The case for free market-driven public health services

 

Vincent van Gogh: Ward in the Hospital at Arles, 1889. Image in Public Domain

 

In a Reason Foundation study, economist Pierre Lemieux envisions a “formal voluntary cooperation” model for healthcare. Considering individuals' willingness to cooperate with others to forward their interests, and entrepreneurs' ubiquitous profit motive, the health field could be propelled by innovative new institutions if gov't stepped back—and let local consumers shape the market. Meanwhile, Newsom and local Assemblyman Ash Kalra push for pricey “universal” coverage.

To build a formal voluntary cooperation model, let’s imagine that there is no government. A potential free-rider realizes that his refusal to participate in the financing of a public good he wants implies a certain probability that it will not be produced. Think of a flood-control dam, protection against antimicrobial resistance, or a measure of epidemic control. If this potential free-rider assigns a high probability to the possibility that the minimum number of contributors will not be reached without his participation, he may rationally play the role that game theorists call “sucker” and pay his share because he thinks it is a fair bet that his contribution will be indispensable. He is making a bet to further an outcome he wants. Similarly, an entrepreneur who considers supplying the public good will make a bet regarding the number of contributors (“non free-riders”) necessary to for the project to be profitable.

Another way to see the possibility of voluntary cooperation despite the free-rider temptation is the following. A public good will likely be produced by individuals or groups of individuals who prefer to pay in order to make sure that it will be available to them even if that implies a gift to free-riders. These paying consumers will choose to be suckers instead of going without the good. The game-theoretic equivalent is called the “snowbank game”: two cars are stopped by a snowbank blocking the road; each driver would prefer the other to shovel, but any one of the two will do it alone if it’s the only way for him to continue his trip. Still another reason for the apparent sucker’s behavior is that an individual often has an interest to cooperate in social games in order to entice the beneficial cooperation of others.

In this model, we expect some private contributions to the production of public health as a public good. Some individuals or corporate bodies will hedge their bets against epidemics by voluntarily contributing to public health measures, either by being vaccinated, submitting to self-quarantine, or giving money to public health campaigns and medical-care institutions. Private entrepreneurs, on their side, will produce related goods—vaccines diagnosis tests, hospital beds, etc.—if they think that there is a good chance that the number of paying customers or charity money will be sufficient to yield a profit.

This model provides a reasonable expectation that some public goods will produced by naked self-interest. Whether it will be in optimal quantity is another issue, but defining and measuring optimality is a difficult challenge (if not a mission impossible) anyway.

Philanthropy and charity should not be ignored as another sort of motivation for the production of public goods, especially in the field of health. Even in the realm on non-public-good medical care, this motivation has been historically important. From the eighth to the 12th centuries, monasteries played the role of hospitals for the poor. In the 18th century, many English hospitals and dispensaries were financed by philanthropists—whose charitable impulses were probably strengthened by their occasional right to have their sick friends (or themselves) admitted when ill. Before the welfare state, philanthropy and charity filled many of its functions. It is true that charity, where religious groups used to dominate, may carry a stigma for the recipients and lend itself to donors’ paternalism. But the stigma is not necessarily bad, for it makes resorting to charity a last resort. Moreover, paternalism is not absent from the welfare state and arguably more dangerous there. Some evidence suggests that Americans are the most charitable people in the world. They give to charitable organizations the equivalent of about 1.44% of their incomes, compared to 0.54% in the U.K. and 0.11% in France. Another estimate indicates that the two-thirds of American households who give to charity contribute 4% of their incomes. Some 15% of charitable donations go to “human services” and 11% to health. A large reservoir of charity thus exists in America. The fact that 39% of American charitable donations go to religious organizations testifies to the importance of this motivation. Morals are also produced by social rules and conventions (that is, social pressure), which developed precisely to motivate social cooperation when it cannot be produced by ordinary market relations.

When the state does not occupy an area of social interaction and evict voluntary cooperation, new institutions can be expected to develop. In America, the 18th century and especially the 19th were characterized by the growth of fraternal societies that offered benefits to their members in case of disease or death. According to Beito et al., at the end of the 19th century, “[a] fairly safe bet is that fraternal membership encompassed one-third or more of the voting-age male population.” Many of the fraternal orders offered life insurance: “By 1895, half of the life-insurance policies in force were on the fraternal plan,” as opposed to commercial life-insurance. It is a reasonable hypothesis that the fraternal societies started declining in the 1930s because of both the strain of the Great Depression and the competition of the welfare state.

This article originally appeared in the Reason Foundation. Read the whole thing here.

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