Mimsy Were the Borogoves

Editorials: Where I rant to the wall about politics. And sometimes the wall rants back.

Economies of scale and government-run health care

Jerry Stratton, July 7, 2017

Reagan For the Little Guy

One of the common arguments in favor of government takeovers of a service is that government agencies can perform the service cheaper because of “economies of scale”.

Since insurance is a requirement… more premiums should bring the price down.

This argument shows a profound misunderstanding of what an economy of scale is and how scaling up works to raise the quality of a service or product while also bringing the price down.1

More premiums, like more of any service, only bring prices down when people are free to buy or not to buy, and when buyers are free to negotiate with sellers for what they want to buy and what they are willing to pay for it. The ACA, for example, mandates what people are required to buy within very narrow boundaries, and mandates that they must in fact buy it (or pay a penalty). This is guaranteed to cause prices to rise drastically. The skyrocketing prices and reduced access to health care providers that we now see was predicted during the law’s passage based on that simple economic principle.

Economies of scale only work when they allow a leaner competitor to discover a way to provide the same or better service at a cheaper price.2 An economy of scale doesn’t automatically cause the same old processes by the same old business or government agency to suddenly become cheaper. If anything, large scale in a monopoly will cause prices to rise and quality to drop as competition moves from competing to reach more people and persuade them to purchase the service, to instead competing for turf inside the bureaucracy.

This shift to bureaucratic infighting causes increased prices to pay for the extra soldiers in the turf war; and it causes lower quality service as the employees turn inward and pay more attention to the bureaucracy than to their customers. Why shouldn’t they? Their customers have no choice.

But even worse, increased scale in a government or government-created monopoly also results in increased complexity for the people who need the service. The inevitable turf wars mean that individual services become spread across multiple departments, any one of which can block or delay service—such as some person’s needed health care. Navigating the system becomes an essential skill, and it is one that people with more resources—who can hire dedicated navigators—will do better at than people with fewer resources.

For a long time, the greatest example of government-run health care in the United States, often praised in the mailings I received from progressive lobbyists, was the Veterans Administration. And they were right, although I haven’t seen that example used as often now that the VA’s efforts to kill veterans has been made public.3

Government agencies don’t have competitors who can put them out of business, which is why you never hear of “lean government agencies” except sarcastically or as an aspirational item during campaigns.

Government monopolies, such as single-payer bureaucracies, have even less incentive than government-created private monopolies to take advantage of economies of scale to improve quality and reduce prices. Very often, if not always, government agencies are able to hide their costs outside of direct charges to the recipient of the service, or even indirect charges through tax appropriations. Costs can be offloaded to civil services, government equipment providers, government office space providers, government pension providers, and more I’m not devious enough to think of. Government agencies can even make the rules about what counts as a cost to be recorded against them—which is why pensions are often excluded from the cost of government-run services4. Private monopolies don’t usually get to do this.

The Unaffordable Care Act tried to provide this same ability to insurance companies by including a “risk corridor” that used taxes to bail out insurance companies who spent more than they received from their customers. Of course, the risk corridor increased costs because it had to pay for the bureaucrats to manage the risk corridor on both sides of the bailout. But it also means subsidizing poor customer service within each insurance company. When the taxpayer is going to secretly bail you out, what does it matter that you’ve made health care so complicated and bureaucrat-heavy that even an insurance company can’t afford it?

Economies of scale also require a competitive environment to improve the quality of a service. More eyes on a problem all trying to steal the other’s customers are what drove the rapid increase in quality of care we have often seen in this country. A single government-run organization has no such incentive, and in fact has the opposite incentive. All of those quality improvements initially cost more money to perform. They won’t be improved without competition because they violate the cost-cutting provisions government systems impose in order to pretend to the benefits of a free market.

Such as the exchanges that Democrats love to put in place to emulate a free market but that inevitably cause higher prices and service blackouts.

So when someone says that health care should not be profit-oriented, should not be a business, what they really mean is that health care businesses should not have to compete for your business, on either quality or price. What they really mean is that it should be expensive, low quality, and so complicated that only the rich and well-connected can take advantage of it.

In response to Why we must not ration health care: Rationing health care means fewer cures.

  1. It also contradicts their other go-to claim that the service should not be treated as a business! In fact, pointing out that economies of scale only work when there is competition usually brings exactly that contradictory response, for example, “I don’t care… There is nothing you can say to change my mind that Healthcare does not need to be a money making industry.”

  2. For products economies of scale can sometimes produce lower costs to the company making the product, however, even then those lower costs are likely to be more than offset by increased bureaucracy absent a competitor to keep them honest.

  3. At a recent science fiction convention, I talked to a veteran wearing a t-shirt that read “The VA: giving veterans a second chance to die for their country since 1930.”

  4. Or are estimated using impossibly-high interest rates that make the pension look like an asset rather than a cost.

  1. <- A dog of a law
  2. ACA cuts off healthcare ->