What problems exist with a socialist approach to health care?

Question

I'm kind of ignorant on the subject, and it's probably commonly known at this stage, but I recently read an article explaining how Obamacare provides health insurance through the private insurance companies as a sort of "middle man" in which they still make profit.

Although eliminating the existence of private insurance companies may be beneficial for society, isn't that a massive blow on the insurance companies themselves and in turn, the economy?

Please educate/criticise me if what I'm saying seems really ignorant.

Answer 1

Having private insurance companies over a government bureaucracy isn't particularly 'good' for the economy. The transition might be a shock, especially if it was mishandled, but no particular industry is good for the economy in itself. In both the industry and the bureaucracy, consumers would trade money for heath care administration and aid in getting some level of heath care. Both would ration health care to some degree; the insurance industry with pricing and the bureaucracy with rules.

The difference comes in that the industry is competitive, while the bureaucracy is not. Ideally, health insurance companies would compete to give consumers the best care for the lowest price, and if they didn't, entrepreneurs would have incredible financial incentive to enter the market and provide better care and/or a lower price. Of course, private insurance companies will make a profit, so the total cost could be higher.

The bureaucracy, on the other hand would ideally find the best way to provide health insurance to the people. Unfortunately they don't have a strong incentive to do so, because there are layers of principal agent problems between the consumers and the bureaucracy. If the bureaucracy was mismanaged (ie: higher costs than competitive equilibrium, bad service, long wait times), consumers would still have to use it. Given institutions like almost every state DMV, many people are mistrustful of a bureaucracy to handle complex and important issues like this.

As an added complexity, there are many complicated regulations in the healthcare industry. Compliance to these regulations makes it very difficult for new firms to enter the market; instead of focusing on consumers, they instantly need large, expensive regulatory compliance and legal departments. Furthermore, since the voting public has little knowledge (or incentive to acquire knowledge) of the healthcare regulatory structure it's possible for the industry to influence politicians to put up regulatory barriers to entry that don't particularly serve the public good.

Answer 2

The existing answers to this question seem to miss the point of this question. They address how health care quality and price would be affected for the consumer, not the actual question "isn't that a massive blow on the insurance companies themselves and in turn, the economy?"

Is it a blow to the insurance companies?

Yes, of course it is. Providing health insurance is a business nobody would engage in when it wouldn't be profitable. Placing it in governments hands would remove this market segment and any companies which have no other stream of revenue would have to liquidate.

Is it a blow to the economy?

Likely, it would not. While all the jobs in private health insurance would disappear, there would be plenty of new job offerings in the new public health insurance system. The GDP generated by the health insurance industry wouldn't disappear, it would move from the private sector into the public sector.

Neither privatization nor socialization of industries is intrinsically good or bad for the economy. It just moves responsibilities around. It can of course have an effect on the economy how the industry is managed after the responsibility change, but this change can be in either direction. Whether you trust government officials or company managers to manage an industry more responsible is a question of ideological orientation on the capitalist vs. socialist axis.

If you wonder if it might be bad when a centralized health insurance would require less employees than a decentralized one and thus cause unemployment, remember the Broken Window Fallacy. Employment is only beneficial when it results in an actual benefit for society. Paying unemployment benefits to people who do nothing is not any better than paying people to do a job which doesn't benefit anyone.

Answer 3

Coming to this question a bit late, I would like to provide a slightly different perspective.

Private vs. public sectors and national accounts

Part of the problem is purely an accounting issue: If healthcare (or anything really) is provided by the private sector, it's “easy” to record its price. If you tally all insurance premiums, you can say that the health insurance industry produces X billion dollars worth of insurance. Similarly, if physicians and other healthcare professionals work independently, each consultation is also a market transaction.

But if healthcare is free at the point of use and funded directly by the state (e.g. the NHS in the UK), what is it worth? Intuitively, you can easily see that it's worth something. One way to deal with this when computing the GDP is to consider the costs involved but aren't lower costs a good thing? If patients get the exact same service, it does not make sense to consider the country as a whole poorer! And, as @Philipp explained, even without private insurance or even private-sector healthcare at all, there would still be many people working in this area one way or the other.

The same problem shows up in completely different contexts. For example, are Europeans poorer because they tend (on average) to have more free time than North Americans and to cook for themselves instead of eating out? There are many things to be said for or against each approach (and also on the reasons behind the difference) but the answer is definitely not obvious.

Protecting existing businesses and innovation

Beyond these accounting difficulties, it should however be obvious that protecting the bottom line of each and every company (or even of entire industries) is not beneficial to ‘the economy’. If you look past healthcare and the ideologically loaded public sector/private sector alternative, you can easily find other examples of this phenomenon.

For example, consider horse-drawn carriages or wood for heating. Not so long ago, entire industries existed to provide these but they were displaced by other operators who offered better alternatives. Many of the individuals involved certainly suffered from the change and the transition wasn't necessarily easy but the rest of the economy profited through better transportation and cheaper energy sources.

To the extent that the public gets the same service, getting rid of a middle-man is a non-issue. Free-market advocates would probably argue that the public is unlikely to get the same care in a single-payer system but they should be even less concerned about the effects of the reform on the rest of the economy because adapting to changes like that is precisely what markets are supposed to do better than centralised organisations.

Or to put it more provocatively: If you think it's not the government job to pick winners and losers and support companies like Solyndra, why should you be worried about the financial health of private insurance companies? Once you have decided on the general framework, you can let the market work its magic.

Health insurance and overhead

So the real question is whether the new system (or any other alternative) is able to deliver the same level of care or at least broadly similar health outcomes with similar costs. And the data does not look too good for private insurance. Even better managed private-insurance-based systems like those of the Netherlands or Switzerland (which are doing better than the US in many respects) tend to cost a bit more than systems based on public insurance and mixed delivery (a common model in Europe) or mostly public healthcare (e.g. the UK).

The Dutch or Swiss systems are not particularly bad either so you can still make a case for private insurance on practical or philosophical grounds but they don't have any obvious superiority in terms of costs or outcomes (it's more difficult to make a case for the US system, though, it's just that much worse than anything else you can find in high income countries).

Importantly, insurers manage the flow of money and can thus influence other parts of the system but they don't deliver health care. And if they keep more money for themselves (which can easily become mere rent seeking), the public (patients/insurance buyers or their employers, ultimately the rest of the economy) or possibly health care providers have to make up for the difference and would have less money available for other things.

Even in countries with single-payer systems, most of the money simply goes to the healthcare providers themselves, which are often private businesses or independent practitioners. The organisations taking care of payments might conceivably be so poorly managed as to impair the efficiency of the system as a whole but in terms of raw overhead, they are not obviously less efficient than private insurers, in practice.

Since, generally speaking, costs and health outcomes are not dramatically worse in public insurance systems, the extra overhead created by private insurance (including e.g. advertising) is arguably a net loss for the rest of the economy.

Epilogue

The dirty little secret behind all this is that insurance companies are really private bureaucracies. It's easy to talk about competition and markets on an abstract level but in practice, private insurance is often just as rule-based and unpleasant to deal with as the worse state-run organisations.

It's relatively easy to design a system with some space for for-profit insurers (even France or Germany have some) but that alone does not magically create a competitive or efficient healthcare system.

Answer 4

All health care systems have some level of administrative cost; but this cost is particularly high in the private insurance system of the USA:

Administrative costs accounted for 25 percent—or more than $200 billion—of total hospital spending in the United States. In the other nations included in this study, these costs accounted for between 12 percent of spending (Canada and Scotland) and 20 percent of spending (the Netherlands).

The potential savings are considerable:

Reducing U.S. per capita spending for hospital administration to Scottish or Canadian levels would have saved more than $150 billion in 2011.

There are many ways of spending this $150 billion which would provide a long-term economic benefit: For example, education, scientific research, or infrastructure. (In fact the total savings would be greater, as the above statistics refer only to hospital administration, not the healthcare industry as a whole.)

The data suggests this can be done without a negative effect on health outcomes. Life expectancy and infant mortality rates in the UK and Canada are better than in the USA.

If administrative costs were reduced, then health insurance companies would not require as many staff. Many people now working in health insurance would need to find new employment. In the short term, this would cause some disruption to the economy. In the long term, it could be of benefit, as people previously employed in health administration transferred their skills to more productive industries.

Answer 5

To answer the titular part of the question, Milton Friedman would say that the problem with socialized healthcare is that it removes downward pressure on prices. (Either completely or partially, depending on implementation details like proportional copay.) In other words, when people don't pay for something, they don't care how much it costs, so they consume wantonly at any price. The government's guarantee to pay a price, no matter if the price could exist in a free market or not, guarantees that the price will rise beyond market rates. Within this framework of thought, a similar situation exists in education due to subsidization.

The answer to what to do about private insurance, in this framework, would not be to get rid of insurance, but to end government subsidization and force prices to drop. (Realize that prices must drop to a point of optimal utilization of resources. Hospitals can't afford to stay open if they only treat the small population of the filthy rich.)

From 1946 to 1989, the number of [hospital] beds per 1,000 population fell by more than one-half; the occupancy rate, by one-eighth. In sharp contrast, input skyrocketed. Hospital personnel per occupied bed multiplied nearly seven-fold and cost per patient day, adjusted for inflation, an astounding 26-fold. One major engine of these changes was the enactment of Medicare and Medicaid in 1965. A mild rise in input was turned into a meteoric rise; a mild fall in output, into a rapid decline. - Milton Friedman, http://mises.org/library/what-true-health-care-reform-would-look

Answer 6

In capitalism every organization strive for efficiency and limiting resources needed to perform the service. The final cost charged by the service provider is just a sum of profits of each member of production chain. The goal is to make the chain short and negotiate lowest possible profits for all suppliers.

Socialist approach to health care does not have that property. The strive for efficiency is not intrinsic property of the system, instead it heavily depends on the will of those in power.

Also the system with insurance companies is not efficient, because the actor that pays for the service (insurance company) is different from the actor that receives the service and those two have different priorities.

As an example let's imagine 70 year old patient going to a doctor with pain in left knee. Doctor answers, this knee is 70 year old it is normal that you feel pain from time to time, but there is 0.1% chance you have 'knee cancer' (fictional example). The doctor offers some specialist procedure to diagnose potential cancer for $1000 dollars. If the insurance company or socialist healthcare paid, the patient would ask for the procedure, if the patient had to pay himself he would reject the offer. Of course the answer is different if the procedure costs $10 or $100.

Answer 7

If you were tasked to 'improve' the health care system, upon what fundamental elements of health care would you focus your efforts? The answer would be the same for virtually any product or service you might substitute for health care.

1. The quality of the product or service.
2. The cost of the good or service.

The combination of these two, along with individual perception, determine value.

Free markets tend towards improving these elements automatically and organically as, in theory, it is the market itself which is the final arbiter.

Socialism, particularly in its base format, utilizes artificial methods to determine both the production of goods and the cost of goods. In fact, it is not possible to actually know what a good or service should cost, how much of it should be produced, or how much demand exists under a classical socialist system.

The problem with a socialist approach is that it is simply a very poor method for accomplishing the intended, specific goals for which it supposedly is intended to address and will nearly always result in excessive waste of resources and low productivity/output.

It is difficult to improve upon what cannot be accurately measured.