Privitizing Medicare

Moneybox points out that 'privatization' is simply not truly possible for some government functions which cannot be outsourced.  You can privatize (outsource) the paper production for paper that the government uses, but outsourcing the military to a private company is a bad idea.  The same is true of any for-profit company.  If Microsoft completely outsources its coding, it ceases to be a software company.  It can outsource bits and pieces of coding, but not the strategic parts.  Similarly, when the government is 100% paying for Medicare health insurance, there is no evidence that adding another middleman reduces bureaucracy.  Private companies are less cost-effective than Medicare:

I agree with today's David Brooks column on one important point, namely that the Obama administration's criticisms of the current version of the Romney/Ryan plan for Medicare are overstated. But by the exact same token and for similar reasons, I think Brooks' criticisms of the Obama plan for Medicare are wildly overstated. The thesis of the column—which is shared by Romney and Obama—is that it's very important to reduce the growth rate of aggregate Medicare spending.

Brooks says Obama's plan to do this with price controls is doomed for political economy reasons. A politically powerful coalition of elderly people and health care providers will block it. That's certainly plausible. But what's the alternative?

Brooks says the alternative is to insert an additional layer of rent-seekers into the dynamic by contracting Medicare services out to private health insurance companies. There are certainly situations in which it makes sense for the government to contract things out. It would be absurd for the GSA to be manufacturing paper for use in government offices, and doubly absurd for the GSA to be operating tree-cutting operations to procure the wood for use in paper manufacturing. Across government functions there always comes a point where you end up saying "it makes more sense to buy this service from the private sector than to do it ourselves" and people disagree about where that point is. But I don't think there's any other context in which Brooks would say that this form of contracting-out alters the political economy of the situation in the way he seems to think it does here.

Right now both the elderly and health care providers lobby for higher Medicare spending. Creating a new set of Medicare sub-contractors whose industry-wide revenue level is determined solely by their success in lobbying Congress to increase Medicare spending is not going to fix this problem. And I dare say it's obviously not going to fix this problem.

If you read the column, I think that what you'll find is that basically all the analytical work is being done by a project of ideological labeling. Brooks describes this as a plan that works "through a market system" featuring "normal market incentives." He twice calls it a "market-based approach" and once refers to critics as scoffing at "market-based strategies." The idea of a market has positive emotional resonance with many people, so if you convince them that you have a "market-based" alternative to price controls that will sound good. But a system of government-funded subcontractors is only market-based if you squint at it really funny. Or, rather, it's very much a market but it's a market for political influence. Medicare subcontractors will have access to detailed demographic and health status information about their clients which they'll be able to use to create customized mailers in favor of their preferred political agenda which, naturally, will be one of higher levels of government spending and lower levels of government accountability.

Last but by no means least it's simply not the case that contracting out lets you do away with the unelected panel of experts that Obama needs to make his price controls work. The premium support model of Medicare has at its heart a panel of experts determining the value of each person's voucher since absent demographic and health status adjustment the whole system will be ruined by adverse selection.

Chinese manufacturers outsource the retailing and distribution of their products to a 'middleman' like Walmart because Walmart can get their goods to customers much cheaper than the Chinese could do it.  Walmart does not merge with its Chinese suppliers because they would see diseconomies of scale.  But there is no evidence that privitizing jails saves money.  In the long run it just creates another concentrated interest to lobby for increased jail budgets.