The day before I took a trip out of town I happened to reply to a friend’s Facebook post linking an article with the headline: “Majority of Democrats favor a single national government program to provide health care coverage.” My comment was: In my mind I just re-word it as “Majority of Democrats favor massively reducing economic freedom.” It is sad the widespread state of economic ignorance today.
The next few days I was traveling and occupied. When I returned from my trip I found quite a few replies. Before responding to any I read them all – and there was enough commonality of themes that I began to write a single reply to all of them. And this comment got longer and longer. Until I realized it best to turn it into a blog post, and link it. So here we are!
First let me say to all of you who collectively wrote over 1000 words in reply to my two sentences, I hope my in depth reply here is not overkill, and makes for interesting reading!
At least one commenter was specifically unfamiliar with the concept of economic freedom, and others seemed to be as well. Here’s a good primer. Indexes of economic freedom by country are easy to find. Statista has one. Canada’s Fraser Institute has one. Heritage has one.
My comment meant what it said – that a single payer health insurance system would reduce economic freedom. And it totally would. Americans would be forced to buy health insurance (including those who don’t want to), it would be provided by a monopoly (the government), and necessarily paid for by higher taxes (because costs would rise). All three of those directly reduce one’s economic freedom.
As a justification for my comment, I could stop here. That would not engage with the substance of most comments, however. A lot of folks in their responses conflated health insurance with the entire health care industry. That’s understandable (they are inseparable after all). But it led to a lot of the comments really boiling down to a variation of “health care costs are very expensive, so we need single payer.”
As my friend Stephen is fond of saying: “Well.”
If we’re going to propose a single payer health care system in the US, it’s equally reasonable to propose the alternate: a market based system. That’s what I favor. Our system has elements of a free market, but also elements of a non-free market. I’m not going to defend the messy current system per se against single payer. After all, consistent with my original comment, I’m against most areas of the current system that reduce economic freedom! I will limit myself to pointing out the major flaws of single payer, rather than make a new proposition for what I think a market based health insurance would look like. That way I can keep this (relatively) short, while still responding to the substance of the Facebook replies.
Several comments were about the possibility – and even actual experiences – of bankruptcy. I am always sorry to hear of anyone going bankrupt – and I know of the heartbreaking reason for the medical bills in one of the examples. This is a staggeringly somber topic, and one that I would never treat lightly.
One major purpose of health insurance is to prevent and avoid bankruptcy from unexpected and costly medical bills. If health insurance is not doing that, there’s clearly a problem. But identifying that as a problem is not the same as assuming single payer is the only – or best – solution to this problem.
High, unexpected medical bills are not the only way people can go bankrupt through seemingly no fault of their own. Owning a non-LLC business that is involved in litigation – through no fault of the owner – can nevertheless cause that owner to lose everything. Unexpected job loss, divorce or even car accidents can cause bankruptcy under the right set of (unfortunate) conditions (even if you have car insurance, in that last example). My point is emphatically NOT that because unexpected bankruptcy can be caused by other things it’s “okay” that it can be caused by medical bills too. My point is that we do not create a single payer system to prevent those other types of bankruptcy. Nor do we generally have other government provided mechanisms for all of these.
Since medical bankruptcy is the most common type of bankruptcy there is certainly a market for good catastrophic coverage that prevents bankruptcy. If this demand is not being met, it’s not because insurers don’t want the associated profits of selling into this market. It means something – likely regulations, or warped incentives due to them – is preventing the supply of this service to the market. Therefore, the solution to preventing more medical bankruptcy is a freer market which will create better insurance options.
When virtually any industry is actually allowed to operate as a free market the result is – over time – lower prices and higher quality. My favorite living economist, Don Boudreaux, illustrates this principle well with many posts about how many hours the average worker has to work to buy common household items over the decades. See here, here, here, and here for examples.
Once commenter said that some people might pay less than they do now even with increased taxes, due to how much they’re paying for insurance now. There’s no doubt that single payer will reduce costs (especially in the short term) for some people. But it will raise costs for others. I believe it can be demonstrated that overall costs will increase with single payer, and that necessarily means average individual costs will increase as well.
This comment reminds me of the lament that politicians only give tax cuts to the rich. This is actually a tautology – the US tax regime is so progressive right now that any income tax cuts at all would go to the top 40% of income earners, as they are generally the only net payers into the federal system! With single payer it may very well be the case that only the most wealthy two quintiles of income earners will be paying for all healthcare. Good luck expecting our economy to continue growing with that sort of plan!
ADDENDUM: One comment, after reading this was that the preceding paragraph was an error because of social security taxes. Fair enough, I have revised the above paragraph to simply clarify that I should mean cuts to income taxes. As an aside, I would favor eliminating all social security taxes entirely anyway! (But that’s another conversation).
The same commenter noted that “good and decent people believe everyone should have access to healthcare.” Sure. Just as good and decent people believe everyone should have access to food. Without food, we all die. And yet a competitive, open market makes food more abundant, more diverse, and cheaper, overall, decade by decade (though not necessarily year by year). For example, according to this book, in 1975 the average supermarket in the US sold 9000 different types of items. By 2008 that average had quintupled while the real prices went down. Suffice it to say, single payer grocery stores in which the government paid for everyone’s food purchases would not make for cheaper, let alone as diverse, options.
Now to a litany of what I find to be major flaws of the single payer idea for health insurance. Since the replies to my Facebook comment were almost entirely about high costs, I’ll limit myself to flaws involving costs – but I believe there are other (moral) flaws as well to single payer.
Major Flaw 1 – There’s No Cost Savings Potential
The first obvious economic argument put forward for why single payer will lower costs is because it would eliminate profits from health insurance companies. This is specious: even if health insurance profits drop to literally 0, the savings is miniscule because the industry has single digit net profits already. (Also, here’s a Google search for that too). This unnoticeable savings would be more than offset by other disadvantages of the single payer plan which drive up costs.
ADDENDUM: Another comment on FB after reading this noted that the elimination of outsized CEO compensation (by going to single payer) would create an area of cost savings. That’s an even weaker argument than saying the elimination of net profits creates cost savings. CEO compensation is much smaller than total net profits of a company, making the cost savings a fraction of the already tiny savings from eliminating net profits altogether. To put numbers to this, a quick Google search shows the size of the health insurance industry as about 1 trillion USD, and another quick Google search shows the total compensation of the top 62 CEOs for that industry as being just over 1 billion USD. That means the savings is one one thousandth, or a tenth of a percent. We’re not even in “single digit” savings anymore! I think we can discard this entirely as a meaningful idea.
Furthermore, this is only feasible if government also controls the supply of health insurance, and not simply as an intermediary who simply pays on behalf of the consumer. If the government is the single payer among many sellers (a monopsony), that would be akin to the defense industry, which has profits. (Again, they’re single digit). More on this analogy below.
Therefore, to lower costs by eliminating profit the government would ALSO have to be single seller, not merely single payer. And there’s a word for that: socialism. Show me an example of socialism that outperforms a market system in terms of cost control and I’ll show you a pink unicorn.
Major Flaw 2 – Inefficiency will Drive Up Costs
A major component for driving costs down over time in a free market is due to efficiency – businesses that are more efficient tend to earn higher profits and obtain a larger market share over time. The government will operate much less efficiently than a profit-driven business. This is so self-evident I’ll give no examples.
Major Flaw 3 – Untethered Demand will Drive Up Costs
With single payer health care usage will go up. Normally, as demand rises supply also rises as more sellers appear to reap the profits of an expanding market. But with single payer this mechanism is disconnected – especially if there aren’t profits to be had in the industry any longer (see Flaw 1). When demand rises but supply doesn’t the result is a rise in prices (in real world terms this could manifest in several ways, including health care rationing and much longer wait times to see specialists, etc.).
Major Flaw 4 – Lack of Negotiating Leverage will Drive Up Costs
The second obvious economic argument (after the idea that profits will be eliminated) put forward is that the US government, as single buyer, will have strong negotiating leverage with health insurance and health care providers (in economic terms, because it would be a monopsony). But in practice, due to a lack of any pricing signal, the government will not have any real leverage. Plus, it will have no ability to walk away from the table because it must buy insurance for the population. Let’s take these two parts in turn:
Look at the defense industry as a good analogy. (Note: municipal water supply isn’t an analogy because there’s only one seller, nor is electricity because while the government often regulates prices and profits, it is not actually single payer). Major defense contractors such as Lockheed Martin and Northrop Grumman sell their major products to only a single payer – the US armed forces. And everyone knows the arms industry is famously wasteful. Our armed forces regularly pay for cost overruns, and politicians on the right and the left frequently criticize this. Even defense “hawks” recognize that we pay a pretty penny for our world class military, they just argue it’s worth the cost. (Admittedly, that’s what many might say about single payer, but remember, the choice is not a dichotomy, but a trichotomy between single payer, the flawed current system, and a free market). But I’m limiting my post to economic arguments.
And this is where a lack of pricing comes in. With no market of buyers, there is no price signal for the government to use as leverage. And so it does not get very good pricing. For example, is a single tomahawk missile actually 1.8 million dollars? Or is it that price because Raytheon can (informally) collude with all missile sellers that a LAM of the tomahawk’s quality should be priced that high? No one really thinks the armed forces get good pricing from defense contractors. Just ask literally anyone who criticized the Iraq war over the past two decades.
Secondly, the government cannot possibly walk away from the negotiating table. It must buy health insurance for the population. This is really the same problem as described above, but from a different angle. If you go to buy a used car, and the car salesman somehow knows you literally cannot leave without one, you are not going to get a low price. The very possibility that you can simply walk away gives you negotiating leverage. With single payer, the government cannot walk away – and every health insurer knows it.
If you believe the health insurance industry reaps ungodly profits now (it doesn’t, again), just wait until it gets to negotiate with a single buyer whom it knows has bottomless pockets of cash AND must purchase what they’re selling.
Major Flaw 5 – Lack of Pricing Signal will Drive Up Costs
I was amused when one commenter wrote in part “we often can’t even find out what we will have to pay in advance [for medical bills].” Bingo. This flaw that already exists in our current system will be magnified tenfold with single payer. (Again, remember trichotomy, not dichotomy).
The fact that health care costs are both incomprehensible and opaque to the common consumer demonstrates that the prices are not market based. The solution isn’t to make them even less market based with a single payer model, but to do what is needed to allow the pricing system to create signals to producers and consumers. No one (at least not consumers) knows the prices, so no signals are being interpreted correctly by the market.
Note: While the elimination of the pricing signal also contributes to the government’s weak negotiating position as in Flaw 4, the problem I’m describing here is a separate one. It’s just caused by the same source.
Prices inform sellers and buyers of opportunities that allow them to coordinate disparate decisions. They inform and modify the behavior of individuals in a free market in ways that benefit everyone. Importantly, prices reflect the knowledge and decisions of millions of individuals. Single payer removes all that knowledge. One of the greatest economists of all time – F. A. Hayek – wrote extensively about this knowledge problem, describing the market as an “extended order” that constitutes more information than any central agency or person could wield. There is simply no known substitute for prices in a market. This helps to explain why currency – which codifies prices – exists in virtually all societies since the dawn of man.
Without this vast knowledge comprehended only by the market itself costs inevitably rise and quality inevitably falls.
There are no doubt more major flaws that cause a single payer plan to have higher costs. But this post is long enough. I may later write a post on my moral objections to single payer. Or, to sketch out the alternate plan in which the health insurance industry is actually market based.