• Uwe Reinhardt Replies

    This post originally appeared on The Finance Buff.

    Earlier today I posed questions to Uwe Reinhardt about his NY Times Economix post that drew a parallel between a public health plan and the federal program for student loans. I was essentially asking for a standard, pure, economic welfare argument in favor of a public plan. He was kind enough to respond at length.

    The reason I asked what I did of Reinhardt is that I am struggling to come to a decision about how I feel about a public plan myself. (Since writing this my thinking has progressed. I make a proposal for the role of a public plan in a follow-up post.) My own world view predisposes me to be in favor of such a plan, but my knowledge of economics pushes me the other way. My fundamental concerns are for efficient use of tax payer dollars and maximum benefit to society. Finally, my experience studying Medicare makes me well aware of the problems with both public and private coverage of health care. I am not convinced a government plan is the right answer, nor am I convinced a private-only system will be “fair” (in some “you-know-it-when-you-see-it” sense).

    I more-or-less know the standard economics argument for private markets. Do they apply to health care or not? Are we certain there would be market failures that would justify a government role? If so, what are the failures, and need that role be a public plan, as opposed to, say, enforcement of anti-trust laws, regulation, clever methods of assigning ownership of externalities, and so on.

    My quest is not complete. I am still looking for the economics argument for a public plan. Uwe Reinhardt’s response didn’t bring me any closer to it. He essentially rejected the premise that there is such an argument. He’s right that economists’ notion of “welfare” is not welfare as “straight-thinking people” would view it. But I’m not aware of any other objective way to judge the correctness of prices and quantities. Are the prices and quantities set by a public program (e.g., FFS Medicare) better? Do they lead to higher welfare (in any sense) or not? How do you know? Are you sure? Really? I’m not.

    When I find better answers to these questions I’ll post them. In the meantime, if any reader finds an economics argument for a public plan, please direct me to it.

    • mort,

      Economic welfare analysis is not about corporate profit. It is a systematic, objective way to compare the prices and quantities in a market relative to what they might be under a different market structure. Government participation is not excluded from such an analysis.

      I would be very skeptical about the quantity and quality of what would be supplied by a market based on the willingness of individuals to supply services out of concern for the “well-being” of human kind. The profit motive can and is harnessed for the production of some wonderful things that promote well-being. There is currently a shortage of primary care doctors due in part to Medicare’s underpayment of their services. We won’t get more primary doctors out of their sense of compassion for humanity. We will get them if we pay them more. On the other hand, if we think we should have fewer, then we’re doing the right thing. I don’t think there is a strong argument for fewer primary care doctors being a good thing.


      It is a funny thing as to which services are in the public domain and which are private. It isn’t uniform either. There are private security forces that operate like police. Why? Because the government provided ones aren’t sufficient and a purchaser (e.g., a university, a large housing complex, and so on) is willing to pay for more.

      How does one determine which goods and services should be financed publicly vs. privately? Typically arguments include externalities (tragedy of the commons) and other market failures. I think many of us just become used to something being a government or a private function without thinking that it could be done another way and perhaps to the better.

      Having said all of the above, I do believe there is a clear need for government participation in health care. But I do not believe that it has to be in the form of a public plan. I’m just not convinced it would be better that way. How can we know for certain in advance? We cannot. So this is opinion. This is not science. This is not economics. (See my follow up post for what I think the role of a public plan should be.)

    • A public plan needs no economic argument. It would be the same as a religious argument against the scientific fact the earth revolves around the sun, it is not needed, nor can it be useful. Too many times I see people trying to jsutify the private health system for business, but let’s look at it the way the rest of the world looks at health care, as a PUBLIC SERVICE. Granted private healthcare encourages competition and the theory is better service… or is it? the theory falls short because of human behaviour and not theoretical models. an important point left out in this theory is the GOAL of health care. In industry, the goal is profit, job creation, and growth (to support a growing population). However health care runs into a nasty obstacle called ethics. Health care should never be about profit, but instead the focus should be on the population. The underlying reason for government and economic markets is to support the wellbeing and welfare (in the layman’s definition) of the people of the country/world. Health care in America unfortunately, is the culmination of years of this simple fact being neglected. The best thing for profit would be to keep healthcare private. The best thing for humanity is otherwise. You can argue that by creating a public plan for healthcare will result in the loss of a market, and profit for companies, but little else. Jobs will remain as will job competitiveness and salary levels (except for bribes and “incentives” of course). This can be seen through most of Europe’s health system as an example.

      If your view is so narrow that only economic incentives should drive changes to the health system, then America is screwed. There used to be a thing called ethics and the biggest problem with health care is that profit is put before human life, this is why governments need to be in control because the PEOPLE dictate who represents them so it is in the best interest of government to take care of its constituency rather than it’s bank accounts. Healthcare isn’t the only area where the government should be involved as human wellbeing is at stake, though it is the only one that I have space to comment about.

    • I fully agree with Mort. There is a moral argument in favor of socialized healthcare. A free market ordinarily skirts these issues by demonstrating that competitive private enterprise will produce more efficient, less costly services for all. But has this been the case with healthcare?

      I’m always astonished by the free-marketeers who argue in favor of private medicine. Another example is in the marketing of pharmaceuticals directly to the public – should marketing morally be allowed to play a part in (influence) consumer’s healthcare decisions probably best left to their doctor? This would seem to pre-empt the doctor’s advice IMO in an effort to boost profit.

      Some areas of public good ought to be free from moral hazards brought on by private enterprise. Would anyone argue for privatization of our police or fire departments? Or that an insurance company ought to determine which police/fire department may serve you? Why healthcare has historically not been viewed in the same terms is beyond me – perhaps it has something to do with the profits being reaped and/or the income level of the practitioners.

    • One of my professors from undergrad had some very interesting insights and is a very brilliant researcher on the subject. I believe if you skim over some of the papers below you will find some very interesting and appropriate findings.:

    • Drew F,

      I read the abstract or introduction and conclusion of Duggan’s papers that seemed relevant to my post or the follow up to it.

      I agree with the general sentiment of Providing Prescription Drug Coverage to the Elderly: America’s Experiment with Medicare Part D: that Part D has been successful but not without issues.

      The main point of The Distortionary Effects of Government Procurement… is that Medicaid drug procurement distorts prices in the drug market. This is an example of a source of loss of economic welfare due to the effect of government involvement in the market. It is a cautionary tale for what might happen if Medicare negotiated prices for the entire Part D arm of the program.

      Finally in Does Contracting Out Increase the Efficiency of Government Programs? Evidence from Medicaid HMOs he finds that outsourcing Medicaid coverage to private HMOs has resulted in higher costs to California with no evidence of improved health outcomes (infant mortality). This result is consistent with what has occurred in Medicare as well. Under Medicare a main source of the high cost of HMOs (relative to FFS) is the generous payment rates. Almost by definition that has to be the case in CA Medicaid too, but I couldn’t easily find a thorough description of payment policy in my scan of the paper. Genuine price competition with real bidding (as opposed to administrative pricing) would go a long way to fixing the problem in Medicare. Basically, it isn’t a real market system and weak political resistance to rent seeking by plans has led to overpayment.

    • Lester Thurow (a noted economist) made the point that the most efficient market solution for voting was to allow people to buy and sell their vote. Given the different skills, education and interests of the population, those with the greatest interest, experience and capital could expend their resources on what they believe is the best candidate – the person most consistent with the purchaser’s best interests. Yet we don’t allow votes to be bought and sold. Because there is a principle in our democracy more important than the market solution (even assuming a working market). Just like clean water and clean air and education, I believe that healthcare is a public good. Do you know when you’ll be unemployed, become seriously ill? Is there any reasonable way for an individual to personally insure against future illness? Personally, my health insurance costs more than my mortgage and real estate taxes each month under the only plan that I can gualify for. How can an individual insure against that possibility?

    • Judy Novey,

      You make an argument by analogy (much as Rienhardt did) for a government role in health care. I agree that there is a role for government, one that is much larger than it is today. But no argument can unambiguously define what exact form that role should take. That there should be a government role does not mean that role should be any particular style of public plan. Hence, there will be and should be a messy debate. I expect the outcome will take some middle form. It will not be a Medicare-for-all style, single payer, public plan. Nor will it be the current market configuration. The former is too much a departure from what the majority of Americans would find palatable. The latter has too many problems.

    • The argument I would make is this, those things which create positive externalities are under produced because the private benefit is not sufficient. Healthcare, as a service, certainly produces positive externalities, herd immunity being the most basic example and yet not nearly enough people get flu shots each year. The private insurance market fails to produce an efficient level of healthcare (access) and so the government must substitute in order to capture those positive externalities to greatest possible extent, as it already does in certain fashions like additional payments to hospitals in underserved and low-income areas. The current forms of government intervention are inefficient so an argument for a public plan would be to extend coverage and thereby reduce the myriad of other supporting programs and thus gain efficiency in the processing portion of government aid. Additionally, it would allow for much better planning by providers as they can now have better estimates of expected income creating efficiencies there as well. These efficiencies may be possible in a completely private market but significant regulation would be required (as evidenced by the current failings of the private market) thereby eliminating any potential efficiency that the private market may have over a public plan. The public plan may also act as competitor and bring the “self regulation” of private markets to fruition so that margin cost finally equals marginal revenue at zero economic profit. What this will require is that the public plan cannot operate at level below where marginal cost equals marginal revenue plus the value of the positive externalities accruing to the society as a whole.

    • Judy – While water cleanness may be a public good, water itself is not. I pay a utility company for my water. Some people also buy fancy water from stores.

      Nobody can predict their own death, but life insurance remains a private market product. I don’t see how health insurance is inherently different from life insurance. How come rich people’s kids are better protected financially from their parent’s death than poor people’s kids?

    • CJ,

      My only dissatisfaction with the debate about government involvement in health care is not whether the government should be involved (this is clear) but how, exactly. Plus, there are political realities that may force a compromise of some sort, reconciliation notwithstanding. I do not find it productive to make an argument for a public plan because the current market is not working out or that we cannot fathom the regulatory structure to make it better. I’m more of an empiricist and I’d prefer to see the market given a good try with ample regulation first. Then if it fails, the government should move in. Did you read my follow-up post on this?

      I would not expect perfect competition in the health care market in any circumstance. Few markets can achieve that. Health care and health insurance is too differentiated and there are substantial fixed costs to entry.


      In the case of water (and some other utilities) it is very common for the utility to be a regulated monopoly. I’m not a scholar of utilities but it would seem to me that in many cases the distance between the regulated monopoly utility and government operated utility is small compared to that between a “Medicare for all” type government health plan and a private health insurance market that is a more regulated and subsidized version of what we have now.

    • “I don’t think there is a strong argument for fewer primary care doctors being a good thing.”

      Actually it’s the opposite, there’s a strong argument that more specialists is a bad thing and that more primary care docs would be a good thing. But that’s only if you believe that saving lives or improving the health of the population is a good thing. Any individual med student who wanted to maximize their income would choose a specialty over primary care.

      “The inconvenient truth in workforce planning models is that research shows a weak link between patient outcomes and physicians per capita, with the exception of studies of primary care physician supply… Studies examining outcomes associated with higher supply demonstrate that although a very low supply of physicians is associated with higher mortality, once supply is even modestly greater, patients derive little further survival benefit… One of the most durable findings from studies of physician supply is that populations tend to do better in regions and health care systems emphasizing primary care.”
      Does Having More Physicians lead to Better Health System Performance?
      JAMA 2008; 299(3):335-337.

    • SteveH,

      We agree here. I should have written “relatively fewer primary care doctors” (relative to specialists). The financial incentives for med students to preferentially enter into specialty care does not seem to make sense given the literature you cite.