The inability of health care consumers to monitor product quality leads to regulation, such as the licensing of physicians, dentists and nurses. For much the same reason, the Food and Drug Administration oversees the safety and effectiveness of pharmaceuticals.

Health care spending can be unexpected and expensive. Spending on most things people buy — housing, food, transportation — is easy to predict and budget for. But health care expenses can come randomly and take a big toll on a person’s finances.

Health insurance solves this problem by pooling risks among the population. But it also means that consumers no longer pay for most of their health care out of pocket. The large role of third-party payers reduces financial uncertainty but creates another problem.

Insured consumers tend to overconsume. When insurance is picking up the tab, people have less incentive to be cost-conscious. For example, if patients don’t have to pay for each doctor visit, they may go too quickly when they experience minor symptoms. Physicians may be more likely to order tests of dubious value when an insurance company is footing the bill.

To mitigate this problem, insurers have co-pays, deductibles and rules limiting access to services. But co-pays and deductibles reduce the ability of insurance to pool risk, and access rules can create conflicts between insurers and their customers.

Insurance markets suffer from adverse selection. Another problem that arises is called adverse selection: If customers differ in relevant ways (such as when they have a chronic disease) and those differences are known to them but not to insurers, the mix of people who buy insurance may be especially expensive.

Adverse selection can lead to a phenomenon called the death spiral. Suppose that insurance companies must charge everyone the same price. It might seem to make sense to base the price of insurance on the health characteristics of the average person. But if it does so, the healthiest people may decide that insurance is not worth the cost and drop out of the insured pool. With sicker customers, the company has higher costs and must raise the price of insurance. The higher price now induces the next healthiest group of people to drop insurance, driving up the cost and price again. As this process continues, more people drop their coverage, the insured pool is less healthy and the price keeps rising. In the end, the insurance market may disappear.