Do you know why it is that there is only one garbage company serving our area? Or only one cable provider? Would it not be better to have multiple companies in these industries to increase competition and thus drive down prices for consumers?
The answer to the latter question is no. These particular industries lend themselves to being what is known in the field of economics as “natural monopolies”—monopolies that exist because they are more efficient than competitive markets.
If a garbage company drives its truck down a street with 20 homes but only picks up the garbage at 5 of these homes, it will face higher average costs than it would if it picked up at all 20. Let it pick up all 20 houses and it will face lower average costs that can be passed on to consumers in the form of lower prices only if mandated by a governmental authority (which it is, by the way). At the same time, the number of trucks spewing pollution and snarling traffic is reduced by allowing just one company the exclusive franchise.
The health insurance industry fits this same mold. A health insurance company is profitable when it can have a vast number of healthy premium payers to counter the few unhealthy ones. The more people (and healthy ones at that) they add as customers, the more they lower their average costs.
But since the insurance industry is a competitive one, no firm is required to pass on those lower average costs to the consumer in the form of lower premiums. And since the demand for health insurance is relatively inelastic (like cigarettes to a smoker), consumers will continue to bear the burden of higher premiums rather than go without—many consumers can’t switch to a competing insurer because they may have pre-existing conditions or get their coverage from their employer. It is no wonder these corporate health insurance providers are reaping huge profits, such as Well Point’s $61 billion last year alone (this, despite the economic downturn).
Now, I have nothing against companies or individuals reaping profits for providing solutions—profit is a great motivator. And the price system is an effective way to allocate the things people want. But by its very nature, the price system necessitates that some consumers will not be able to afford certain items. For example, if I want a giant flat-screen TV but can’t afford the price the seller is asking, I don’t buy it. If enough people don’t buy it, the price eventually comes down to the point where a few more can afford to buy, but not everyone. This is a very effective system for allocating most everything. The question we should ask ourselves is should it be the system we use to allocate life-saving health care? Think about it: we don’t use the price system to allocate police protection—everybody gets it regardless of their ability to pay. It would be an insult to our police force to suggest that they only protect those that can afford to pay the price. Besides, that would be extortion.
A single-payer health insurance provider can take advantage of the natural monopoly phenomenon. Every working individual would pay into the system and every American citizen would be covered. There would be ample healthy payers to make this system not only viable, but much less expensive than that offered by private insurers.
Many Americans fear a government take-over of the health insurance industry. But I would wager to guess that many of these same people regard America’s military as the most powerful in the world despite being government-run. Or they claim that our fire fighters are the bravest, even though their paychecks are financed by our tax dollars. By the way, fire companies were once privately owned: At some point we saw the inherent flaw in that arrangement and now our fire departments work for the public good.
When the natural monopoly that was our electrical system in the state of California was deregulated in the misguided attempt to introduce competition, it was a disaster. In order to ensure that prices wouldn’t skyrocket (which is what happens when a natural monopoly is broken up), the state imposed price caps on companies, especially PG&E. Market manipulators like Enron jumped in to gouge this supposedly free market and took advantage of the inelastic demand for electricity that runs our air conditioners. California as a result was faced with rolling blackouts, PG&E eventually filed for bankruptcy, and taxpayers subsequently footed the bill to bail out PG&E. While PG&E, its customers, and taxpayers all suffered during that tumultuous time, the publicly owned natural monopoly known as the Los Angeles Department of Water and Power fared well.
People get so caught up in the effort to remain “American”—insisting they won’t do what the Europeans are doing because that’s not the American way—they lose sight of the greater good and the smarter choice. No one is asking for a takeover of productive resources by the government to destroy America’s way of life. But if we don’t allow the creation of a single-payer insurance system, we will continue to throw a disproportionate portion of our incomes to the wealthy oligopolies that control one of the most fundamental aspects of our lives: our health. Not only does having a single-payer, universal health insurance make moral and ethical sense, it also makes economic sense.
Chris Harmon graduated from Cal Poly with a degree in hIstory and has been teaching Advanced Placement Microeconomics and General Economics in Santa Maria schools since 1991. He currently works at Pioneer Valley High School and lives in San Luis Obispo. Contact him via the editor at firstname.lastname@example.org.