To refuse a hearing to an opinion, because one is sure that it is false, is to assume that one's own certainty is the same thing as absolute certainty. All silencing of discussion is an assumption of infallibility.
- John Stuart Mill -

None shall be one's slave, none shall be one's master; everyone shall have the same rights, same priviledges, same justice.

- Antti Chydenius -

Any sufficiently sophisticated human thought is impossible to distinguish from artificial intelligence.

- The Ironmistress -

Tuesday, March 23, 2010

Health Care Revisited

On her previous tapping, the Ironmistress inspected the sorry state of US health care system, why it is so screwed up and what could be done to improve it - and why Capitalism and free market might not be a solution but rather make the situation worse.

Health care is a necessity good. Id est: we cannot do without it. Simultaneously it is a necessary evil: having it doesn't improve our lifestyle - it prevents it from getting worse. Likewise, health care is a commodity. That means that it is a thing on which there is demand but there is very little variation on either quality or properties around the suppliers. As such, it is fungible, i.e. the same no matter who produces it. Everyone has the same product, it is a necessity good and there is no choice - there are no alternatives (no substitute goods) for health care. The customer cannot really choose between two different treatments nor whether he is to be treated or not - unless he wants to harm or damage himself.

As such, health care forms a natural cartel. Since there is no choice - the customer is in no position to vote with his wallet nor choose between different providers, especially in a case of emergency - it is the providers' market. As the health care providers are local and likewise the customers are local, the providers have an arbitrage - their interest is to charge as much as possible and treat as little as possible - as the customer is in no position to make a choice.

Capitalism is based on free market and free competition, but it also is at the same time based on the assumption that a) the customer can make a choice and b) there is a choice and c) there are substitute goods. In the case of health care, the markets are very much skewed on the side of the provider. Since the product is demanded and there is no alternative, and the providers are in no position to compete with either quality or quantity, the customer is in very precarious situation. The interest of the provider is to restrict competition as much as possible, and rather pursue common goals by dividing the market locally. Ergo, the unrestricted and free capitalism in such situation leads into a natural cartel - the providers form strong lobbying groups to guarantee their interests, will restrict the amount of supply to correspond with demand to prevent oversupply, and will also lobby the government and the legislature to set up restrictions, provisions, licences and qualifications on who may become a provider and who not. Of course all this is masked as "guaranteeing the judicial safety of the patient" - but it effectively is milking the customer.

The result is a very undesirable situation on behalf of the customer - since the health care in this model is profit-oriented business, it leads into providing minimum services at maximum price with no competition between providers.

And this is exactly what has happened in the United States.

There are many similar instances where the capitalism simply doesn't work, and one striking example is violence. Without a monopoly of violence, a civilized society simply doesn't work. Anarchies like Somalia really do not encourage on attempting free markets on violence. There simply must be a monopoly in violence. Likewise, justice is another example where free competition simply doesn't work. A situation where local enterpreneurs set up competitive judicial systems - one sets up Romano-German, another Codex Napoleonica, third Anglo-Saxon, fourth Beit Din, fifth Sharia and sixth the Law of the Jungle, and all of them set up private courtrooms, prisons and electric chairs - simply won't work. Full stop.

Likewise, private provision of commodities where a natural monopoly situation exists, such as provision of potable water, leads easily into arbitrage - and in a very nasty situation on behalf of the customer. Privatization of water supply has led into unrests and commotions in many countries.

In a case of a natural or mandatory monopoly, the least bad solution is a public monopoly with democratic control mechanisms. What would be the least bad solution for a natural cartel?

The universal experience (not any economic theory, but practical experience) has shown that the solution for a natural cartel is public monopsony. It means that there may be many enterpreneurs on the field, but one single purchaser - and payer. The monopsony is able to break the arbitrage; it is able to push the prices down to a level where they are profitable to both. While at normal situation the monopsony is a very nasty situation for the provider, in case of a natural cartel it rather prevents the prices getting skyhigh.

There are basically three ways to arrange the monopsony:

1) Socialized market. The society (state, government, county, municipality, parish) owns the provider and pays the costs. The funds are either from taxes or from a budget. The good deal of this model are simple organization and excellent service. The bad deal on this model is inefficiency and bureaucratic overhead.

2) Vouchering. The society provides the needy either vouchers (value coupons) or insurances with which they may pay the services. The funds are either from budget or distributed to insurees. The good deal of this model is that the society tampers the markets as little as possible. The bad deal of this model is that those who are most needy usually also are the least able to pay and may get undertreated.

3) Outsourcing. The society purchases the services from external providers or instead of organizing the health care system as a bureau, rather as owns it as a corporation. Often the outsourcing contract is made amongst several subcontractors. The good deal of this model is generally low costs. The bad deal is that the treatment quality may suffer.

What would be the most plausible solution for the American situation? It is certain the health care system cannot continue as it is, as a cartel. Americans are notoriously allergic to anything called "socialistic", so #1 is out of question. While outsourcing can provide very low costs, it generally tends to be a swear word amongst both providers and customers - the providers are in a very precarious situation and the customer satisfaction may be low, so the most plausible solution might be #2, vouchering. The society funds the health care through private enterpreneurs, which is the situation in the Netherlands and Switzerland.

Which other situations could be similar natural cartels?

One which comes immediately on the mind of the Ironmistress is schooling. The education is like health care: something a modern hightech society simply cannot do without. Yet it is a similar commodity and necessity good and necessity evil; a privatized schooling system would quickly lead into a cartel. Therefore all societies around the world have recognized that public monopsony is the best way to arrange elementary and secondary education.

The usual way to arrange elementary and secondary education is the Socialist way: the public sector provides the schools. At best, the situations are excellent, as shown by Finnish PISA results. At worst - needless to say.

But could the monopsony on education be arranged on similar ways - either as vouchering or outsourcing? The Ironmistress would like to receive any suggestions gladly!

No comments: