Harvard economist Greg Mankiw had an op-ed in The New York Times over the weekend busting the chops of the proposed “public option” for health care reform in the US, that idea of creating a government-run, (probably) tax-subsidized competitor to private health insurance companies, with the goal of universal coverage. Mankiw objects because he can’t see how the system would be “fair,” an argument that I confess always seems a little odd to me coming from a market economist, but that’s because I tend to regard markets as entities that, on a fundamental level, leverage unfairness. But his characterization of a government-run insurance plan as a monopsony caught my eye.
This lesson applies directly to the market for health care. If the government has a dominant role in buying the services of doctors and other health care providers, it can force prices down. Once the government is virtually the only game in town, health care providers will have little choice but to take whatever they can get. It is no wonder that the American Medical Association opposes the public option.
Monopsonies—markets dominated by a single buyer—never seem to get the PR that their single-suppler monopolist cousins do, but both of them have similar potential to screw the workers, in revolutionary-slogan terms: if monopolies can price goods out of proportion to the wage market, monopsonies can squeeze wages out of proportion to the marketplace. (You owe your soul to the company store.)
Faithful readers of this space (with unusually good memories) might recall that I once analyzed orchestras as monopsonist entities, so one might be tempted to compare notes, as it were, to try and predict how a health-care monopsony would resemble the orchestral world.On the basis of that, professional wages would, probably, go down. Sure, a few conductors and soloists are really raking it in, but the majority of orchestral musicians are probably sneaking into the middle-class through the back door (and via multiple jobs). For comparison, Mankiw links to some data that puts the average US physician income at $199,000 a year. $199,000! For an orchestral musician, that’s Big Five money—and it’s probably not coincidental that the Big Five are all in cities that support enough musical activity to dilute those orchestras’ monopsony power.
Does this mean, as critics of the public option propose, that the overall talent of health professionals—and the quality of health care—will decrease? The orchestral evidence actually says no. Small-market orchestras tackling Mahler? The Rite of Spring? Other repertoire that, a lifetime ago, would have been out of reach for all but the best groups? Happens all the time. There are enough musicians who love their jobs—in economic terms, who sufficiently value the positive externalities—to put up with the reduced income. The flipside is the number of talented people who leave music for better-paying pastures—or who never embark on a music career in the first place. So, if the model holds, what you’d likely end up with is a health-care system full of doctors who really love their job, and a nagging, probably unquantifiable sense of a lot of talent opting out of the sector. (Not that it doesn’t already—how many potentially brilliant physicians have disappointed their mothers by sticking with the violin?) Other parallels, both incumbent—the movement of musicians from market to market as compared to the current patchwork of local health-care monopsonies resulting from state-by-state regulation—and potential—the pitfalls of a board-led philanthropic model vis-à-vis prospective models for maintaining government-subsidy accountability—could also be interesting.
But the problem with this overall comparison is that there’s an 800-pound gorilla in the room that hasn’t been mentioned much in either context: political will and perceived political worth has an enormous effect on how monopsony power plays out in the marketplace. Look at the Department of Defense, possibly the biggest monopsony in the world—that market rarely gets squeezed, either in price or quality, because of its political impregnability. So comparing doctors and section woodwinds, while fun, probably only yields small-potatoes results in comparison with the real question, whether universal coverage would meet with enough approval for the resulting political fairy dust to inoculate any resulting monopsony from negative externalities. And that, in turn, is a lesson for orchestras. Hearts and minds, people.
It's got to be hard for a Harvard economist to mention the word fairness without invoking the spectre of John Rawls, which is someone Mankiw would probably just as soon forget in this context.
The thing that really bugs me about the article is his use of the term 'honest competition.' There is little that is honest about competition in the health care industry and nothing particularly honest in his arguments. The analogy to a grocery store is a good example. A well-functioning market doesn't just depend on a choice of which products to buy, but whether to buy any at all when the prices are out of hand. Confronted with the choice of going bankrupt or dying of cancer, how many people are able to make a rational economic choice? The only rational option is to mortgage your future sickness in the form of insurance. The market forces and the rational consumer go out the window in these circumstances. Healthcare is one of the few sectors of the economy where you may have a choice of provider, but you WILL buy from someone; a fact that people like Mankiw choose to ignore while still bowing before the alter of the invisible hand. If he wanted to see how a truly honest market would handle healthcare costs, I suggest making healthcare insurance illegal.