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How much good could health care monopsony do?
Greg Mankiw has an interesting column on the public plan option; you've already seen related points on his blog and on MR.
Today I'm interested in a slightly different question, namely the potential benefits of monopsony. Imagine a benevolent single buyer of health care services. Forget about whether or not it could be a government; let's just focus on the logic of the model. I can think of a few scenarios:
1. The buyer bargains down price and suppliers in turn lower quantity.
2. The buyer bargains down price and the monopolizing suppliers respond by expanding quantity. The monopsonist moves us to a more competitive solution. Note that under this option the direct institution of more competition could have the same effects.
If #2 is true, you might expect supply restrictions to be an important issue. That is, the people who favor monopsony should also favor greater competitiveness on the supply side. Yet this does not seem like a current priority. I hardly ever see talk of deregulating medical licensing, allowing paramedics and nurses to perform more basic medical functions, or abolishing other entry restrictions. I do recall that an earlier version of Obama's plan, struck down by Congress, would have created a nationwide insurance market. There was no big fight, either in the administration or in the blogosphere.
Those who favor monopsony might have another model in mind. In this model there are many medical suppliers but each supplier still has a fair degree of ex post monopoly power. Search costs, non-transparency, lock-in, and consumer irrationality can generate this kind of result. And in these models allowing for more entry needn't much help the basic problem.
Under #2, which other policies will help set this market right? What are the possible policy substitutes for monopsony?
And in #2, what happens if a monopsonist third party payer bargains prices down? What are the offsetting quality responses? Are monopsonists good at bargaining for higher levels of quality? Or might the all-in-one, bureaucratic nature of the monopsonistic enterprise mean that the monopsonist is very good at bargaining over price (measurable) and very bad at bargaining over quality (harder to measure and verify and we already know there is irrationality, non-transparency, lock-in, etc).
If we put monopsony in place, can a version of the Card-Krueger monopsony model apply to medicine, namely a welfare-improving minimum wage for doctors, albeit at a very high level? That would mean we don't want the monopsony to economize on how much we spend on health care.
For all the recent writings on health care, these questions remain underexplored. Comments are open, but today I'm not interested in the usual bickering about public vs. private sector. I'd like to hear about the logic of monopsony.
Posted by Tyler Cowen on June 28, 2009 at 06:57 AM in Medicine | Permalink
Comments
Some points:
1. There isn't going to be a monopsony even if a single country has a single-payer system; at the margin some people will still go to clinics abroad (Switzerland, probably).
2. There are quite a few countries that have domestic monopsonies or near-monopsonies already; surely it makes more sense to study real examples than to theorise in a vacuum?
Posted by: Richard G at Jun 28, 2009 8:23:27 AM
Dean Baker talks about expanding the number of doctors all the time. This is one example, but he has written about this for years.
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=06&year=2009&base_name=health_care_protectionists_can#comments
Posted by: mickslam at Jun 28, 2009 8:28:22 AM
I found this to be a useful book on the topic: http://press.princeton.edu/titles/7522.html
Posted by: wintercow20 at Jun 28, 2009 8:37:25 AM
"Search costs, non-transparency, lock-in, and consumer irrationality can generate this kind of result. And in these models allowing for more entry needn't much help the basic problem."
I think Michael Porter came to something like a related conclusion awhile back:
"Our research shows that competition in the health care system occurs at the wrong level, over the wrong things, in the wrong geographic markets, and at the wrong time."
http://hbswk.hbs.edu/item/4255.html
He would probably agree that more entry would simply have more entities competing for the same customers in the *wrong* way.
Of course this doesn't answer your deeper question of what the fundamental market failures are, but it does suggest that you are asking the right question. For example, reading Greg Mankiw's links to a pro and con of the public option, (http://gregmankiw.blogspot.com/2009/06/public-option.html) I don't get the sense that the authors are addressing the fundamental issues you raise.
Posted by: Robert Bell at Jun 28, 2009 8:44:54 AM
Actually, many who favor monopsony do seem also to favor greater competition in one aspect of the supply side: patents. I have heard many single-payer advocates express concern that patents confer excessive profits on pharmaceutical companies.
Posted by: Richard S at Jun 28, 2009 8:49:41 AM
I agree that increasing competition through removing the sometimes arbitrary restrictions in place is a good idea, but I think it's a good idea independent of monopsony. Wouldn't reducing entry requirements and depending less on relatively scarce doctors save dollars regardless?
Posted by: Michael Foody at Jun 28, 2009 9:06:21 AM
“I strongly believe that Americans should have the choice of a public health insurance option operating alongside private plans. This will give them a better range of choices, make the health care market more competitive, and keep insurance companies honest.”
Prof. Mankiw might have pointed out that government "health insurance" isn't insurance; instead it's a pre-paid, taxpayer-paid, healthcare consumption plan.
Insurance is individually underwritten; premiums are based on the risk profile of the insured; and they have a deductible to give the insured more incentive to stay healthy and avoid becoming ill.
Government "insurance" would not be underwritten at all; it would be paid for with taxes, not voluntarily paid premiums; and it would pay from the first dollar of "coverage."
To see what a disaster the "public option" would be, look no further than the disaster that is Medicare/Medicaid. These programs are riddled with corruption, yet he thinks that more government involvement in healthcare will avoid this problem, and make the insurance market more competitive and insurers more honest.
Posted by: AADL at Jun 28, 2009 9:46:28 AM
I'm not sure how well the monopolist model works when you have so much diversity, in the types of workers and geographic spread. The government would have a very hard time setting a monopolist price in both Boston and rural Mississippi without causing the complete failure in one of the markets.
Still, assume a drop in wages and a drop in labor force participants with large dead weight losses. If you want, view it as a tax on health care workers that the government transfers to the government.
Next assume that people who become physicians have many career options. The AMA restricts access to the medical fields which raises wages but also forces intense competition, based on human capital, for entry. The AMA model is a tradeoff between fewer doctors with higher incomes but they can select from a pool of highly skilled individuals. Critics argue that many highly qualified candidates, people who have the skills required, are rejected each year. So that an expansion of the number admitted to the profession would lower income but would not greatly diminish the quality. The question is what is the market clearing wage if you refuse to lower your standards. And will the monopsony set the wage above or below this wage. If the monopsony also has formed a monopoly, would they care that much about a drop in quality? Plus this is a monopsony that wants to buy more general health care and less specialized (expensive) health care.
Can a monopsony defeat a vibrant labor market? The labor market could unionize, just as coal miners did against perceived monopsonies. The whole reasons for unions was the perception that the power balance between employer and employee was too much in favor of the employer. People can migrate away from the field.
So should we assume that the current health care system is based on the destructive monopoly power of health care providers, power that can be broken by a monopsony for the betterment of society. I think the government will use their market power to try to shift the market to delivering more primary care (were wages tend to be lower) and place extreme pressure on specialized care. They will make the pay for highly specialized care so low that complex medical problems will be rationed due to shortages.
Posted by: DanC at Jun 28, 2009 10:27:22 AM
Whether you have monopsony or not, it is important to be able to do some kinds of reasonably accurate quality measurement. If you don't have that, it is hard to come up with a model that does a good job of allocating medical resources.
However, as implied in your post, a monopsony has a lot of incentive to develop good measures of quality, in a way that seems to me to be less true of a system with many purchasers.
Posted by: matt wilbert at Jun 28, 2009 10:41:02 AM
"Search costs, non-transparency, lock-in, and consumer irrationality can generate this kind of result. And in these models allowing for more entry needn't much help the basic problem."
If this is the problem, then you may not really need a monopsony, rather competitive HMOs would do nearly as well. I'd be curious as to whether the market supplies something like HMOs in countries where people pay out of pocket (like Singapore.) If not, then perhaps consumers don't feel they need assistance in bargaining with health care providers. If so, then the market is apparently able to provide that assistance.
Posted by: Scott Sumner at Jun 28, 2009 10:53:01 AM
The defense dept is a monopsonist. I don't see F-22s as inexpensive. If this goes through there will be massive consolidation on the supply side to counterbalance the govt's purchasing power.
Posted by: JJ at Jun 28, 2009 11:00:23 AM
Richard,
"1. There isn't going to be a monopsony even if a single country has a single-payer system; at the margin some people will still go to clinics abroad (Switzerland, probably)."
Outstanding point. In fact, the aforementioned people won't even have to fly to Switzerland. If Obama gets his way, then thousands of American specialists will most certainly migrate quickly to more welcoming off-shore locations--Bermuda, Bahamas, Lesser Antilles--that are easily accessible by sea and air. I wouldn't be surprised if governments in the Caribbean are already eagerly planning for a "medical tourism" boom in the next couple of years. Hell, the Canadians might very well take a hard look at reprivatizing their medical system in order to get a major piece of the American medical tourism market as well. Ditto for the Mexicans.
As an aside, Lord Obama thinks unions are swell. But what happens if medical practicioners form a truly Euro-style union in this country and engage in strikes and slowdowns as has happened on the Continent? Seems to me that Obama will then be f***ed: if he does nothing about such strikes then the public will vent its wrath upon him and his party. If he tries to break the strikes, then, in the eyes of Big Labor, he'll just be another scab-loving hypocrite.
Whoa, if ObamaCare actually comes about, it's going to suck....to be Obama.
Posted by: MarkJ at Jun 28, 2009 11:09:54 AM
What are the offsetting quality responses?
In the Soviet Union, the people’s response was an entrenched practice of “motivating” a doctor by either indirect bribe in a form of gratuity gifts, or direct under-the-table payments.
Another, even more widespread, “stimulus” system was an elaborated arrangement of trading favors via connections in the economy where all goods and services were scarce/rationed. You treat my cousin by letting him see some unique specialist, and I will help you out with the back-door purchase of a refrigerator that cannot be purchased at all otherwise.
I am wondering if something like that is happening in Europe or Canada?
Goods and services of course are not scarce, but what if my sister is on the waiting list for some medical treatment, your brother is a doctor in a position to speed it up (by, say, overstating severity of her diagnosis), and my closest buddy is your wife’s boss, and she’s up for promotion?
Posted by: Ozornik at Jun 28, 2009 11:55:44 AM
Slight tangent:
>I do recall that an earlier version of Obama's plan, struck down by Congress, would have created a nationwide insurance market. There was no big fight, either in the administration or in the blogosphere.
This raises a big question I have, about state-based plans and labor market flexibility.
I live in seattle and my daughter's going to U Chicago next year. We're required to buy the college health plan because our plan doesn't cover 80% of costs. (No preferred providers in Illinois, of course.)
So to protect her against long-term illness, I need to have both plans in place. If she got sick and withdrew, she'd lose her college insurance.
This is just one example of how state-based insurance impedes labor-market flexibility. (Or in this case, college-market.) We all know people who stick to less-than-optimal jobs, or don't commute across a state border for work, because of health insurance.
I really wonder whether the availability of national plans, owned by the insured rather than the employer, wouldn't greatly increase labor-market flexibility hence macroeconomic efficiency. Would be damned hard to measure or predict that, but...
Posted by: Steve Roth at Jun 28, 2009 12:43:39 PM
Say you're concerned that monopsonies in other countries are pushing up the prices in your own country because that's the only way the drug companies can make a profit. If you set a up a monopsony in your own country that will even the bargaining status vs other countries. That will push up the prices in other countries and lower prices in your own. Worldwide social welfare remains flatish, but national welfare goes up. This assumes that producers don't have monopoly profits.
Posted by: Kyle at Jun 28, 2009 2:42:34 PM
To respond to some of your points (I am one of those high priced specialists), first, physicians are constrained by standards to a minimal level of care. If you have a monopsony and lower payment, we will not be able to lower our level of care, even if want to do so.
Next, are monopsonists good at bargaining for costs OR quality? Does this need to be a dichotomy? Maybe when buying TV's or cars. The European health care systems cost much less than ours AND are generally as good as ours, sometimes better. As far as I can tell we are probably only ahead, maybe , in cancer outcomes. This may be just a statistical anomaly.
What people keep forgetting is that there is risk in medicine. If we only do procedures or use medicine when the benefits outweigh the costs of those negatives, we come out ahead. When, as seems to be the case in McAllen, there is over utilization, you get higher costs and worse outcomes. In this case, I would think but feel free to correct me, a monopsony might have the power to change this, assuming the political will and savvy. Private insurers have little incentive to stop this spending either. They simply pass on the costs. This makes them bigger which ultimately justifies larger salaries. Also, the adverse publicity from denying one patient care incorrectly is so costly, they have further incentive to just pass costs on. Remember the HMO backlash.
MarkJ-Specialists rely on referrals and infrastructure. They will have neither in the Caribbean or Canada. We already have medical tourism going out to India and Western Europe. Google it. I think it much more likely that you will see parallel institutions forming in the U.S.
I suspect a monopsony is most likely to fail, from the physician POV, because it will take the easy route and use across the board pay cuts rather than targeted cuts. Across the board cuts will spur those who already practice according to proper standards to adopt a more profit oriented approach, ie, follow the McAllen model.
Steve
Posted by: steve at Jun 28, 2009 3:51:06 PM
Regarding increasing the number of providers and thus competition. It's my understanding that all the evidence suggests that areas with more physicians per capita have higher costs. Causality is difficult to determine, for sure, but I believe it's far from clear that increasing the number of physicians will result in lower health care costs.
Posted by: mark at Jun 28, 2009 4:26:49 PM
Steve Roth writes:
I really wonder whether the availability of national plans, owned by the insured rather than the employer, wouldn't greatly increase labor-market flexibility hence macroeconomic efficiency. Would be damned hard to measure or predict that, but...
Thanks to a couple of court decisions in the 1920s, the states took it upon themselves to regulate the insurance industry, including prices. That led to 50 heavily regulated, smaller markets, rather than one big robust national market. It's impossible to buy health insurance across state lines thanks to the smaller, fragmented, and regulated state-based markets.
Your point about labor market efficiency and macroeconomic efficiency is right on.
(I'm a resident of the People's Republic of New York, and bought a Mutual of Omaha policy with a $10k deductible in 1997. In 1997 Mutual of Omaha got tired of putting up with the stupid PRoNY regulators and politicians, so it exited the Empire State. I switched to GHI and a $5k deductible at a 20% higher premium. GHI canned that policy in 2004. Guardian, the last of the oldline indemnity insurers, had already quit selling health insurance in the PRofNY in 1993.)
Would someone tell Comrade O that socialismo would no more work in supplying healthcare (or what they mislabel as heath "insurance") in the U.S. than it did in supplying consumer goods in the U.S.S.R. when Uncle Joe, Nikita the Shoe Pounder, Comrade Breshznev et al. ruled the show?
Posted by: AADL at Jun 28, 2009 4:43:19 PM
Massachusetts has very high physicians per capita.
Medical care is very expensive in Mass. But I have not seen this adjusted for the cost of living are the quality of medical care.
Massachusetts doctors have the lowest average income of doctors in any state.
Supposedly, doctors are attracted to Mass by the quality of life despite the low income.
Posted by: spencer at Jun 28, 2009 4:43:34 PM
For all the recent writings on health care, these questions remain underexplored.
Are you sure?
I recall in Sick Around the World, a PBS Frontline? documentary, a Japanese health care official was talking about the Japanese strategy that used the market. I'm not sure of the details at this point, but Japan has, as I recall, multiple regulated insurers, "union" and employer and "medicare" who all work from a standard list of prices for multiple private/public hospitals and doctors.
The pricing is set by a central board that first sets the prices based on industry data on costs, and then modifies the prices based on the rate of increase/decrease in the quantity/total cost of each of good/service.
If the number of the goods sold is increasing, then the interpretation is the price is yeilding high profits, and so the allowed price is cut. Likewise if the total amount of low cost services is falling and the total of high cost services is increasing, then the low cost service prices are raised if reason exists to believe that more of those will reduce the number of high cost services.
As an example, he talked about CT scanning proceedures. The Japanese really like tech, so both doctors and patients really liked CT scanners, doctors because they were high profit. So, the price was cut for CT scans, and the CT scanner centers demanded lower cost CT scanners, both in capital cost and operating costs. The Japanese manufacturers cut the cost of the machines and then automated them so that they could be operated by fewer less skilled people. That resulted in more of these low cost CT scanners which were used more extensively, so the prices were cut further. The end result is that Japan has a lot more CT scanners per capita then the US and far more CT scans are done, but the total spending per capita on CT scans is less.
So, based on a central planning agency setting prices, and lowering allowed prices to reduce costs, the result was your #2.
Japan is looking forward, and not wanting to bring in workers to care for the elderly, Japan is investing heavily in such things as robotics, and one presumes they will adopt a similar strategy, pension funds and health funds paying set prices for assistance with prices set centrally to favor the balance that maximizes useful benefits at the lowest total cost.
Posted by: mulp at Jun 28, 2009 4:59:30 PM
There's another way to analyze it. Consider price cuts an attempt to tax the producer.
When you impose a tax, the degree to which it's paid out of the producer's profits or passed along to the consumer is determined by the elasticity of demand. When demand is elastic, taxes will come out of producer profits. When demand is inelastic, the producer will be able to pass the tax to the consumer.
In health care, if the government expands its current role in Medicare and Medicaid to one in which it becomes, to some degree, the gatekeeper for the entire middle class by means of the government option, then the tax of a price cut can either be absorbed by lower producer profits or it can be passed through to consumers in the form of lower quality, i.e., poorer production and service standards, cessation of production or services, curtailment of research on new products.
The key is demand elasticity. In this case, the government's role as buyer makes it the manager of elasticity, at least in the non-tradables sector, i.e., hospitals and doctors. Drugs and medical devices have a world market, but the world market is one in which other governments already manage demand elasticity in their countries, and typically impose much higher taxes (lower prices) than the U.S. does.
Therefore, in the tradeables sector, reduced prices negotiated by the government are likely to come out of the profits of the producers. At the moment, the profit margins are extremely high, so there will be plenty of room. At some point in the future, that might not be the case and you could see R&D and production affected.
In the non-tradeables sector, profit margins are thinner, depending on what subsector we're talking about. Health insurance companies could be endangered, which I don't see as any great tragedy because I don't see what benefit they provide. Hospitals and doctors, on the other hand, are directly providing care and will need close attention.
Also, there will certainly be a top-end sector of people who are willing to pay up for the very best, and for them I think we will see a continuation of the trend that began in the 1990s toward extremely luxurious "concierge" services. This should make the right wing happy. You know, free market at work and all that.
Posted by: Analyst at Jun 28, 2009 5:13:02 PM
IMO the strongest argument for monopsony is that the benefit from health care, beyond the basic cheap stuff, is small and so no reason to worry about quality just squeeze the providers.
Though at the point of a medical crisis we want help and may wish that we could get more, we might be closer to maximized utility for more people to pay less all our lives enjoying the money elsewhere and have less care at the point of the medical crisis.
Posted by: Floccina at Jun 28, 2009 5:27:57 PM
I suspect a monopsony is most likely to fail, from the physician POV, because it will take the easy route and use across the board pay cuts rather than targeted cuts. Across the board cuts will spur those who already practice according to proper standards to adopt a more profit oriented approach, ie, follow the McAllen model.
If the prices for the specialist care were reduced so there was very little profit in your specialty, so that only the most skilled, most disciplined, and most efficient could operate at the required minimal return on investment, with zero economic profit, while the prices for the preventative care were increased, so the less skilled surgeons left the field, while the the people skilled family practitioners were rewarded with higher fees, drawing in more doctors who would need to compete by offering better patient care to attract patients, spending long times with the patient, providing more advice and lifestyle counseling.
Add in performance bonuses that took a long term view, say rewarding bonuses on a moving average of cost containment for the family/geriatric/chronic-condition primary care doctors and rewarding surgeons on outcomes, so the long term management for primary care, and long term outcomes for surgeons would be controlled.
As a specialist, if you get business profit for being both efficient to limit costs to give you a reward, and then also do the absolute best practices so your patients survive at one week, one month, one year, five years to earn a long term bonus, would you be better or worse off than today? (The answer must be "yes" or else you admit to being inefficient, as well as not providing long term outcomes.)
Obviously, the issue is in grading the patients and the conditions; the really great doctors, primary or specialist who can work magic for the really hard cases should be rewarded for performing worse than the doctor who only deals with the easy cases.
Maybe the price setter also looks at the treatments that a patient gets and then sets the prices for that patient for different options to shift the patient to different providers and behaviors? Let's say a patient with diabetes is consuming too much emergency care, so their price for certain services, like extensive lifestyle coaching, goes up, so that they are given more. With the long term reward system, the doctor/councilor has time to work with them, but if they don't get results, they will be dinged on long term bonuses. That would motivate referring them to another person, which would be easy in a group practice where everything is pooled.
Posted by: mulp at Jun 28, 2009 5:29:41 PM
Two points that seem worth exploring:
First the issue of ex-post monopoly of the insurer. Obama's account of his mother negotiating with insurance companies during her terminal cancer comes to mind. Once you acquire a disease you are basically vulnerable to hold-up by the the insurance company who can point to fine print in the contract that implies that they do not have to pay to nearly as much as you thought beforehand. Naturally, given rational expectations people may anticipate that and insurance companies may have an incentive to create a reputation to design contracts which are easy to understand and implement. The question is whether this is possible and why it doesn't happen more.
The monopsony could help with the first issue since it would be open to public scrutiny. The lack of exit (which already exists) would be effectively substituted for voice.
The other issue is a bit of a cultural equilibrium. In the US operations to remove wisdom teeth are done under general aenesthesia. This is way more expensive than the local variety and has added risks of complications. I removed my teeth with local anesthesia (in Brazil) and so has all other non-americans that I know. If using the most expensive procedure is a norm in a given country, people may regard this as really necessary in order to get good care and will be afraid of other options which are be much cheaper and equally effective. How to deal with this is not clear, but the NIH could fund research in ways to cheapen health care, including cross-country comparisons and publicize these results. No clear how a monopsony would help there, short of limiting options.
Posted by: Felipe at Jun 28, 2009 5:44:03 PM
> In the US operations to remove wisdom teeth are done under general aenesthesia.
I don't know about anyone but me, but I had wisdom teeth removed two years ago in the US with just a few shots of novacaine.
They were not impacted or in any way difficult. (It didn't hurt much.) They offered me general anesthesia.
Posted by: babar at Jun 28, 2009 6:10:31 PM
