Making It Work

 | 

Libertarian policy proposals are often ridiculed for being too impractical and naively idealistic. This article will put forward practical solutions for implementing libertarian policies in ways that can, and will, work in the real world. Privatization and healthcare, two areas in which libertarian policy is hotly contested, are the focus.

I’ll start with a summary of two objections to freedom and follow with a solution for overcoming that objection. I will then add details.

First Objection: infrastructure — such as roads and train lines — and utilities cannot be privatized because they are natural monopolies: two operators cannot compete along the same line at the same time.

Most people are aware that public monopolies are often mismanaged by operators who have no accountability to the public.

First Solution: if the right to operate the space, be it the road, or train line, or power line, were auctioned off for very short periods, at open competitive bidding, it stands to reason that the efficient privatization company would make enough money to place the highest bid at the next round, and would have operated in the best way possible to maximize profits and consumers (if consumers cared to listen to reason). In other words, private operators would compete along the vector of time, not space, with the most efficient one winning the highest profit and likely making the highest bid for the next slot of time.

Second Objection: under the present system, which evolved under capitalism, health insurers pay for the healthcare of the people who pay healthcare premiums, the premiums bearing no direct relation to the healthcare actually received. The system would have to work this way, because the whole idea of insurance is that you pay for the risk that you may one day need insurance, not for the actual healthcare you receive thereafter. This system causes a disconnect between the healthcare buyers and the healthcare sellers, enabling the sellers to jack up their prices. Only big government and a bunch of crusty, arrogant, elitist bureaucrats have the power to step in and force prices down to affordable levels by setting or capping prices by law.

Second Solution: to the extent that health insurance as such poses a structural tendency to sever payment from delivery of service, the problem can be solved not by leaning toward big government but by moving toward greater freedom in free-market competition. Require doctors to publish schedules of what services they offer and at what costs, as would be reasonable in any capitalist system in which sellers must be honest about what they are selling. Then drastically deregulate health insurers so that any entrepreneur can start a health insurance company and compete in any state, across state lines. In this ideal world, health insurers would compete in a marketplace — not a fake Obamacare exchange but a real capitalist free market.

What this natural monopoly thought process ignores is that there are many ways for companies to compete, if you think outside the box.

What will naturally evolve from this is a situation in which, to pass along as much cost saving to customers as possible, in order to get as much business as possible, some health insurers will develop a system for the insureds to prepay for the price services they want, from specific doctors at specific prices. Then, if they get sick and need those services, they will get what they shopped and paid for. The actual payment mechanism would still be the insurer pooling all payments and then paying after the fact for the people who got sick, but price competition would force doctors to lower their prices to competitive levels to get buyers, and this same pricing pressure would force health insurers to pass along the best deal to the buyer. Premiums would be applied after the fact, pro rata, to the healthcare that people chose to buy before the fact. A buyer will compare prices and choose a seller, and buyers and sellers will naturally converge at the equilibrium price point between supply and demand — which as (smart, sane, rational, libertarian) economists know, is the right antidote for monopolistic price gouging.

Details:

Examples of so-called natural monopolies include transit routes, bandwidth, electric utilities and power lines, cable service, garbage collection, and air space for planes or drones.

“Natural monopoly” public infrastructure can be privatized. And they should be privatized. Most people are aware that public monopolies are often mismanaged by operators who have no accountability to the public.

But it is assumed that there can be no competing alternatives, since the land or space simply isn’t there. So let there be a monopoly, but have the government regulate it so it will be forced it to sell at price points below the monopoly price. What this natural monopoly thought process ignores is that there are many ways for companies to compete, if you think outside the box.

Competition in running natural monopoly infrastructure can take place along the dimension of time, not of space, such that, when the natural monopolies are privatized, what is sold is a lease, essentially, to last two or three years, but no longer. The buyer would have every right to do whatever he likes with the land or infrastructure and monetize and run it as he pleases, but only for the term of the lease, at which point the right to buy the next period of time would be up for open bidding and awarded to the highest bidder. Economic efficiency and capitalist theory dictate that the company that can make the most money from such an enterprise will tend to be both the highest bidder and the company that can continue to run it the best. If a transit route is run badly, sales will flag, profits will drop, and the opportunity will arise for someone better to place a higher bid in the next round. Thus, even with only one owner, there will be competition in the economic sense.

If you believe instead, as smart people do, that money is made in a free society by creating high quality at an affordable price where supply meets demand, then the objection collapses.

Additions to the scheme may need to be made, such as requiring a pro rata portion of an operator’s profits to be paid back to previous owners who invested in long-term durable equipment or improvements from which the current owner benefits. But such additions are not difficult to design. As a bonus, if any contractor commits massive fraud against the consumer, this will be easy to see, because if a competing operator wins the next lease bid, when he looks at the infrastructure he will see what the previous operator did to it, and consumers will be protected better than we would be under heavy regulator scrutiny.

Today’s economy already proves that this will work. There are hundreds of huge corporations that buy some downstream service from only one seller, for the term of a lease; and there is ample price competition, even though only one seller can get the deal to be a supplier at one time. The companies that sell “back end” human resources services (outsourced services such as paychecks and benefits management) to Fortune 500 corporations are an example: a buyer can sensibly go with only one seller at a time, but there is a ton of competition. Another example: places exist where various owners own the rights to different heights above the ground of a single plot of land, so that two companies can compete by owning different floors of the same building, competing along the dimension of height, not of length.

The person who made the original objection to privatization will object again, saying that the rich will bid big to get ownership of the monopoly, charge high prices while offering crappy service, and run away after their lease ends — taking profits derived from forcing people to pay a lot for a service with no alternatives. The operators’ costs would have been low, since they didn’t give a damn about infrastructure investments. But this objection reduces merely to the general argument against free market capitalism. The Marxists and socialists think that rich people get rich by fleecing their victims. If you believe instead, as smart people do, that money is made in a free society by creating high quality at an affordable price where supply meets demand, then the objection collapses. Specifically it is wrong because an operator who does a good job will always make more, net, long term, than a con artist, hence the good operator will have more money and more motivation to outbid the crooks.

New York City as subway operator does not, and cannot, spend the money it should to maintain the subway service as it deserves and needs.

This is not to say that the system can never be abused. No system is perfect. Privatization is certainly not less perfect that a regulated natural monopoly, and it would ultimately be far better. Just ask anyone who rides the subway in New York City: in addition to being a vital means of transportation for millions of New Yorkers, it is also the location that the wonderfully brainless liberal politicians of New York have chosen as the de facto living space for the mentally ill homeless people, just to get them off the streets. The bigger picture is that the economic demand for the subway would justify a rise in fares that is politically unpopular and therefore impossible. So New York City as subway operator does not, and cannot, spend the money it should to maintain the subway service as it deserves and needs. The New York Times even ran a crusade to get more spending for the subways, noting how horrible they are and how many people use them, which crusade did not succeed, and could not succeed. The free market would do better.

I have suggested two or three years as the basic contract period for the operation of natural monopolies. It needs to be short enough to enable consumers to hold bad operators accountable so that better ones can step in. Employees may not want two- or three-year contracts, and somewhat more may need to be paid them on this account. Nevertheless, we need to get away from the labor union mentality, according to which the labor pool only works if employees are chained to their jobs and employers are chained to long-term labor contracts. The United States is becoming "the gig economy," as they say, led by the Uber and Lyft drivers. A lot of industries are moving toward hiring employees for a temporary, shorter duration and away from hiring them for permanent, full-time jobs. Employees with strong professional skills are so valuable that no one who purchased a short-term lease on a natural monopoly would want to get rid of them.

As far as planning goes, there are examples in today's economy of businesses drawing up plans for long-term operations, because that is how they can best succeed, but if their basic contracts are not renewed, they just tear up the plans. In business you need long-term plans, but you also need to face the risk that these plans may fail dramatically, at any time. If you don't get investors in your second year of operation, you just eat the third, fourth and fifth years of your business plan, no matter how great those years might have been.

Thousands of small businesses will pop up to become micro-health insurers and facilitate the trade, between doctor and patient, of treatment for money.

Now to some details about healthcare. Free market economics doesn’t work if there is a disconnect between the person who pays the money for a benefit and the person who receives the benefit. The disconnect causes prices and costs to skyrocket, because the buyer cannot force the seller down. Many libertarians already know this: one of our objections to government spending is that the government will overspend because there is a disconnect between the taxpayer and the beneficiary. Healthcare, where the health insurer pays but the patient receives the treatment, and does not directly pay the doctor, and the doctors don’t compete for each individual patient on price, is a great example of a buy-sell disconnect.

The problem with health insurance is that, originally, it was in fact insurance that a person bought to mitigate the risk of getting sick, but it has become a behemoth that pays for all medical expenses and then collects exorbitant and arbitrary amounts from the public, with no connection between payments and collections in an individual patient’s case. The problem arises because, by the time people become sick, their medical costs are typically too great for them to pay, so they must have already had insurance to get treatment, and the insurance will then end up paying all costs.

To reform healthcare, first, require doctors, as a condition of receiving their license to practice medicine, or merely by means of laws mandating truth in advertising, to create a schedule of fees and prices for each of their services, and publish it, and let individual patients receive that care if they pay that fee from the schedule of rates. Second, break up the regulations of health insurance companies so that anyone can start one and can compete in every state with a minimum of red tape. Third, require that each health insurer publish the actuarial tables that each insurer is using, showing what portion of your payment will pay for what medical treatment in the future from what doctor’s schedule of fees. Fourth, allow the consumer to “buy” his future medical treatment by choosing what portion of his premium he chooses to allocate to the doctors’ services that he could potentially get, from the competing doctors’ fee schedules, “through” his health insurance company.

The doctors who succeeded would be those who proved they could deliver successful, effective treatments, but at cheaper prices.

The health insurer would pool the buyers’ payment to make the actual payment to the doctors for the insureds who become sick, but each buyer could take the income that he has allotted for health insurance and “spend” it by choosing the slate of healthcare services he would pay for at that price, selecting his doctor from among the competitors. Doctors would compete on the price to be chosen by each buyer when he decides how to allot his healthcare premium spend.

This would combine two novel approaches: “shopping” for treatment from the doctor, not the insurer, and expanding competition among health insurers by allowing small startup health insurers, akin to what was done for poor businesses in Asia by the “micro-credit” revolution that enabled any poor woman or man to open a business on a small loan. Thousands of small businesses will pop up to become micro-health insurers and facilitate the trade, between doctor and patient, of treatment for money. This would connect the buyer to the seller and enable massive price competition among doctors, so costs would plummet, because many doctors would seek patients by offering cheaper prices at affordable levels of quality. Obviously this would not lower the quality of healthcare, because the doctors who succeeded would be those who proved they could deliver successful, effective treatments, but at cheaper prices. In today’s world, where everyone finds ratings and reviews online, the doctors with the best value propositions, defined as higher quality at cheaper price, would be readily apparent.

The micro-health insurer could also prepay, locking the buyer and seller in at that price while taking profit up front and not when the healthcare is delivered. This would keep healthcare costs locked down at the competitive price the buyer chose to pay, and complete the sale for the buyer at the time of purchase, not after the fact when the patient-buyer becomes sick and his very life depends on paying for healthcare. Right now there are maybe a handful of insurers and 20 health insurance plans that compete in any given state Obamacare Exchange, but the initiative I have outlined would open the door to thousands of health insurers, and potentially hundreds of thousands of healthcare “menus” and “menu items” available to buyers pre-paying doctors a pro rata share of the healthcare premium cost of treatments received.

A free-market system could work for the benefit of all Americans by introducing price competition into the healthcare industry.

The analogy of healthcare options to a menu at a restaurant is apropos. People need food. If you don’t have it, you die, just as a sick person who needs medical treatment gets it or dies. This does not enable the farms to jack up the price of food until it is out of sight, as doctors, hospitals, and pharmaceutical makers are doing. Instead, thousands of restaurants and grocery stores compete, buying food from farms and selling it as a selection of options on a menu. People buy what they want, within the limits of their budget. Consumers win, and have tasty meals and full bellies. Yes, poor people may have to eat at cheap fast food stores, but they don’t starve to death (and the food at Dunkin Donuts is not that bad!). If you are willing to make do with less, such as by purchasing vegetables and cooking your food at home, you can eat quite nicely. So, too, could a free-market system work for the benefit of all Americans by introducing price competition into the healthcare industry, which would create affordable options across a range of price points.

The conclusion to infer from this article is that, while the statists object that libertarian policy cannot be implemented in a practical manner, this is simply not true. Thinking outside the box, and being creative and innovative about policy solutions, will meet the challenge of making liberty work for America.




Share This

© Copyright 2018 Liberty Foundation. All rights reserved.



Opinions expressed in Liberty are those of the authors and not necessarily those of the Liberty Foundation.

All letters to the editor are assumed to be for publication unless otherwise indicated.