Monopsony: An Economic Solution To Healthcare

Yesterday, I discussed one of several easily demonstrated problems with the provision of healthcare through the mechanisms of the free market.

As covered, in most cases the equilibrium point reached by the aggregate demand and supply curves for a market achieves maximum social surplus. This did not hold in the case of the healthcare industry because of wildly varying personal utility curves and, hence, wildly varying willingness-to-pay for healthcare services.

The major point yesterday was that the nature of the services in the healthcare industry creates many instances of nearly pure monopoly within the healthcare industry.

So, from an economic perspective, what can be done to deal with a monopoly? There are, really, three ways to manage this problem.

The first is to break up the monopoly, assuming it is a single organization. Obviously this does not work in the case of healthcare, as the monopolistic markets are nested within larger, healthy markets, and simply creating more hospitals will not solve this problem.

The second is to introduce regulation to prevent the ordinary problems related to a monopoly from creeping up. While this solution might work in relation to the healthcare industry, it carries with it the difficulty of legislating appropriate regulations, which would need to be frequently and correctly updated. This, of course, would have to be carried out by legislators and bureaucrats.

I, personally, wouldn't trust them. Even with the best of intentions, the task would be very difficult, and I don't believe the politicians of America currently have our best interests at heart.

The third solution, and the one I believe to be the best solution, is to create a monopsony capable of controlling the monopoly. A monopsony is the sole purchaser within a particular market. There are no good examples of a pure monopsony, but the power that Walmart wields over some companies approaches monopsonistic power, as they are able to dictate prices and many other aspects of deals between themselves and suppliers of the goods they sell.

For the healthcare industry, I believe the best solution to solving our problems is to have the government wield monopsonistic power over the market for healthcare.

Essentially, the government would be the only entity paying for healthcare. Not all healthcare, mind, but anything deemed to fall under necessary treatment for the continued health and well-being of the patient. This would include nearly any medical procedure, but would preclude things such as plastic surgery and many forms of orthodontic work.

The most important question here, then, is how the government would pay for all of these procedures.

Firstly, every individual would have an increased personal income tax. This would be the first of two sources of revenue the government would use

Secondly, if the previous amount was not enough to cover the costs of all healthcare operations (it should not be intended to) then those employers whose employees who spent the most on healthcare over the year would have a percentage raise in taxation for the year to cover the costs.

Now, you might be wondering why it is that I want the employers to cover the costs of healthcare services not paid for by the proposed personal income tax increase. The answer is simple: outside of yourself, your employer is the one who benefits the most from your continued health and well-being.

In addition, the employer will be entitled to dock the employees wages by a certain portion of what they pay up, amortized over the lifetime of the employee. This is not a debt; instead, it is a method by which employees can be made to repay the employer by, essentially, doing a small amount of free work every year.

(Even very costly operations create only a small loss of wages every year when repaid in this fashion.)

This system has a number of advantages.

First and, perhaps, most importantly, the monopsonistic power of the government in the market would drive down prices. This is a natural and inevitable consequence of the existence of a monopsony, just as monopolistic power naturally drives up prices.

(We can be largely assured that prices will not drop too far, however, as doctors and the controllers of the healthcare industry are extremely wealthy and influential. They will ensure that they still make decent money regardless of the nature of the market, and this will result in healthcare continuing to be a desirable employment opportunity.)

Second, it requires no additional regulations. The government will simply inform healthcare providers as to what sorts of procedures they will cover (that is, that they will cover only procedures necessary to ensuring the health of the patient) and how much they are willing to pay for those procedures.

(All procedures outside of the scope of government payment could be paid for out of pocket or by utilizing the much-shrunk healthcare insurance industry.)

Third, the system is simple to implement and has few consequences. With the exception of the collapse of the healthcare insurance industry, the healthcare industry will continue to function normally.

Fourth, the system of wage docking and employer payment helps to ensure that employers will go out of their way to retain employees that they have invested in through the system. While they still will not want to keep those with constant high healthcare costs, those who have one or two major problems will have more job security, rather than less.

And, finally, this solution does not actually infringe upon the mechanisms of the free market in any way. While it is true that the government would become the major player in the healthcare industry, they will not acquire any existing businesses and, in fact, the market will continue to exist, albeit in an artificially warped way.

The system has some inherit flaws to it, as well.

Firstly, the government has to be willing to let the hospitals decide what care is necessary for a patient and what is not. If they attempt to do so themselves, problems will arise. The most influence they should have on the hospitals themselves is attempting to lower prices and ensuring that they are not deliberately providing unnecessary care.

Secondly, those without employers will not cover themselves if they go outside of the limits of the personal income tax increase. However, I don't see a problem with this. The majority of the unemployed are either destitute, incredibly rich, or somehow only loosely associated with the business they work for. Of these, the first should not have to pay for healthcare, a necessary service, the second will most likely pay for healthcare better than that provided by the government, and the third represent only a small portion of the American population. While this does pose a small problem, it is not insurmountable.

And, finally, there exists the possibility that the monopsonistic power of the government would drive down prices so much that few would be interested in becoming doctors or nurses, and this would cause the quality of care to drastically increase. As stated above, I don't believe this will happen, but the possibility does present itself.

Anyways. I'm sure you all have your own ideas on the issue, but hopefully you learned a little something by reading through this long, list-laden post of mine. If you have any comments or complaints, put them down below and I'll get back to you on them.