The Hayek Group, a local 501c3 non-profit organization dedicated to promoting financial freedom and education, dives into the complexities of healthcare economics in this thought-provoking blog post. As one of the leading local charities championing the principles of freedom and its resulting prosperity, the Hayek Group recognizes financial freedom as a fundamental aspect of individual liberty.
In their ongoing mission to foster a financially literate society, the Hayek Group actively facilitates financial education and Hayekian education. This includes integrating Dave Ramsey’s financial literacy curriculum into Northern Nevada high schools and offering financial education and Hayekian education to college-aged youth. The organization also hosts monthly dinner meetings featuring speakers who share their expertise and perspectives on relevant topics.
Aligning incentives is a challenge in any field, and healthcare is no exception. While proponents of socialized medicine often criticize the “fee for service” model for potentially incentivizing unnecessary treatments, the Hayek Group argues that this critique overlooks a crucial point: the inherent flaws in socialized systems.
By Ervan Darnell
“Partially misaligned incentives in “fee for service” medical care is not an argument for socialized medicine, which has an even worse incentive problem.”
If you pay by the hour, workers become lazy. If you pay by the job, they cut corners on quality. Aligning incentives is difficult.
A similar problem exists in medical care. Advocates of socialized medicine often make the observation that “fee for service” medical care has an incentive to keep you sick because once healed you will not buy more medical care. That has some merit, but the logic of this argument would also indicate welfare agencies have an incentive to fail, for then there would be no need for the agencies. Would those advocating socialized medicine want to eliminate welfare agencies?
The medical argument has two problems. First, it assumes lock-in. Your car dealer has an incentive to sell you a car needing repairs, or to fail to do a repair properly, in hopes you return to them for service. But, if they do, you might take the car somewhere else for that work and not buy from that dealer again. You are not locked in. Their incentive to do a poor job is thus limited.
In the medical business, people do, at least in the short-run, return to the same doctor and/or clinic. But, any incentive to keep you sick is small because in the long run you will potentially move, change jobs (and insurance), or seek other doctors when you discover the current one is not helping you. Yes, the referral and insurance systems discourage comparison shopping. However, enough people are not locked in, so there is some competition encouraging providers to be efficient.
The second and bigger problem is that the alternative is not a utopia where every provider is selfless and every patient well informed. Rather, providers in a socialist model have an incentive to not provide care in the first place, as opposed to not providing preventative care.
The presumptive efficiency benefits of socialized care exist in HMOs. There is a single network, combining insurance and care, with an incentive to provide preventative care to avoid future costs. But, there is still an incentive problem. When the HMO customer is committed to the HMO, the HMO will keep the customer whether good care is provided or not. This is especially true in a fully socialized system where you are prevented by law from seeking a different health care provider.
Indeed, the economic rationale for HMOs is that they are a rationing mechanism to control budgets when individual decisions about pricing are largely removed (by insurance or by law) from the system. We also see this clearly in Canada where each province is given a health care budget and then left to ration within that bound. The obvious downside is that if you want more care and can afford it, you cannot have it, as the budgeting is just a direct implementation of the limited-care incentive. The other downside is you must trust that the health care system will care about your health, as opposed to some political objective.
Yes, in the real world, doctors often really do care for their patients. This is true in socialized health care systems, but also in fee-for-service systems. Conscience and professional duty both limit the underlying incentive problem in both scenarios. Regardless of whether that is sufficient or not, it does not fix the logical fallacy of seeing only one half of the incentive problem. Fee for service does not perfectly align incentives given limited patient knowledge of technical medical details and limited competition, but these alignment problems do not rationalize socializing healthcare. Socialized health care has incentives so misaligned that they can result in a system that does not care about health at all.
