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Its never good to depend on the state, or is it?

Alternate title: Utilizing government purchasing power to regulate costs of privately delivered public healthcare

Some times dependency on the state is economically better for citizens’ then pure private enterprise. However, a simple minded approach often used by proponents of 'free market capitalism' is that state dependence never benefits the citizens of the state as a whole. I argue that citizens can depend on the state and benefit if the government were to use its purchasing power to decrease the costs of private health care while maintaining the universal healthcare program. I do not totally agree with state dependency but in some cases, such as government run healthcare, state dependency can make the citizens better off. For example, if the government utilized private delivery for public healthcare it can theoretically make the public better off by lowering health care costs by using the Governments monopsonic purchasing power.

Firstly, consider a basic economic principle: a Monopsony. A Monopsony is a market structure with only a single (monopsonic) buyer of a product or service who is able, because of its size and market control, to set and control the market price, and thereby saving itself money by driving down the price it pays for goods.[1] Consider Wal-Mart, economic principles suggest it is a "monopsonic buyer” because it is so large that it has the monopoly on purchasing power and it can affect the market price that it pays for a product. [2]Similarly, if the Government of Canada used a private delivery model for public healthcare it could also become a monopsonic buyer. However, unlike a regular monopsonic buyer (Wal-Mart), the Government can decrease the market cost and increase the product quality of the supplier's product through legislation, similar to how it controls the costs of pharmaceuticals it purchases.[3]

As Canadians, should we really care who provides our healthcare? If its costs are paid for the by Government we shouldn't care if it’s run by a private or a public system, or should we? Most public corporations in the Country are very inefficient due to the government workers mentality[4]. Unfortunately, the Canadian Government has proven time and time again that it cannot run a corporation or program effectively or efficiently[5]. In contrast, corporations have incentive to save money under a partial privatization agreement. For example, if there is a defined list of prices that a corporation can charge the government for its services, and also a certain quality level that it must provide, Corporations have the incentive to become more efficient.

Now, some may argue that efficiency means a decreased quality of healthcare. But the government supersedes any corporation and it can create laws that mandate certain levels of quality. If these laws are broken the corporations can be penalized very harshly. Now quality levels are difficult to quantify but there are control systems available that can effectively measure quality.[6]

So this presents us with a question: Is fully privatized health care better? Or can we use the state system effectively in order to benefit consumers (taxpayers)? I believe that by using the Government's purchasing power, we as citizens can provide free healthcare to every citizen through the use of private delivery.

Corporations have proven to operate a process more efficiently than the Government can. A good example is healthcare.[7] State healthcare run by the Government clearly does not work. However, a socialist type of coverage (universal healthcare for every person) such as we have in Canada can benefit consumers because it could use its monopsonic purchasing power to decrease the costs it pays for healthcare.

Some may argue that if we privatize health care then costs will significantly skyrocket for the government (and by extension, taxpayers) over the years, similar to how private Auto insurance costs in Alberta, Canada are much higher then a similar public system - such as in Saskatchewan, Canada. The disparity in Alberta is caused by an unrestrained (to an extent) margin of profit the Insurance companies can charge to the consumer. However, you can bet your dollars that their operations are much more efficient then the Sask. insurance corporation because they want to squeeze out every profitable single cent that they can.

The main difference between consumer auto insurance costs and government medical costs is that citizens (as auto insurance consumers) are legally required to buy insurance in order to drive, but also, as a consumer, we do not have enough purchasing power (i.e.: not a monopsonic buyer) to control the costs in order drive the market price down. And, indirectly the Alberta government is promoting a monopolistic market by legally requiring drivers to purchase the insurance while not providing controls on its costs. This is not the case with healthcare in Canada; in fact it’s quite opposite. The Government is required to pay the costs of healthcare, but its economic advantage is that it is a monopsonic buyer and furthermore, it has the ability to control the price through legislation, so likely it will enact laws to ensure its medical costs.

Some may argue that under a government controlled cost structure, health care corporations would not bother doing business in Canada. This is not a good argument because corporations will theoretically do business if they can even make 1$ per year.[8] Furthermore, the Public/Private Healthcare/Automobile argument is dissimilar because the key argument with healthcare is the government (the monopsonic buyer) can limit the amount the supplier can charge for the service. In contrast, with auto insurance, the consumer CANNOT limit the amount the supplier can charge for the service.

So in this instance, in a state run medical system that uses private delivery, every citizen is better off because essentially the citizens of the state are monopsonic buyers and they can control the costs of health care through its legislation and government purchasing power. This has proven to work for consumer drugs; Canada regulates the costs of drugs so that citizens can afford to purchase them[9]. This is one of a few example where staying dependent on the state is good for you.

Written by:
M.K. Braaten

[1] Monopsony: http://en.wikipedia.org/wiki/Monopsony
[2] Wal-Mart is good for America: http://www.ncpa.org/edo/bb/2004/20041122bb.htm
[3] Government Intervention in Markets: http://www.bized.ac.uk/educators/16-19/economics/markets/activity/pricecontrol1.htm
[4] The common perception that government workers do not worry about efficiency
[5] Gun registry cost soars to $2 billion: http://www.cbc.ca/stories/2004/02/13/gunregistry_rdi040213
[6] Enterprise resource planning: http://www.fedpubseminars.com/seminar/ERP.html
[7] The Black Hole: http://www.howestreet.com/story.php?ArticleId=507
[8] Economic principles suggest that a corporation will stay in business if its profit is a mere 1$ as long as its opportunity cost is less then or equal to the cost of doing business.
[9] Government Intervention in Markets: http://www.bized.ac.uk/educators/16-19/economics/markets/activity/pricecontrol1.htm
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4/02/2005 09:51:00 PM

There is also a difference between state "provision" and private "delivery". The provincial government has a mandate to provide a service called healthcare in general, but how it delivers the service is another matter.

For example, consider your dental benefits. Pretend that your dental benefits provider is the government. You get the service delivered through a private professional corporation - the dentist - who bills the benefits provider based on a list of charges for certain procedures. Hence, there is a difference between provision and delivery.

This is a weak argument because corporations will theoretically do business if they can even make 10$ per year.

Somewhat true, but there's a difference between accounting profits and economic profits. If the corporation's total investment were $100, it would make a 10% return. If its investment were $1,000,000, it would make a fraction of a percent and would have been better off investing the money in bonds. In the long run, corporations have to earn an economic profit in excess of their opportunity cost of investing.

The current system is plagued by free riders, but a private system might give way to rent-seeking. Free riders include people who go to emergency rooms for a cold at 4 am and take up resources that could be used elsewhere. Also, people want to pay low taxes and get the best service possible, but one result has been overcrowding and rationing - which has led to lengthly wait lists. To these people, the hospital seems grossly inefficient, when it turns out that it is a combination of over-demand and under-supply. In the absence of a price mechanism to coordinate behavior, the provider has to ration.

Health care expenditures are growing at a rate twice as fast as the economy's ability to grow, which implies that either taxes go up (don't want that!) or cuts are delivered to other areas. Clearly something has to be done.

The benefit tax has become de rigeur in public finance. It basically says that if you personally benefit from a service, then you should pay for it. This is popular because it discourages free riding. By being aware of the costs of your treatment, you can do your own cost-benefit analysis.

But health is a tricky thing. Some people get cancer due to externalities generated by industry. Ft. Saskatchewan Alberta, has one of the highest miscarriage and brain tumor rates in Canada (I'll have to find the citation). Do we want these people to pay higher health care fees simply because they live in proximity to a polluter? That's where Paretian optimality comes into play, but I won't go into it here.

I would be concerned about rent-seeking, and your idea of a "billable" list would prevent that. If you and I agree as private MD's that one stitch is worth $2, but is worth $2,000 when we sell it to the government, the collusion could cause costs to skyrocket.

Furthermore, something has to be done to lower the costs of doctors and nurses. Typically, doctors enter Med school with higher debtloads than other bachelor's level grads, and they incur even more debt to become MD's. This debt is affecting their locational choices upon graduation. Very few want to work in small, rural practices where they won't be able to recoup the return on their investment. It's funny, because this is where all the old people are.

So yeah, it's clear that something can and must be done to change the system; the debate of course, is how to go about doing it. Thanks for the ideas.    

4/05/2005 04:21:00 AM

the difference between free market and health care market is that nobody has a choice whenit comes to cancer or other illnesses. Hence there can be NO free market forces. If I am sick, I am weakned and I want to be taken care of. This is very different from, say, buying a car where I do have choice and time.
Helath care and education are not commodities but rights. That is what separate them from a free market economy.    

4/07/2005 12:40:00 AM

What I am saying is that the government can use its monopsonic purchasing power to drive the market price down of the private healthcare costs. I am by no means saying that individuals could do this.    

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