New Layers of Rent-Seeking

by Reihan Salam

Matt Yglesias makes an interesting point:

I think conservatives have gotten themselves tangled up in this web because they don’t understand that their own critique of big government rationing is a metaphor. Sometimes rationing really happens. During World War II, governments suffered from a lot of commodity shortages, and for the sake of equity chose to distribute the scarce commodities via rationing—hard caps on the quantity anyone is allowed to buy with his or her own money—rather than prices. Contemporary American cities often ration on-street parking. Meter rates are generally low, and resulting shortages are dealt with via rules limiting the maximum quantity of parking time you can purchase. This is real rationing, and it’s very inefficient. In theory you could institute a strict licensing regime on health care services, but nobody’s proposing to do so and there’s certainly no fiscal policy need to do so. What’s being proposed is to try to deploy evidence about the effectiveness of different treatments to limit what Medicare will pay for, leaving people free to pay for it themselves if they want to. Conservatives who don’t like this idea chose to metaphorically label this “rationing” but it’s no different from what they themselves are proposing to do. They just want to add a new layer of rent-seeking profiteers into the mix.

A couple of thoughts:

(a) I’d suggest that there are a number of restrictions on medical providers that constitute something akin to a strict licensing regime, leaving aside the supply-side constraints created by a broken system of training medical professionals;

(b) On the rent-seeking point, which Matt elaborated on earlier


If you turn Medicare into a voucher plan, then you’ll have the following groups lobbying against implementation of scheduled cuts:

— Old people (who’ll be more numerous in the future).

— Health care providers (who’ll be more numerous in the future).

— Insurance companies receiving RyanCare vouchers.

What about the political economy situation has been improved here? A true individual choice model would scrap Medicare entirely and then triple Social Security benefits (or some such) and then force providers to directly market their services to retirees as worth the money.

This is a really important point. The ultimate driver of the political economy problem is the role of other people’s money. If democratically elected legislators determine how much insurance companies ultimately get rather than consumers spending their own money, insurance companies will spend a lot of time lobbying democratically elected legislators.

The goal of the premium support model is to make Medicare beneficiaries more cost-conscious. In theory, restraint on the part of democratically elected legislators will keep the level of premium support from growing very quickly. This will either force insurers to build better, more cost-effective business models to retain customers or it will mean that Medicare beneficiaries will pay an ever-increasing amount of money out of pocket to pay for a given benefits package. If democratically elected legislators really do exercise restraint, the chances of better business models emerging is much, much stronger, because consumers will have a very strong incentive to move their business to the most efficient providers. If democratically elected legislators don’t exercise restraint, lobbying expenditures will skyrocket, as will D.C. real estate prices. 

Part of the plan here is to have the same insurers who meet the needs of the under-65 population compete for over-65s as well. Just as Medicare FFS weakens the incentives for business model innovation, the goal would be a health system in which the incentives for business model innovation are much stronger across the board. There are no guarantees that this will happen, but a coordinated move towards a defined contribution model on all fronts, including for employer-sponsored insurances, will make this far more likely. 

I’d add that for-profits have a number of qualities that not-for-profits don’t. One of them is an incentive to achieve greater scale. If a not-for-profit hits on a really great idea for serving people, it’s not always easy to build out that idea to serve a really large number of people. If a for-profit does the same and makes money in the process, the incentive to serve a much larger number of people is pretty clear. This is one reason why for-profit education holds considerable promise. The key is to make sure that the public authorities who determine the funding formulas and monitor private entities for quality, cost-effectiveness, and responsiveness are doing their job, which is not easy.