How infinite is space, and who decides your fate. Why everything will dissolve into sand. How to avoid defeat, when truth and fiction meet. Why nothing ever turns out as she planned. These are things that I don’t understand, yeah, these are things that I don’t understand. So goes the second verse of the B-side to the 2005 hit Speed of Sound by British rock band Coldplay, Things I Don’t Understand.
Over my 30 some odd years working in government, in corporations and in government affairs, I have come to learn that there are many things that politicians simply don’t understand. This is not a dig on politicians – having a deep knowledge of topics is not part of their job description. Rather, they need to be well versed in making decisions regarding a broad range of topics based on very little information. They are the ultimate generalists.
One thing that I have found that politicians in general lack is a basic understanding of numbers, statistics, and mathematical functions. Again, this is not a dig – why would they. They work in a world of words, not figures. But one unfortunate consequence of this is that they can be led to believe very simple things, when in reality the world is much more complex.
Take the idea of single-payer-insurance, the so-called Medicare for All proposals that many of the Democrat candidates for President are proposing. There are a number of arguments for a single-payer program that seem to make economic sense: It reduces waste by eliminating much of the administrative costs involved with insurance companies; it eliminates the cost of insurance company profits; it encourages preventative care. However, the actual economics, the actual mechanics of single-payer schemes is much, much more complicated.
To better understand the true costs such a health insurance market we need to examine the inner working of the market that were so eloquently described by Adam Smith in 1776, the concept of supply and demand.
According to Smith, in any market, the propensity for sellers to supply a good or service is dependent on the price that they can obtain. The higher the price, the more will be supplied. This makes sense, because as prices increase more marginal producers and operations can come on line to meet demand. Think of farms. If corn prices rise, farmers will plant more corn on more and more marginal land up to the point where the cost of production does not exceed the price that they can get for the corn.
On the other hand, Smith showed, consumers will demand less of a product as prices increase. Again, this makes sense. Consumers have only so much money to spend, and they have to provide for all of their needs with those resources. If the price of corn increases, consumers will substitute other grains, or in some cases simply eat less.
These two independent forces interact with each other and come together at a market clearing price where supply is equal to demand. If the price were to be higher, there would be a surplus and suppliers’ inventories would rise, and if the price were lower, consumers would demand more that could be produced and there would be shortages. While governments can do a lot to muck up this process, they cannot control it.
A single-payer health care system attempts to screw with the laws of supply and demand. It is what economists would call a monopsony, which is when one buyer faces little competition from others so they are able to set prices for the goods or services that they are buying at a level lower than would be the case in a competitive market. In this case, as the only buyer of health care services, the government would be able to set prices below the market clearing price.
When this happens, a monkey wrench is thrown into the market. Prices may be lower, however, with lower prices supply falls. If government pays less for say a heart surgery, less doctors will sacrifice to undergo the training necessary to be a heart surgeon. If physicians are paid less to perform physicals, they will either reduce the quality of the physical, or simply perform less of them. One can see this in the airline industry. So Medicare for All, may provide everybody with insurance, but by creating a monopsony market, it will also necessarily reduce the supply of medical care actually available.
The reverse will happen to the demand side of the market. Lower prices for consumers – in fact no prices for consumers – will encourage them to demand more health care from the market. On top of this there is a problem that economists call the tragedy of the commons. Since medical care (and medical insurance) is paid for through taxes, consumers would be encouraged to use as much as possible. This is in effect like common fishing grounds, where in a shared-resource system, individual users acting independently according to their own self-interest behave contrary to the common good of all users by depleting or spoiling that resource through their collective action. People will demand medical care where none is needed, or will demand too much care.
In a normal market, higher demand for care would lead to higher prices, either dampening demand, or encouraging more practitioners to supply care. But at the same time, the monopsony government buyer would be forcing down prices and therefore supply. The end result will be shortages of actual medical care.
Just like the micro-HMOs that were brought about by the Affordable Care Act, consumers will have insurance, but they will not be able to use it since no doctors will be available that accept it, or they would have to wait months for an appointment. This is a form of rationing no different that that currently occurring in other socialist markets like Venezuela or Cuba, where there is either nothing to purchase, or huge lines develop whenever a product actually makes it to store shelves.
A monopsony marketplace like that created by a single-payer health insurance system will also inevitably lead to corruption, where doctors, or more likely their appointment clerks will demand baksheesh for access to doctors – much like a maître d’hôtel demands a Hamilton or a c-note for a good table.
In the end the machinery of the economy will work no matter what Bernie Sanders, or Elizabeth Warren, or Kamilla Harris would like. Monopsony health insurance programs will invariably lead to less availability of actual care, lower quality of care, and long wait times and rationing. Black markets could easily develop and corruption can increase as people who actually need medical care are blocked from the market by those who really do not. Even if prices go down, nothing will turn out as planned. These are things that socialists simply don’t understand.