* CHP #9 of n
24 Feb 1994
There was a debate on MacNeil/Lehrer tonight about the
appropriatness of the so-called health alliances. The Clinton
li[n]e is that large purchasing cooperatives can keep prices down
by buying in bulk.
First, the mechanism is not that at all, it's a government
bureaucracy sandwiched between consumers and insurance
companies. This extra layer is supposed to lower, yes, lower,
overhead. Since it has a monopoly (as Phil Gramm pointed out
tonight, attempting to sell insurance will be punishable with a
$10,000 fine [yes, the very system that is supposed to give you
more choice]), it can sell you a policy for whatever amount it
wants, i.e. whatever it costs to cover bureaucratic costs. As
for buying it from insurance compaines, their historical profit
margins are similar to other business. In other words, there
is nothing to squeeze. Either prices stay about the same or
the government forces insurers into bankruptcy (as noted
earlier, actual cost might fall some in the face of rationing,
but that's a wash here).
Second, and more important, the implicit economic model is
just simply wrong. If buying cooperatives lower prices, why
don't people voluntarily form them? They do, to a certain
extent, but the essential answer is that a cooperative faces no
smaller organizational and distributional challange than does a
merchant. If 100 of us decide to buy groceries in bulk,
perhaps that would be sufficient to get them 'off the truck'.
But who keeps the cans in their garage and the meat cold?
Who tracks how many beers Pete takes from the cooperative?
Is there anyway to organize this but to make it look like a
store? No. The overheads of dealing with insurance are no less
real, though somewhat less tangible.
Third, the idea that the little guy has no negotiating power
against the big guy is simply wrong (never mind that Clinton is
replacing several big guys with one huge guy). This seems to
be one of the big underlying fallacies of lots of socialist
proposals. Whether I go to work for the government, or IBM, or
Compaq, some five person start-up, or myself, my income will
(on average) by the same in any case. The size of the big
organizations does not let them suppress wages. Or turn it
around, Exxon charged me about $1/gallon last week. If they,
the big chain, hold all of the cards, why didn't they charge me
$10? An assymetry in size does not make for an assymetry in
So, Clinton's health alliances are not alliances, they will
not bring down costs, and there is no justification for them
in the first place. They will give the government a specific
mechanism for price controls and prohibiting competition.