How much good could health care monopsony do?

by on June 28, 2009 at 6:57 am in Medicine | Permalink

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.

Richard G June 28, 2009 at 8:23 am

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?

wintercow20 June 28, 2009 at 8:37 am

I found this to be a useful book on the topic: http://press.princeton.edu/titles/7522.html

Richard S June 28, 2009 at 8:49 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.

AADL June 28, 2009 at 9:46 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.

matt wilbert June 28, 2009 at 10:41 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.

JJ June 28, 2009 at 11:00 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.

Ozornik June 28, 2009 at 11:55 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?

Kyle June 28, 2009 at 2:42 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.

mark June 28, 2009 at 4:26 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.

spencer June 28, 2009 at 4:43 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.

Analyst June 28, 2009 at 5:13 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.

mulp June 28, 2009 at 5:29 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.

babar June 28, 2009 at 6:10 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.

DanC June 28, 2009 at 11:07 pm

Why Steve is wrong.

Unless Steve is going to pay for treatments out of his own pocket, I don’t see how he can make this claim. You can recommend to your little heart’s content, but who will pay?

The biggest problem will be that you will have fewer specialist. If you think the health care system would be better off without specialist, please tell our medical schools that they are training reckless killers for profit. You are talking about redefining what the level of care will be. If you think that most doctors practice medicine in such a way that they endanger patients, please report them to your state medical board.

If you think McAllen demonstrates that patients were clearly harmed by the medical practices followed there please contact the victims and become an expert witness in lawsuits against them. Take up the cause of these victims of the system and stupid, corrupt physicians.

And explain why this might be an argument for greater government intervention. Who was the payer in McAllen?

No, the elasticity of demand determines how much of the costs they can pass on. Also insurance companies can compete on various levels. If the market goes to far one way, they open the door for competitors. This is not true with government programs.

However Steve and I can agree that monopsony in health markets will fail.

Steko June 29, 2009 at 5:27 am

Monopsony in Hawaii has produced:

(1) a high level of health benefits in the nation (first dollar coverage);

(2) for the lowest cost of insurance (despite the highest cost of living and automatic qualification for group coverage);
http://www.statehealthfacts.org/comparetable.jsp?typ=4&ind=270&cat=5&sub=67

(3) with the 11th highest number of nonfederal physicians per capita;
http://www.statehealthfacts.org/comparetable.jsp?ind=689&cat=8&sub=100&yr=63&typ=1

(4) and the lowest percentage of people who could not see a doctor in the last 12 months due to cost;
http://www.statehealthfacts.org/comparetable.jsp?ind=747&cat=8&sub=166&yr=62&typ=2

Hawaii’s BC/BS features quality programs, preventative care and chronic disease management very similar to what mulp describes and which would be probably unworkable in a more competitive environment.

Analyst June 29, 2009 at 3:38 pm

In the US operations to remove wisdom teeth are done under general aenesthesia.

Mine were removed under local anaesthesia

DanC June 29, 2009 at 4:28 pm

Why do doctors from India and the rest of the world come here. Potential incomes are higher. What would rural health care look like in this country without these imports. Next comparing incomes of doctors across OECD countries is useless. Incomes in America are higher across the board for highly skilled professions. People endowed with high levels of human capital have many opportunities they can exploit. Given the sorry state of science education in this country, I’m surprised we produce as many highly qualified doctors as we do.

dihydrox June 30, 2009 at 3:49 pm

I read that and the first thing that comes to mind is auto maker and the myriad suppliers that sell to one. And work is cutting any more thought on that short

Comments on this entry are closed.

Previous post:

Next post: