Public Option

August 31, 2009

For those in favor of a public option (i.e. government provided) in health care, I wonder what makes them think the government will be able to manage better than they have proven in the past.

Some point to the military as example of a well-managed government organization.  Others have used the Post Office, though even President Obama has pointed out that it has its troubles.  I’m surprised nobody has mentioned public libraries.  Public libraries offer free loaners on books and other media and access to the Internet.  I really like my public library (though I would appreciate Sunday hours).  And, even with public libraries where you can borrow books for free, private booksellers, such as Amazon.com, still sell lots of books.

But, I see several problems with these examples that someone who thinks beyond stage one (from Thomas Sowell’s book, Applied Economics Thinking Beyond Stage One) should be able to understand.

First, I don’t know what I’m missing.

The presence of a postal service or library that “isn’t that bad” doesn’t tell me whether a privately run option to these could be better.

Same for the library.  While I’m happy with my library service, who knows what a privately run library could offer?  It’s hard to imagine because you never can predict what innovation or service enhancement will resonate with users (i.e. add value), but I might imagine that a private library might look something like Blockbuster, Netflix, RedBox or Amazon’s Kindle.

Second, there are some differences in the incentive structures in these organizations that might have something to do with their outcomes and we should carefully evaluate these differences when making comparisons to something like health care.

Consider the military.  The military does not provide an individualized service to customers or patients.  It defends the country and wins or loses conflicts.  Further, it has very clear, positive and negative feedback loops.  In other words, its very clear whether the military met its objectives successfully or not.  At the high level (what economists call macro) it either wins conflicts or loses.  On the micro level , it either executes well and saves lives or poorly and loses lives.  Responding to these immediate, direct and clear feedback loops are important to the success of the military.   But, even with that, many from military backgrounds  readily admit that there is much room for improvement in the way the military is managed.

Now consider the post office and public libraries.  Both do serve customers, so in this sense they are better comparisons to use for health care.  But, we still need to think about what’s different.

One difference in the post office is that the majority of its costs have are covered by its users in the postage rates, also known as first party payments.  This is an important, positive-reinforcing loop.  One that’s being heard loud and clear by post office management in their bottom line at present.

In health care, most plans I hear about are based on third party payments – that is taxpayer funds being routed to medical providers via some government bureaucracy rather than paid by patients.  Replacing the positive reinforcement of that first party feedback loop is dangerous.

So, that leaves public libraries.   Public libraries serve individuals (library patrons) and operate primarily on third party payments (usually property tax passed through local government to the operating group).

So, at first blush, public libraries may offer the best comparison to a proposed health care system.  Or maybe not.  There’s one important difference between libraries and a national health care system.  The library system is not nationalized.  It’s funded and operated at a local level and there are many library groups across the country.   This creates several important distinctions.

First, it allows the local libraries autonomy to best meet the needs of their communities within their budget. Second, it allows local citizens to evaluate whether the library is worth their tax dollars or not.  Third,  autonomous libraries provide a good bottoms-up laboratories for innovation, which is the best kind.   Fourth, libraries still compete with

And, when one of these laboratories hits on something worthwhile, others can adopt.  Consider if the library system were nationalized.  Rather than bottoms-up laboratories, we’d have top-down rule books. Who’s to say the one’s writing the rules know anything?  Innovation frequently happens by accident and rarely comes from the top.  This bottoms up nature of innovation is why larger companies find it difficult to innovate while young upstarts often take their cake.

To recap, the comparisons made to convince me that national health care is a good idea don’t work for me.  The military doesn’t serve end users and it is governed by clear feedback loops.  The post office is primarily supported by first party payments, which gives it clear feedback loops.   Libraries, while third party funded, are funded and managed at a local level and with ample competition, giving it several positive feedback loops.

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