U.S. Health Care: An Exercise in Stalinist Industrial Economics?

There was no easier thing than being an industrial manager in the age of Stalin. In an economy lacking the disciplining impulse of market signals, the dictator — keen on achieving greatness for himself and his nation — reduced the process of managing industrial resources to a simple formula: input costs equals output costs.

While the Soviet system described itself as efficient because it did not have to add a profit margin in the calculation of the cost of products, a much bigger cost factor was allowed to slip by.

Without competition, without real transparency and without integration into a real marketplace, the input price was calculated in a highly inefficient manner. Economic managers and planners just added up everything under the sun that they thought was required to produce the good in question.

Under the Soviet planning system, a successful plant director would receive a transfer payment in the form of goods, materials and cash from the state that was equal to the input cost calculation he had presented to the state committee in charge of his or her sector or region.

In other words, business “success” was defined by the ability to convince the political apparatchiks higher up the chain of command. Meanwhile, nobody was overly concerned about matters such as cost efficiency or responding to real consumer demands or needs. No wonder the whole thing eventually collapsed.

Propaganda and reality

If you compare that kind of economic Stalinism to today’s U.S. healthcare sector, you find that its core “value proposition” — the so-called fee-for-service system — resembles Stalinist industrial economics to a phenomenal degree. Essentially, the logic is that, as a producer, you get paid what you charge for. Outcomes, performance, accountability for results, cost effectiveness? Forget about all that capitalist stuff.

Defenders of the current U.S. healthcare system will say that this is not a fair comparison because most healthcare providers are private-sector entities. In a free market system with a variety of competitors, they reason, doctors, hospitals, insurers and other suppliers must be free to charge what they see as a proper price for their service. If only it were so.

There is no “free market” competition. Most U.S. health insurance is organized on a state basis, where a system of mini-oligopolies with cartel-like features prevails.

A communist pipe dream?

But it gets even more bizarre. Hard as it may be to believe, there are even elements of communism in the current system, at least in the Medicare area.

How so? The underlying presumption is that every elderly patient can just ask for whatever procedure they desire. That is certainly reminiscent of the communist pipe dream, but with a crucial difference. In the Soviet Union, lacking the requisite economic wherewithal, such services had to remain a mere figment of people’s imaginations.

Not so in the case of the United States. With its vastly superior resources, the “dream” can become a reality.

How about price signals, as an early warning system for either emerging shortages or overuse? Not foreseen in the Soviet economic model — and, perplexingly, not really much desired in the presumably tough and capitalist United States.

Neutering the disciplines

U.S. state health insurance commissioners are essentially disempowered and can often act as no more than public notaries to cost increases. Most of them are limited to faithfully executing the commercial decisions made by others, such as registering whether newly announced price increases by insurance companies meet the state’s formal, minimum requirements for yet another rate hike.

The only thing that most of these commissioners can’t do is the obvious: deny a price increase — or at least push back hard, with authority and on behalf of the consumers collectively, to test whether a requested premium increase is really warranted. Is this what one calls capitalism?

In an era of stagnant, if not declining, real incomes of U.S. households, the question of whether or not these officials have merely pro forma power or real power matters a great deal. Every additional increase in the cost of health insurance represents a further reduction in households’ already-constrained discretionary spending ability.

False advertising

What follows from this analysis is that, at the core of the current American healthcare system, is a stunning misconception of the essence of capitalism, at least in its modern, post-Manchester industrial-era manifestation. Contrary to Republican ideology, modern capitalism does not mean that producers can charge whatever they feel they can get away with.

And neither does modern capitalism provide a veritable hunting license to game the system. Take, for example, the American Medical Association’s artful way of suppressing the number of medical doctors to be trained. Or the opaque pricing and administrative procedures pursued by most healthcare providers that distort, if not eliminate, the very capitalist idea of cost efficiency and accountability.

At least outside the United States, there is a consensus in the advanced world that capitalism is the system best geared toward the efficient allocation of a society’s inevitably scarce resources.

That system provides private-sector companies with an appropriate margin of profit for the risk-taking involved, the quality of the service and the value created — but no more. That’s not rationing, as the defenders of the U.S. status quo claim. Rather, it’s the essence of capitalism.

America’s nomenklatura

Unfortunately for the United States and its healthcare system, the parallels to Soviet-era economics extend well beyond the equation of (inefficient) input costs equal (exaggerated) output costs.

At the time, the Soviet nomenklatura — its leading politicians and party officials — often received a very cozy deal, including far better treatment than the rest of the population.

It was deemed an appropriate privilege for their service to party and country and served as a reflection of their heightened social status. Hard to believe, but it’s essentially the same with the high-quality, low-cost health care offered to members of the U.S. Congress.

And, tantalizingly, federal civil servants also have terrific healthcare plans at extraordinarily reasonable rates — unlike the rest of Americans. Curiously, these plans are provided by the same firms, such as Blue Cross Blue Shield, that charge far higher prices to private-sector firms in the same area for the same package.

The argument here is not that there are “fat cats” working for the government who ought to be denied their plans. Rather, it is to use the often-advertised wonders of U.S. capitalism to establish a healthcare system that provides similar benefits at similar prices for all Americans.

Ultimately, though, we should give Stalin a reprieve on this — and recognize that U.S. practices in this entire field, which accounts for 18% of the national economy, are far more Byzantine than Stalinist, espcially when one considers the healthcare system’s administrative procedures.

But either way, what needs to happen — and happen soon — is for the country to subject its healthcare system to that old, 1950s American magic of combining economic efficiency and social fairness.

Editor’s note: This piece was originally published on June 25, 2012. It was updated by the author on June 3, 2014.