Day: November 4, 2015

Economic Argument for Single-Payer Health Insurance

Do you know why it is that there is only one garbage company serving our area? Or only one cable provider? Would it not be better to have multiple companies in these industries to increase competition and thus drive down prices for consumers?  

The answer to the latter question is no. These particular industries lend themselves to being what is known in the field of economics as “natural monopolies”—monopolies that exist because they are more efficient than competitive markets.

If a garbage company drives its truck down a street with 20 homes but only picks up the garbage at 5 of these homes, it will face higher average costs than it would if it picked up at all 20. Let it pick up all 20 houses and it will face lower average costs that can be passed on to consumers in the form of lower prices only if mandated by a governmental authority (which it is, by the way). At the same time, the number of trucks spewing pollution and snarling traffic is reduced by allowing just one company the exclusive franchise.

The health insurance industry fits this same mold. A health insurance company is profitable when it can have a vast number of healthy premium payers to counter the few unhealthy ones. The more people (and healthy ones at that) they add as customers, the more they lower their average costs.

But since the insurance industry is a competitive one, no firm is required to pass on those lower average costs to the consumer in the form of lower premiums. And since the demand for health insurance is relatively inelastic (like cigarettes to a smoker), consumers will continue to bear the burden of higher premiums rather than go without—many consumers can’t switch to a competing insurer because they may have pre-existing conditions or get their coverage from their employer. It is no wonder these corporate health insurance providers are reaping huge profits, such as Well Point’s $61 billion last year alone (this, despite the economic downturn).

Now, I have nothing against companies or individuals reaping profits for providing solutions—profit is a great motivator. And the price system is an effective way to allocate the things people want. But by its very nature, the price system necessitates that some consumers will not be able to afford certain items. For example, if I want a giant flat-screen TV but can’t afford the price the seller is asking, I don’t buy it. If enough people don’t buy it, the price eventually comes down to the point where a few more can afford to buy, but not everyone. This is a very effective system for allocating most everything. The question we should ask ourselves is should it be the system we use to allocate life-saving health care? Think about it: we don’t use the price system to allocate police protection—everybody gets it regardless of their ability to pay. It would be an insult to our police force to suggest that they only protect …

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