The Theoretical Case for Socialized Medicine

Tired of emotional arguments for socialized health care, but instead want to understand the economic rational for it?

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Rather than looking at statistics and empirical evidence, lets just focus on the theoretical reason for why socialized medicine is preferable over a market driven one.

In the text book case of a free market we got a large number of buyers and sellers of a product or service. Buyers have perfect information and they are of the species Homo economicus. That means they know exactly which products are cheaper and better and they make perfectly rational buying decisions.

In this scenario companies selling worse products at unfavorable prices will see drop in sales and quickly go out of business, while companies making good and cheap products will increase their sales. New companies are only able to enter the market if they make better and/or cheaper products. Hence over time bad companies get weeded out and good ones promoted.

The alternative to this is a monopoly, which under these situations are a poor choice. Like with any company, the quality of and price of the products produced by the monopoly will be random at the onset. However over time there is no mechanism to weed out this company and promote better ones, because there are no alternatives.

From such simplistic models it is easy to conclude that socialized health care is a horrible choice as we are essentially running health care as a monopoly system. Of course reality is far more complicated than Econ 101.

When people don’t know or understand much about the service or product they want to buy then they tend to focus on external or superficial features, or they focus on single metrics. Most people don’t know much about cameras. When digital cameras got introduced this led to people dumbing down the choice to a single metric which was the number of mega pixels on the camera sensor.

Hence camera producers started competing mainly on providing higher mega pixel count, even though it isn’t that important for picture quality. One also has to consider dynamic range, color reproduction, the quality of the optics and noise.

The competition between PC producers for a while got similar. People learned that CPU clock frequency was important, and for many years consumers almost exclusively focused on that when comparing PCs. Producers would then sell PCs with suboptimal mix of other components such as memory, hard drive and graphics card. While the microprocessor manufacturers like intel would focus on increasing clock frequency to the detriment of everything else to score marketing points.

While this caused sever distortion in market and people bought suboptimal products, it wasn’t a complete disaster, because there was plenty of people who knew better and who performed tests, which you could read in various magazines while any obviously shitty PC would get uncovered quickly when customers tried it out.

None of these moderating forces exist within the health care sector. There is no cottage industry of magazines testing health care services. Nobody is going around trying cancer treatment at several different hospitals. You can not test a hospital or doctor the way you can test a smart phone or camera. Despite the mega pixel problem with cameras at least you can look at the pictures it takes. It if it is really bad you can uncover that.

There is no way to really check if a doctor or a hospital are incompetent. Instead patients start focusing on entirely external features. Does the hospital look modern and clean? People equate the usage of sophisticated machinery with quality. A hospital can thus compensate with lack of skills or competency with simply having more modern looking equipment. Of course hospitals can rely on reputation, but that is rather vague and says little about the particular doctor you interact with. There is no formal way of gaining information about this reputation other than through friends and quittances. Unlike say a collision test for a car, which you can look up and read in detail.

Hence hospitals will focus on external features rather than to actually provide superior care. It becomes more important to give the impression of good care than to actually give genuinly better care. How do you give the impression of good care?

A simple approach is to offer cheap frills, like extra friendly staff, flatscreen TVs by the hospital bed, enticing hospital food. Any behavior which makes you feel pampered or cared for.

In our Econ 101, example it is assumed that whatever product people are buying, it is something they need or which is good for them. That is quite far from real markets.

Economics assume that people know best what is good for them, so that whatever people buy, that is the most beneficial thing to them.

If this was true there would be no market for fast food, cigarettes, illegal drugs, candy and a whole host of other products which tend to diminish our health or life quality rather than improve it.

So while a free market is very good at producing lots of something at a low price, it isn’t necessarily a good thing. The spectacular success of fast food around the world has been rather bad for the overall health of the population.

So companies focus on whatever they can sell and make money off, not what is necessarily good for you. The same goes for private health care. Private hospitals have an incentive to sell you expensive procedures, and treatments. Treating you early while it is cheap, would be bad for business.

If you could compare similar procedures in a free market, such as say a knee surgery, then obviously a free market of health care services has the potential for pushing the price of say knee surgery down. However those gains easily get lost when you factor in the tendency of an increased push for “consumption” of expensive procedures.

More and expensive procedures is not equal to better health care, just as eating ever more food doesn’t improve your life. Quite the contrary complicated expensive procedures are often bad for your health. In fact what is called unnecessary health care is a rising problem places with for-profit-health care such as the US:

In 2009 two US physicians wrote in an editorial, that unnecessary care was “defined as services which show no demonstrable benefit to patients” and might represent 30% of U.S. medical care. They referred to a 2003 study on regional variations in Medicare spending, which found, “Medicare enrollees in higher-spending regions receive more care than those in lower-spending regions, but do not have better health outcomes or satisfaction with care.”

Fundamental Problem With Private Health Insurance

So far I’ve just talked about the issue seen from the point of view of private hospitals. These are issues which single payer solutions can’t solve as private hospitals are still in the mix. In a single payer solution, private health insurance has been replaced by the government, but the hospitals are still privately run.

Adding private insurance into the mix adds a new set of problems.

Again lets look at incentives and the effects of a market. What does it mean to be a good insurance company? A good insurance company excels at:

  • Avoiding payments
  • Avoiding very risky customers
  • Pricing their insurance right. Meaning they put high enough price on their high risk customers to avoid a loss, and low enough price on low risk customers to encourage them to chose you instead of the competition.

Those are useful skills in a market for insurance where you are dealing in non-essentials, where the whole population doesn’t need to be covered.

However for a country which wishes to cover the whole population with health care insurance, those skills are all worthless. Since everybody should be covered you don’t want to hone your skill of avoiding payments or risky customers. Setting the right price for each customer is also pointless as there is no overall economic benefit to it. It doesn’t reduce the total cost of providing health care in any way.

In short private health care insurance is just a big overhead, compared to single payer. For instance if you pay for health insurance through taxes, there is no added cost in sending out bills and process payments. There is no added cost of providing profits for shareholders. You get overhead from every single insurance company having to duplicate the same company infrastructure. You get overhead to pay for ads to gain customers.

It doesn’t mean I don’t see any use for private health insurance companies. They make sense for supplemental care, because it would not be a national goal to provide non-essential care to everybody. Hence judging risk and setting appropriate price, are skills relevant for an insurance company in this setting.

Benefits of Socialized Medicine

With socialized medicine, one typically do not want to carry out as many procedures as possible, because there is no financial gain from that. Budgets tend to be fixed. Hence there will be a drive towards cheap treatments you can enact early before things get overly expensive. This encourages preventative care.

There is also no need for focus on superficial expensive aspects of health care to entice “customers,” as people aren’t choosing health care in a market.

There is no need for profit to share holders, which also reduces costs. And there is no need for duplication of efforts.

Socialized health care of course means monopoly which in our simple Econ 101 example provides some obvious downsides. There is no competitive pressure to improve health care efficiency and quality. On the other hand since the health care market is broken, we don’t really have this in a free market for health care either.

However in some obvious cases, a free market approach brings benefits. If it is a well understood case, such as knee or eye surgery, it is easy to see how price and quality would improve in a free market because it is easier for people to compare price among each provider, and to some extend one can figure out quality by listening to reputation. You can shop around for the beast deal if you don’t need it right away.

The problem is when your health problem has still not been diagnosed or you are in immediate need of treatment, then the market breaks down as there is no way of comparing offerings, nor do you have any time.

When hospitals don’t make money by selling health services, but rather get fixed budgets, then there is no clear incentive to even offer health care services. The less services you offer the more money you save.

Of course if people were driven exclusively by financial incentives, then there would be no health care offered. But of course there is a political pressure, public pressure and professional desire to do a good job. Nonetheless it is given that inefficiencies will creep in.

Hybrid Systems

Health care isn’t difficult without reason. No pure free market or socialized publicly financed system will work perfect for the reasons mentioned. Rather the devil is in the details. One can make adjustments to counter negative effects.

Markets can be utilized where they obviously work. E.g. medical equipment is best produced in a free market economy, because these can be easily evaluated and compared by the hospitals buying them. The same is mostly true for drugs.

Elective surgery like a knee or eye operation are also a well defined task, with a limited scope and which is relatively easy to compare between providers. Hence it is likely best provided by private health care. The public sector could simply buy such services from a private clinics. The main problem is that any profitable operation is more likely to attract the more talented professionals as they can offer higher salaries and benefits. This might shift talent and resources towards health care services which are less important than say emergency care or more serious illnesses and conditions. Hence a hybrid system always have to balance its usage of private clinics, to avoid distortions in the allocation of talent and resources.

To encourage hospitals to perform more treatments, the public sector could pay hospitals per treatment. The problem then of course is as with a free market approach, that it will encourage over-treatment. To counter that, the best approach is probably a hybrid solution where hospitals operate both with fixed budgets and payments per procedure.

Hence there will be some incentive to perform treatments, while doing too many expensive and complicated procedures will cut into the fixed budgets.

While I think the inherent problems with free market based approaches are more difficult to circumvent, there are certainly ways to tinker with the system to make it work better. First one has to dispense with the idea that all regulation is bad and drives up costs. It is all about having the right form of regulations.

First of all you have to be able to create competition. That means regulations have to mandate that hospitals publicize information about their health outcomes in some standard comparable format. Government has to be able to make inspections to make sure they are doing this reporting honest.

Procedures have to be standardized so they can be compared, between health care providers. E.g. the public sector could define codes for each medical procedure along with descriptions. Hospitals and clinics would then be required to post prices for these procedures in a manner which allows prices to be compared across providers.

One problem which is hard to deal with is “creaming”. One hospital e.g. could choose to hike up the prices, and only accept the patients where they are most likely to have success thus making their health outcomes look better. That lets them create a perception of higher quality, which allows them to charge higher prices, without actually offering higher quality.

The most significant problem, is how do you avoid that hospitals suggest too many and too expensive procedures? The best suggestion I can come up with is to regulate private health care so that those performing diagnosis are not allowed to perform treatment. Hospitals performing treatments can’t also do diagnosis. Then there would be no incentive for those performing diagnosis to suggest more treatments.

In practice this would likely be quite hard to accomplish, which is probably why we have not seen it done. In practice diagnosis and treatment is not completely separate. While performing treatment a doctor mind also perform further diagnosis.

Also as always with these cases, it is hard to avoid subversion of the system. Those performing diagnosis might recommend certain hospitals in exchange for kick backs, or the same owners might be behind both a hospital performing diagnosis and one doing treatment.

We’ve seen this when e.g. schools or pre-schools have been financed with public money and there has been a ban on profits. Owners have circumvented this buy buying services from a for-profit company. E.g. the company banned from making profits could rent the school building from a company which is allowed to make profit. Both companies could have the same owner.

Conclusion

My main point was to make the case that from a theoretical stand point there is no silver bullet when it comes to health care. All health care systems have problems. Most of all I want to rid people the notion that if you just get a pure enough free market system, competition will magically drive down costs.

For certain parts of the health care system that is certainly possible, but those effects will likely be undermined by the incentive to offer too many and expensive treatments rather than what is actually needed or desired from a health point of view.

Due to the difficulty of comparing the quality and price of health care services in a free market, competition simply can’t drive prices down and quality up to the extent it can in other markets.

For this reason the monopoly situation of socialized health care isn’t as big of a downsides as it would be in any other more well functioning market. However the ability to reduce unnecessary care is a benefit. Since there is no disincentive towards cheap solutions, socialized medicine is more likely focus on:

  • preventative care
  • simple cheap solutions over complicated expensive ones where possible.
  • avoid unneeded treatments

Written by

Geek dad, living in Oslo, Norway with passion for UX, Julia programming, science, teaching, reading and writing.

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