Competition and Health Care

by Don Boudreaux on June 12, 2009

in Competition, Health

David Rose, Professor of Economics at the University of Missouri – St. Louis, argues correctly that "The problem with American health care is not excessive competition; it is insufficient competition."

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{ 17 comments }

geckonomist June 12, 2009 at 9:12 am

Supported by which facts?
"The absence of competition will result in higher actual costs. This has been the experience in countries with nationalized health care,…"

1. Which country with "nationalized" health care spends more of its GDP than the USA?

2. What about all those countries with hybrid systems, i.e. a mix of public insurance and private insurance? How come the private ones are not bust?

vidyohs June 12, 2009 at 9:14 am

"Part of the reason why Medicare is a good deal is that the government can drive a hard bargain with health care providers in the form of artificially low reimbursement rates. In a competitive market of many insurers, however, if a single insurance company tried to drive a hard bargain with a health care provider, it would find itself laughed out of the room"

Just a real world note:

In the last two months I have taped about ten Doctor depositions. Out of the ten, 7 stated in the introduction that they had opted out of medicare, did not and would not take patients if that is what they had as coverage.

What good is any program if the doctors will not participate?

Furthermore, I am not so high on the food stamp program either as I personally see it abused in blatant fashion down here in Houston. The corruption in that program is rampant.

Daniel Kuehn June 12, 2009 at 9:19 am

I don't get this line -
"The solution is not less competition, but that is the assumption behind the Obama administration's plan and what it will produce. The solution is more competition."

He seems to have the administration's position completely backwards. Am I misunderstanding his point? Don't get me wrong – I agree completely with his point on the tax treatment of employer health benefits. I think that was the single best health reform idea to come out of the 2008 campaign, and I hope it's incorporated from the current GOP proposal. But I haven't heard the administration propose anything like what Rose is describing.

John June 12, 2009 at 11:08 am

Let me see if I've got this straight.
The goal is to eliminate employer provided health insurance so people can shop around for their own, and this ability to shop around will encourage competition and lower cost?

But what if my employer stops providing insurance, but pockets what they were contributing to my insurance?
I'll be stuck paying ten grand a year (OK, maybe eight grand because of the competition) for insurance while my employer pockets the difference.

Morgan June 12, 2009 at 11:24 am

John:

Employers would presumably like to reduce compensation without limit, but all of them actually pay much more than zero, and almost all pay much more than the legal minimum. Why? Because they want to keep their employees, who have other options, working for them.

Wouldn't you go elsewhere if your employer tried to screw you like that? Wouldn't all the best employees?

kingstu June 12, 2009 at 11:27 am

“But I haven't heard the administration propose anything like what Rose is describing.”

Daniel, the public option is simply a backdoor to single payer healthcare.

Here’s how it will work.

1. Public plan is introduced to provide “competition” to the private insurance market (Obama neglects to mention there are somewhere around 1300 private insurance companies, but I digress).

2. Public plan has a cost advantage for a few reasons (one of which is lower administrative costs) but the primary reason is they simply reimburse at lower rates. Rates which are frequently below the cost of providing the service (on average, Medicare reimburses at about 92% – 95% of the cost of providing the service).

3. Since the public plan reimburses at lower rates, premiums will be lower. With lower premiums, more private insurance customers will switch. Depending on how the plan is structured, the Lewin Group projects between 30MM and 130MM people will switch to the public plan.

http://www.lewin.com/content/publications/LewinCostandCoverageImpactsofPublicPlan-Alternative%20DesignOptions.pdf

John June 12, 2009 at 11:32 am

Wouldn't you go elsewhere if your employer tried to screw you like that?

Last Fall my employer dropped my stepson from the plan because we have him part time.
So I'm stuck shelling out three grand a year for a major medical policy because the kid's father is a jackass.
I'm not in a position to go find another job, especially in this market.
If they stopped offering insurance altogether I would certainly look for another employer, but that doesn't mean I'd fine one.

Daniel Kuehn June 12, 2009 at 12:08 pm

John -
It's a tough situation, but I think the point here is ending the tax differential between salary and benefits – not eliminating the benefit as with your step son. That will make benefits relatively more expensive than salary, but that should increase salaries and cut the artificial boost in demand for health insurance, which will lower the price of health insurance.

It's like ending the mortgage interest deduction – yes it will make homeownership more expensive, but that's part of the point – it will reduce the artificially high demand for homes.

Think of it this way – if we tax benefits the same that we tax salaries, you don't necessarily have to see a tax hike because you could reduce the total tax rate by a proportional amount and keep the revenue stream constant. The point isn't to tax people out of employer benefits – it's balance the skewed treatment of benefits.

Seth June 12, 2009 at 12:29 pm

Interesting piece by Rose. Thanks for the link Don.

I would be interested in any answer to geckoeconomist's first post. Perhaps Rose isn't measuring cost purely in terms of % of GDP?

Also, I want someone to shoot holes in my thinking.

Isn't the public/private option much like what we have in parcel delivery with the USPS, UPS and FedEx?

I use USPS for 80% of my physcial parcel delivery and don't have much to complain about. I think the presense of competition makes USPS better because USPS can steal innovations from the private operators.

Am I just use to the USPS service level? Am I missing out on far superior service if that market was completely private?

Thanks in advance to anyone that can help me on this.

LowcountryJoe June 12, 2009 at 12:43 pm

DK, last week, Greg Mankiw posted something very interesting (and also brief) on his blog about healthcare and the Democrats legislative proposals and what they'll mean for us if the policy looks less like actual insurance with real premiums and more like just another entitlement. Please read it. Fair questions are asked and adequate explanation is given as to why a public option would lead to less competition if not done correctly properly.

Daniel Kuehn June 12, 2009 at 12:58 pm

LCJ -
Ya – saw that post last week. I agree completely with him except that I have my doubts it would lead to single-payer as he says. But it could certainly swallow a larger share of the market than it was originally intended to. That's why I'm not a rabid supporter of the public plan, and have a lot more faith in the tax reform angle that the Republican option offers.

During the campaign I got the sense that the "public plan" would be like an extended Medicaid for middle income families that couldn't afford insurance, but that it would resemble Congressional health care in the sense that it isn't as substantially subsidized as Medicaid. If that is what the public plan ends up looking like, I could see limited taxpayer subsidy going a long way towards introducing competition in the market for those types of families, while reducing the number of uninsured (not as big of a priority of mine as costs).

I haven't been following exactly what the public plan is shaping up to be. If it's single payer it goes without saying that it's a bad idea. If it's an extended medicaid, and it's coupled with the tax reform, that seems very different to me.

LowcountryJoe June 12, 2009 at 1:45 pm

If 'premium' payments are decoupled from risks and expected consumption and instead tied to the ability to pay for the premiums – whether directly (actual premiums but based on income level) or indirectly through tax & government spending) – then it will be welfare/entitlement and it will not be pretty but surely stinkith.

vidyohs June 12, 2009 at 7:57 pm

Insufficient competition, yes it is a problem, but not, IMHO, the problem.

The problem, IMHO, is that the people have forgotten who is paying.

The position of doctor, your employee, has been turned topsy turvy in modern times; they occupy a position not justified by the fact that they take your money to perform a service.

In what other single commercial transaction would you accept the BS of regulations and interference of the government as you do in health care?

It is true that no one is compelled to become a doctor, and life would really suck without good doctors; however, we the individual still have the ultimate responsiblility for health care decisions.

From my position of the guy behind the camera, day in and day out watching doctors being sued by people who signed releases testifying that they understood and accepted the risks of a procedure, yet still get a blood sucking attorneys to sue on their behalf when perfection is not delivered, my contempt for the majority of socialist indoctrinated Americans could not be higher. It takes a sick socialist to attempt to profit from the things I see.

Even with that America still has the finest health care in the world.

Obama and his colony of clowns are going to ruin even that.

vikingvista June 12, 2009 at 11:35 pm

"1. Which country with "nationalized" health care spends more of its GDP than the USA?"

Countries with nationalized health care can and do dictate how much will be spent. Rationing is a way of life under those systems with the corresponding delays and prolonged suffering typically excluded from "studies" of their efficiency.

Also typically diminished in those studies is the suffering of those who have invested the most and have the greatest demand for those services–the elderly. The concern of the state, after all, is the longevity of its taxpayers, not its retirees.

Even with rationing, government health care costs in those systems are also growing at an unsustainable rate. The reason is that nationalized health care does not solve the problem of why health care costs are rising so rapidly.

"2. What about all those countries with hybrid systems, i.e. a mix of public insurance and private insurance? How come the private ones are not bust?"

Most ARE bust. Those private markets are not nearly as big (i.e. affordable to their citizens) as ours or as big as their's would be without government crowding out. And when you add in the cost of the tax for the unused NHS, people using the private system (which I understand is far superior to the NHS) in Britain are not getting the same value for their health care dollars that we get here.

But since this author is arguing that there is too little competition in the US too, the differential between the US and GB private systems would not be expected to be an extreme one.

vikingvista June 12, 2009 at 11:38 pm

"I am not so high on the food stamp program either as I personally see it abused in blatant fashion"

You mean the ubiquitous food stamp for cash services stationed outside every liquor store? What is the going rate these days? $5 cash for $20 in food stamps?

vikingvista June 13, 2009 at 1:16 am

"But what if my employer stops providing insurance, but pockets what they were contributing to my insurance?
I'll be stuck paying ten grand a year (OK, maybe eight grand because of the competition) for insurance while my employer pockets the difference."

You forget that it is a job MARKET.

So, your argument doesn't work, but it still can be argued that health care would be more expensive if employers stopped offering it. The discount the employer gets for the employee comes from three factors:

1. Tax deduction
2. Group discount
3. Cost shifting (benefit if you consume more, cost if you consume less, health care than the average employee).

The third item is nice for those who get it, but it provides no net benefit to the whole population. However it is always present in a group rate, so it is always a benefit to someone.

The real question is: Will consumer groups arise once employers no longer serve that function? I suspect they would, if there were a net benefit to it.

In addition to the expected cost reduction brought on by competition, employee compensation would be expected to increase. That is because by not being tethered to an employer for insurance, an employee has a lower cost to changing employers. All else being equal that would have to be matched in a job market by employers.

The ability of the young & healthy to avoid the expense of cost shifting in a group, would also be a beneficial social feature. Youth not only correlates with low premiums, but also with low income and low savings. It is a fortunate coincidence that demand for health care tends to correlate with the opportunity to afford it.

vikingvista June 13, 2009 at 1:20 am

"Even with that America still has the finest health care in the world."

True, for those who use it. That's another neat trick researchers use to slant their comparisons of US and socialized systems. They look at outcomes for everyone, not just for those who actually make use of the health care system.

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