Healthcare: Monopsony vs. Oligopoly

The difference between European and U.S. healthcare systems is not how humane the system is, but rather what form of imperfect competition is in place. In the single-payer healthcare of Canada and Scandinavia the market is structured as a monopsony. In the U.S. it is easily argued that the system is an oligopoly on both sides of the productions line, both in health provision and input supplies.

The implication of an oligopoly and monopsony is that inefficiency is occurring. This means that a lot of improper allocation is produced and that the market is nowhere near as capable of functioning at maximum efficiency.

In the U.S. you have a healthcare oligopoly behemoth so large only big oil gets close to its market dominance. From healthcare providers to insurance agencies the limited competition creates a market of high prices and in some cases low quantities. These situations are created by a variety of factors. First of which is subsidies. Compared to Canada for example the U.S. government spends more on healthcare per capita. This is surprising considering the fact that the Canada has government run hospitals. Most of this money is split between subsidies to pharmaceuticals and other healthcare product and service firms and Medicare. Subsidies while may lower costs give a competitive edge to certain firms. This creates the market dominance that some pharmaceuticals have as well as other health device manufactures. This causes prices not to react to market changes and thus one is left with large input prices into healthcare. This translates into high costs to consumers.

The other half of the picture is the oligopoly in insurance provision. In California two insurance companies control 44% of the market. This occurs even though California is the most competitive market for insurance companies out of any state. These oligopolies become the market and thus they control prices and from this you have the inability for prices to react to social needs. The reason for insurance oligopolies arises from many factors, most of which are linked to regulations. The lobbying body that is at the helm of corporations such as State Farm, Blue Cross and others is incredibly influential and  cause of great harm to consumers. This lobbying body is not at just the federal level but deeply entrenched in the local and state levels. This creates the imposition of high costs that prevents competition. Once they control the market they do not negotiate regularly.

To solve such an oligopolistic structure only an introduction of competition can help. This includes revisiting regulations, removing subsides as well as targeting state legislators to have more streamlined regulations that are uniform and allow for interstate insurance markets. The incentives for large firms to yield power have to be removed. The programs that provide them with subsidies and contracts have to be terminated. The incentive for corruption has to also be removed. This is far more effective than legal or regulatory action.

Some will suggest pursing a single payer healthcare system. Such system has merits. The main one of which is low cost compared to the oligopolistic system. With one healthcare provider, the government, the bidding for supplies can drive down costs. This is the reason behind the cost effectiveness of single payer. In some ways it is far more fiscally conservative than a federally subsidized option. However this is where the buck stops. The corruption is far from ending in single payer than it is in an oligopoly. The theories of the Public Choice School of economics play perfectly in any illustration of single payer healthcare. The amount of corruption behind government contracts is tremendous. In Canada the cases have gone on for years. The last scandals have come from Quebec (McGill Health Centre) and Alberta (health expense scandal). Showing that such scandals can affect two completely different provinces.

Besides the obvious political ramifications of single payer there are obvious economic issues. A monopsony is not close to perfect competition. There are issues with long-term outlook and the subjective value of healthcare. While many systems of healthcare in Europe are roughly 20-40 years old. Their capitalization of the healthcare market did not occur till recently. And even now countries are beginning to introduce more market friendly reforms to help create long-term potential. Switzerland comes to mind when speaking of market reforms to single payer. As single payer has grown in Europe innovation has been more dependent on American research. This correlation has resulted in the need for market reform. As well as other economic freedoms are granted people’s wants for a wider range of services has forced for the introduction of more choices that are not provided through tax dollars but rather through private exchanges. This has also forced upon Europe more and more market reforms.

People that espouse the ability to bid down prices in a single payer are ignoring one glaring issue. When they drive down the prices they are not negotiating for a better product all the time. The government now represents the whole market and thus removes all possible forms of knowledge as to what to buy. Thus the balance between price and quality is based on one perspective not an aggregate. Couple this with the propensity to be corrupt with government contracts and a recipe for neglect is created.

I don’t have to drone anyone with the stories of avoidable deaths created by single payer systems. While such events took place the empirical evidence of a correlation and causation have not convinced me as of yet. However there is a higher chance theoretically of such incidents occurring because of structure of market. Information would not be traded and exchanged similarly to a free system thus whether or not an avoidable death occurred such an event would be unknown because of the monopoly on service. This is extremely important as proponents of single payer healthcare see it as just universal provision when it is really the exchange of knowledge and quality that drives health. Provision will only come successfully and sustainably when knowledge is exchanged and research is conducted.

The lost service and potential a government system creates is tremendous. A simple concept to compare it to is a monopoly plus monopsony plus a price ceiling. The amount of uneconomic allocation is profound. Such analysis into the misallocation requires one to suspend what can be seen and try to look past the first dimension and see what can’t be seen. In most single payer systems what can’t be seen is an aging population and increased costs. What can’t be seen is negative consequences on knowledge and increased asymmetry (contrary to popular belief) created by a monopoly (as well as a monopsony) and the assumption of having knowledge.

There are other issues with single payer healthcare that deal more with the philosophical aspects. Healthcare has been and can be provided in diverse ways by diverse channels. Unlike the arguments for roads, police, and fire fighters the argument for healthcare is a reaction to what is seen. The lack of humility and perspective in such ideas is caused by a poor understanding of economics. It is important to understand that there is no such thing as a free lunch and that nothing has intrinsic value.

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