Markets are not painless panaceas to prickly problems. We can marvel at the marvels of markets in the old movie Trading Places when the Duke brothers’ plans are foiled and they fall into financial ruin, but the pain that comes from bad outcomes from the best of intentions can have real effects on individuals, companies, and entire sectors of the economy. That pain is exactly why some of us prefer markets to government action, because they limit the fallout from unintended outcomes through diversification.

The latest example of how things can go wrong is in the long-term care insurance market, and government regulators come in for their share of blame. Overall, though, it is a story of how reality can fall athwart the best plans. Long-term care insurance may still be a good purchase, as some of our policy proposals a decade ago suggested, but the prices will be higher and the benefits not nearly as generous. A sample from the Wall Street Journal article:

It turned out that nearly everyone underestimated how long policyholders would live and claims would last. For example, actuaries, insurers and regulators didn’t anticipate a proliferation of assisted-living facilities. And they assumed families would do whatever they could to avoid moving loved ones into nursing homes, holding down policy claims.

By the late 1990s, assisted-living facilities were widely popular. Especially at well-run ones, staff members looked after policyholders so well that they lived years longer than actuaries had projected. …

Last year, a state-court judge in Pennsylvania approved the liquidation of two long-term-care insurance units of Penn Treaty American Corp., based in Allentown, Pa., and known for its relatively low rates.

The judge blasted regulators for not granting rate increases sought by Penn Treaty years before its collapse….