• Monopolies might not work, but monopsonies might

    Matt Yglesias notes that Rep. Ryan defended the breaking up of Medicare today by arguing against monopolies:

    Talking to Mario Bartiromo at today’s Fiscal Summit, Representative Paul Ryan offered a number of arguments in favor of repealing Medicare and replacing it with coupons to partially offset the purchase of private health insurance. One such argument that I found particularly curious was the idea that “monopolies don’t work.” For one thing, obviously Medicare’s customers seem to like it pretty well. That’s why Ryan is (somewhat disingenuously) running around trying to assure people over the age of 55 that nothing’s going to change for them. By contrast, everyone hates their private health insurance.

    Here’s the thing: a single-payer health care system isn’t a monopoly; it’s a monopsony:

    Monopsony is a state in which demand comes from one source. If there is only one customer for a certain good, that customer has a monopsony in the market for that good.

    Analogous to monopoly, but on the demand side not the supply side.

    A common theoretical implication is that the price of the good is pushed down near the cost of production. The price is not predicted to go to zero because if it went below where the suppliers are willing to produce, they won’t produce.

    Now there are arguments to be made against monopsonies, especially from those providing the goods being sold (providers, hospitals, pharmaceutical companies, etc). But what a true single-payer monopsony insurance company would be really good at is driving down the price of care. Moreover, if that insurance company were non-profit (government), then it could pass along that savings on to customers (all of you).

    There are valid arguments against Medicare and government as cost controls, but its monopsony power isn’t one of them.

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    • Here’s the thing: a single-payer health care system isn’t a monopoly; it’s a monopsony:

      Single payer is both a monopoly and a monopsony. I do not knwo how you can get monopsony without having a monopoly at least on the insurance side (you do not need a provider monopoly). If you do not like the service the single payer gives your only options are no care/illegal care or going to another country for care that is monopoly, but that is balanced with the fact that if suppers do not like the deal the single payer gives them they have limited options to leave the healthcare business/provide care illegally/take bribes for care/leave the country.

      Monopsony can certainly lower cost and spending. It can create shortages but it works pretty well in some countries.

      • A distinction one might make is that a government-run single-payer program wouldn’t be a monopoly in the same sense that a privately-run single entity would be. The latter would maximize profits, the former would not.

        Therefore, one has some reason to believe that the savings achieved via a government monopsony would be shared with consumers. Not so with a private entity.

        In this sense, the emphasis on monopsony is “more correct”. A government single-payer program really is a monopsony. But it really isn’t exactly like a monopoly.

        (I’m not trying to be cute by sidestepping legitimate issues associated with various forms of government dysfunction, I’m just making one pure point.)

      • I agree with Floccina that Medicare is both a monopoly and a monopsony. I also agree with Austin with his points, but it does seem like he’s trying to “sidestep” the issue.

        The question should be whether the drawbacks of Medicare’s monopoly characteristics (less incentive to innovate, increase quality, reduce prices, provide different types of insurance for different people) are greater than the benefits of its monopsony powers (minimizing costs). On top of that there are advantages and disadvantages to being a government program like the absence of profits (lower costs) but also the reduced incentive to reduce costs.

        Paul Ryan’s statement wasn’t incorrect, only incomplete.