurer (which means, of course, to the other insureds of this insurer), the externality would be merely pecuniary. That is, it would be merely a transfer of wealth rather than an avoidable investment of scarce resources, as in the example just given where a medical expense is incurred that would not have been incurred had it not been for the failure to test. But transfers often and here are likely to have such effects, and not merely to alter the distribution of wealth. The cost of health insurance will rise if the new law goes into effect, and that rise will increase the number of persons who do not have health insurance, and their lack of insurance coverage may cause them to forgo tests and treatments that may, just as when a genetic test is forgone, avoid costlier treatments and other adverse consequences later on. Employers' labor costs will rise too, resulting in lower net wages; and health is positively correlated with income, so again the transfer will have secondary effects in the form of more ill health.
So even if the new law led to more genetic testing--which probably it would not do, for the reasons stated at the outset--its social costs, from the standpoint of economic efficiency, would probably be negative.
The law might seem defensible on noneconomic grounds as a form of social insurance, since persons who test positive for genetic defects may be unable to obtain private health insurance. The broader point is that the more that science reduces uncertainty about individuals' health, the less risk pooling there will be and the greater, therefore, the demand for social insurance. In the limit, if everyone's health prospects were known with certainty, there would be no market for health insurance at all and this would exacerbate the effects of differential health on equality of wealth; no longer would the healthy be paying to insure the unhealthy.
If social insurance is desired, the question becomes whether to finance it through taxes or, as under the proposed law, to compel private industry to provide it. The major difference is the identity of the "taxpayers": it is federal taxpayers in the first case and the members of the private insurers' insurance pools in the second. The allocative effects of the social insurance "tax" will differ because higher income taxes do not have the same behavioral effects as higher health-insurance premiums. The higher premiums cause people to leave the insurance pool; given current political concerns with the number of people who do not have health insurance, placing the "tax" on those who do have such insurance is questionable.
Eighty percent of Americans tell pollsters that they do not think that health insurers should be allowed to deny coverage or charge higher premiums to people with genetic defects. This is an example of Americans' economic illiteracy.