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The Fatal Allure of Single Payer
This past week, Senator Bernie Sanders of Vermont proclaimed in a New York Times op-ed that the time has come to create a program of “Medicare for all,” a government-run single-payer healthcare system that would over a four-year period displace all existing private healthcare plans. His new program, rightly denounced as delusional, purports to provide to over 325 million Americans coverage that would be more extensive and costly than the rich benefits supplied to the 55 million Americans on Medicare—which itself teeters on the edge of insolvency. Sanders proposes to fund his new plan with a variety of heavy taxes on productive labor and capital, without noting that his program will cut into the very tax revenues needed to support such a system. Incentives matter, even in la-la land.
None of this matters to Sanders, for whom noble aspirations cure all technical defects. He believes that the United States, like all other modern states, should “guarantee comprehensive healthcare to every person as a human right.” In his view, the simplification of administrative costs should remove frustration from a beleaguered citizenry constantly at war with its insurance carriers, while simultaneously slashing the expense of running a healthcare system. It is fortunate that the odds of getting this plan enacted soon are low, notwithstanding that his position is swiftly becoming mainstream in the Democratic Party. Of greater import is the catastrophic consequences that would follow its enactment.
Most fundamentally, Sanders and his many acolytes never ask hard questions about what the term “comprehensive” means. Many public healthcare plans, like that of Great Britain, wrestle with this challenge, knowing that aggregate demand for expensive medical services explodes whenever these are offered for free. The extra services demanded cannot be supplied from existing personnel and facilities, so finding additional resources is expensive, given the inevitable diseconomies of scale. It is only possible to survive the onslaught by defining protected benefits relatively narrowly.
These systematic shortages are aggravated as the existing supply of medical goods and services shrinks, with the government imposing caps on salaries, drugs, and procedures. These shortages impose high costs as services are rationed by queuing, not money. These queues spawn intrigue: the rich (who under the Sanders plan would be barred from paying private providers of goods and services) go either overseas or into the black market in order to obtain vital goods and services that less fortunate individuals cannot afford.
This grim picture is no idle abstraction. These incentive effects are so powerful that they will swamp any effort to improve national healthcare by government fiat. It is conceptually indefensible and politically naïve to assume that healthcare is somehow “special” and therefore follows economic rules that don’t apply to other markets. In housing, it has been known for decades that rent control only aggravates shortages by creating massive distortions in housing markets. In agriculture, ethanol subsidies for gasoline have wrecked the operation of both food and energy markets. In transportation, endless queues formed when price controls at the pump created systematic gasoline shortages. The lesson is that basic economic principles apply to all goods and services, no matter their elevated position in the social discourse.
We already have good evidence of the destructive effect of regulation on healthcare markets. The individual mandate of the Affordable Care Act (ACA) does in miniature exactly what the Sanders plan will do in the aggregate. By mandating benefits and coverage formulas, it requires huge public subsidies to keep the program alive, and then makes matters worse with its system of community rating. The combined effect of these initiatives is to contract severely the insurance market for individual healthcare policies. The failure of central planning to work should lead people to shy away from universal healthcare, which will only magnify the same set of dangers. But instead, the constant refrain one hears today is that the public wants single-payer to ease the frustration and complications of the current healthcare system.
This common position makes the disease the cure. But there is another way: deregulation. Removing regulation can do two things that a national healthcare system cannot. First, it reduces administrative costs by removing the role of government in decisions insurers should make about what goods to supply and what prices to charge. Second, it increases the level of choice in the selection of healthcare coverage. There is no reason to think that every American needs exactly the same set of benefits regardless of age, health, sex, and income. Choice is generally regarded as a virtue in markets that deal with food, transportation, housing, and other goods. It is a fatal conceit to think that healthcare is so unique that a central planner can decide at a low cost which of the thousands of permutations of goods and services belong in the one comprehensive nationwide healthcare plan, especially after dismantling the private sector—which would take away the essential information needed to best allocate scarce resources.
In contrast to central planning, markets tend to bring supply and demand into balance, as higher prices draw in more suppliers in case of shortages, while lower prices draw in more consumers in case of surpluses. Price controls for healthcare services operate just like price controls everywhere else: the shortages they create ripple quickly through the entire economy. Delays in the provision of healthcare allow serious medical conditions to fester until emergency care becomes necessary, but prompt access to such treatment is far from certain.
Sanders misses the point because he lives in a Pollyannaish universe in which these fundamental structural principles somehow do not apply. Accordingly, he finds it all too easy to pin the breakdown in the current healthcare system on the villains of “the medical industrial complex.” In so doing, he foolishly assumes that the high salaries paid to executives are unearned and should be plowed back into better services for the population at large. Wholly foreign to his way of thinking is that people who command these salaries function in a competitive market in which few players long prosper if they do not deliver to their customers benefits in excess of what they receive in exchange.
Unfortunately, Sanders starts from the Marxist premise that all contracts are forms of exploitation. He thus finds it hard to fathom the essential truth that markets work precisely because of the gains from trade that follow from voluntary exchange. In 2016, Pfizer, for example, offered its CEO a compensation package of over $17 million, which is small potatoes against its nearly $53 billion in sales that year. On a daily basis, the CEO and his team have to make high-stakes decisions that go straight to the bottom line. You pay top talent top dollar because complex businesses are exceptionally hard to run, especially in today’s regulatory environment. Perhaps Sanders thinks that every compensation committee in the land is afflicted with some deep confusion concerning the worth of its key officers. Perhaps he also believes that institutional shareholders, to whom this information is disclosed in a myriad of ways, are duped just as easily.
Indeed, when he writes that the United States should negotiate down the prices of key drugs, he ignores the well-established point that a cut in prices will necessarily lead to a decline in pharmaceutical innovation. The large payments to drug companies would be a proper source of concern if they resulted from some improper use of monopoly power. But under competitive conditions, these prices reflect both the high cost of getting drugs to market through the approval maze set up by the Food and Drug Administration, and, once some drugs run that gauntlet, the huge benefits they provide by stabilizing chronic conditions, responding to acute illnesses, and eliminating costly surgeries and other forms of intervention.
There is much that can be done to fix the American healthcare system. All sides of the debate agree that it costs too much to operate and supplies too few benefits. But there is no way that a system can control costs while catering to unlimited consumer demand. The law of unintended consequences applies to all social activities, healthcare included. It is this message that has to be hammered home in the upcoming debate over healthcare reform.
© 2017 by the Board of Trustees of Leland Stanford Junior University
Published in Healthcare
Whoever is the spokesperson for the anti-single payer position had better be top notch. Bernie and the Dems have the easy job: “We’ll give you all healthcare – FOR FREE! And we’ll eliminate those obscene salaries being paid to those evil CEOs! And we’ll fund everything you can imagine!” He can lie all he wants because he knows the media (generally) won’t hold his feet to the fire on any claims he makes. Everyone remembers all the lies Obama got away with for Obamacare. It’ll be even worse with Berniecare.
“The art of economics,” writes Henry Hazlitt in his book, Economics in One Easy Lesson “consists in looking not merely at the immediate but at the longer effects of any action or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
But as he goes on to say, this is difficult to do and even more difficult to explain. Bad economists often present their errors (shortsightedness) more effectively than good economists present their truths. By the time an economist has gotten through the “long, complicated, and dull chain of reasoning” necessary to explain the long-term consequences of a particular policy, the audience is bored or asleep. Therefore, many economists – and their very vocal cheering sections – have resorted to half-truths, and arguments against even considering the longer view are reduced to mere quips. “It’s only laissez faire,” “greed,” “capitalist apologetics,” “extremism,” (and worse terms these days when rhetoric has reached a fever pitch).
Thus, it’s going to be an uphill battle.
Also, has Mr. Bernie considered that in England with approx only 30 million the system is broken but assumes that the US with 325 million the system will flourish??
Bernie, in 1987:
“If we expanded medicaid to everybody, we would be spending such an astronomical sum of money that we would bankrupt the nation.”
Richard,
Bernie is an optimist. Although he only knows how to dog paddle he is convinced he can swim the English Channel with a 150lb weight around his neck. If it wasn’t that he was trying to drag the rest of us into the water with him I’d love to let him try.
Regards,
Jim
This is a collection of “Annals of Socialized Medicine” from James Taranto’s WSJ column Best of the Web Today.
https://rushbabe49.com/2012/11/11/consequences-of-national-healthcare-obamacare-to-be-fully-implemented/
As anything progressives or liberals advocate, “Single Payer” is misnamed. Its better called “Prepaid Rationed Healthcare”.
A portion of your taxes go to pay for healthcare, but because its free to the end user, there will be more patients than tax payers. Meaning that some method of rationing will be needed to prevent the system from being over run.
So in the likely event that you need some healthcare in the future – it may not be there – as you could not meet the criteria to qualify for the care that you prepaid for.
This is the best takedown of stupid I’ve seen on this. Couple of things:
Even if you saved all the costs on those jobs (by firing people, and putting them on the Bernie Dole – a hot new political ticket in 2020!), it’s a fraction of percent in savings. At best. It’s a drop in the ocean of costs at the hospital, so small as to be almost irrelevant. You could instead build another parking garage and fund those jobs with it after the payback period was over.
6,500 people worked at my hospital. 20 salaries are so small as to be difficult to measure in the scale of 1 billion dollars.
2. Over half of the labor costs went to doctors and nurses. So the biggest savings, from a reduction standpoint, would be in a) firing doctors or nurses, or b) reducing their salaries.
Good luck with that, Bernie. The same complaints about CEOs making millions applies to doctors, too – you get what you pay for. Which is why congressmyn are overpaid.
3. Price controls, and rationing, is the result of Bernie’s plan. An example: Canada. Had a friend in Canada once, and she hurt her knee. It took her 2 months and weeks of frustration just to get an MRI scheduled.
A couple of years ago, I hurt my knee. Called the hospital. Got an MRI done in a week.
Yep. Let’s be Canada.
Lots of misconceptions (and “stories” ) about healthcare in Canada. I recently had an MRI done on my knee in Montreal…I had it done 4 days after calling the clinic…it would have been done sooner except that I also had to get an x-ray of my eyes first. Canada isn’t some dystopian 3rd world hell hole with deformed and diseased people running around and dying in the streets (or so one might believe based on some of the misinformed comments on this site). As far as life expectancy and quality of life is concerned, there’s virtually no difference between Canadians and Americans. In fact, in terms of overall health (not healthcare) of its citizens, I think that Canada has the edge.
I like to ask folks in favor of government run health care if they have ever been to the MVA, and if they found that experience quick and efficient.
Great piece! “Medicare for All!” is a plaintive plea popping up in my Facebook feed by well-meaning friends, who are also unfortunately ignorant of health care basics, some of which the author outlined here.
They have not considered that adopting single-payer would put millions of people out of work, almost immediately–insurance companies and private health care systems first, and ultimately drug and medical device companies. Poof. Gone.
Also, my FB peeps realize that countries w/single payer rely on the U.S. for innovations is medical procedures, devices, and drugs? We go single payer and as Epstein said, incentive to innovate (for–gasp!–profit) is gone. Sanders urging to buy drugs from Canada is asinine. They buy those drugs FROM US, they don’t grow on fir trees. If they start to sell medications to U.S. citizens on a large scale, U.S. pharma will raise the prices that Canada pays. Canada rightly looks out for Canadians; they’re not going to pay more to sell to U.S. citizens. As a single payer system they tell U.S. pharma, “no negotiation. This is what we pay you for drugs.”
In addition, the quality of our medical schools, currently the best in the world, would diminish. What incentive would aspiring physicians have to train rigorously for 12 plus years? To become government employees, paid according to fixed salary grades? Physician superstars ARE compensated highly under the current system, and rightly so: they save lives, and not just rich people.
IMHO, one reform would be to raise the mandate to force more healthy young people into the current system. It induces gagging in libertarians and conservatives, but isn’t some compromise better than the nightmare of single payer?
It’s not a “story” – it’s not made up. She lived in Quebec, too, just outside of Montreal. It’s anecdotal, but it’s not something I pulled out via rectal extract.
Canada has 35 million people. The US has about 300 million more people than that, including millions of people receiving “free” care via Medicaid that’s roughly equivalent to the entire population of Canada. If you want to compare apples to apples, have at it. But they are not the same thing. Not even remotely.
@ChrisCampion I never said that your story was made up (you still haven’t said when it happened) and I never said that the Canadian healthcare model would work in the US. Like you said, the healthcare situation in Canada isn’t remotely comparable to that of the US by virtue of sheer numbers, so why did you make the comparison?
So a few things doctors are generally well compensated in Canada, but there certainly is potential to make more in the the US, this comes with some advantages and disadvantages, my cousin opted for the US. Doctors are not typically government employees, they often operate under their own business entity rather than as an individual.
Canadian health care does not cover drug purchases outside of immediate surgery. Reason drugs typically cost less in Canada is primarily due to the difference in patent laws.
Thanks for your balanced view…I fully agree with everything you said! =)