fbpx

Latest Posts

Home

Facebook

Twitter

Search
About

Can private firms deliver social insurance?

“Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all. We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain.”

– Frédéric Bastiat

The Great Society

Yesterday, we were pleased to host Amity Shlaes, who spoke about her new book Great Society. In it, Shlaes describes the efforts to build a ‘Great Society’. But how to do that? “Time and again, whether under John F. Kennedy, Lyndon Johnson, or Richard Nixon, the country chose the public sector.”

Shlaes also talks about the consequences of these government programs:

Yet the targets of our idealism proved elusive. Johnson did not manage to cure poverty as he had promised. What’s more, Johnson and Nixon’s programs shackled millions of families in permanent government dependence.   

This brings us back to the above quote from the 19th century French economic writer Frédéric Bastiat. There needs to be welfare for those who are unable to provide for themselves. But it does not follow that a government program is necessarily the best way to provide it. 

The private provision of Medicaid

An example comes from a recent paper by Timothy J. Layton, Nicole Maestas, Daniel Prinz, and Boris Vabson titled ‘Private vs. Public Provision of Social Insurance: Evidence from Medicaid‘.

Noting that public health insurance benefits in the US are being increasingly provided by private firms, the authors set out to: “investigate the impact of privatization in Medicaid by exploiting the staggered introduction of county-level mandates in Texas that required disabled beneficiaries to switch from public to private plans”. In theory, competing private plans are incentivized to use the technologies available to them (some of which may not be available to a public program) to efficiently ration access to health care services. Profit‐​maximizing plans desire to keep spending low because they are often the residual claimants on any savings generated, while the combination of competition for enrollees and regulatory action by government prevents them from rationing too much.

They find that:

Compared to the public program, which used blunt rationing to control costs, we find privatization led to improvements in healthcare—including increased consumption of high-value drug treatments and fewer avoidable hospitalizations—but also higher Medicaid spending. We conclude that private provision can be beneficial when constraints in the public setting limit efficiency.

While the increase in Medicaid spending might appear to be a concern, it was mostly due to the fact that capitation payments to private plans were set higher than the counterfactual (i.e., FFS) cost of plan‐​covered services under public provision and not that private plans were driving up spending on uncovered services that continued to be paid on a FFS basis even for those enrolled in private plans (i.e., drugs). Importantly, however, these spending increases were accompanied by increases in health care utilization. Indeed, the authors find that in Texas the vast majority (80%) of these spending increases were passed through to providers and beneficiaries in the form of additional health care services.

In this instance, private provision lead to higher spending for the state of Texas and weaker rationing of health care services in that state. These results are contrary to the conventional wisdom among policymakers that private provision saves money, though they are in line with previous findings of cost increases. Furthermore, their strong evidence that Medicaid enrollees in Texas were better off in private plans is contrary to the conventional wisdom among economists that private provision typically leads to worse outcomes in Medicaid.

So, as with education and welfare, just because you might be skeptical of the government providing it doesn’t mean that you are against it being provided at all.

John Phelan is an economist at the Center of the American Experiment. 

Comments

Subscribe

Categories

Upcoming Events

  • Morning in Minnesota: St. Cloud

    Location: St. Cloud

    Sign up HERE! Courtyard by Marriott St. Cloud 404 West Saint Germain Street St. Cloud, MN, 56301 Please join Center of the American Experiment on Tuesday, July 21 for breakfast with Center policy fellow and education expert Catrin Wigfall as she explains K-12 education in the state and its persistent disparities despite decades of increased spending. Following her presentation, Catrin will lead a Q&A session. 7:30 AM Check In and Breakfast 8:00 AM Presentation 9:00 AM Conclude   Catrin Wigfall is a Policy Fellow at Center of the American Experiment. She is also the director of EducatedTeachersMN and EmployeeFreedomMN. Catrin’s…

    Register Now
  • Kristi Noem: The Courage to Reject a Shutdown

    Location: Online

    Sign up HERE! Join us Wednesday, July 8th for an interview with South Dakota Governor Kristi Noem over Zoom. In response to COVID-19, Noem defied the norm of a statewide shutdown and let South Dakotans choose for themselves what safety precautions to take. Tune in to this live online event to hear how Governor Noem preserved her state’s economy while still keeping citizens safe. Wednesday, July 8th at Noon CT Sign up HERE!  

    Register Now
  • Morning in Minnesota: Marshall

    Location: Marshall Golf Club

      Sign up for this event HERE! Please join Center of the American Experiment on Thursday, July 16 at Marshall Golf Club for a breakfast with Center economist, John Phelan, as he discusses Minnesota’s economic future. Following his presentation, John will lead a Q&A session. 7:30 AM Check In and Breakfast 8:00 AM Presentation 9:00 AM Conclude John Phelan is a graduate of Birkbeck College, University of London, where he earned a BSc in Economics, and of the London School of Economics where he earned an MSc. He worked in finance for ten years before becoming a professional economist. He…

    Register Now