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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. 

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