Is private sector more efficient than government?

I didn’t want to hijack the pit thread on the advantages/limitations of a single-payer healthcare system. So I decided to start this thread instead. Over in the pit, Sateryn76 said:

This is a statement I see a lot. It often shows up in threads about universal health care, but it may stop by for brief visits in discussions about federal intervention in private industry in general. The gist of these assertions seems to be: “The government cannot consistently do anything correctly or efficiently”. My question is…

Really? Is this actually true? Are there any comparisons between industries administered by federal/state government and privately-run industries to support this? Is there any research that shows overall the private sector is better at providing higher quality, less expansive services? A couple of cursory Google searches got me essays such as this one that’s big on theoreticals but not so big on actual numbers and stuff. And that’s what I’m looking for. Numbers. And stuff.

What separates an economic realist and a libertarian lunatic is the fundamental understanding that competition is only beneficial if the incentives are correct and there are RULES, neither conditions necessarily exist or are possible for every circumstance.

For example, let’s say there was a product (apple pies, cars, whatever), several producers of the product, and demand for it. If we lay out the rules so that the makers of the product cannot advertise falsely, defraud their customers, or burn down the plants of other producers, then the producer that can make the best product for the lowest price will have the most sales and thus the most profit. This is an example of an efficient outcome of the private sector - that has been made possible by clearly defined and reasonable RULES which make it so that the incentive, profit, encourages economic actors to act in a socially desirable way - produce more/better product for lower cost.

So with that in mind, how would you suggest that the market for health insurance work? If we are to take the usual mechanics of the insurance market - the companies that charge the highest premiums while paying out the least in benefits will be the most profitable, then the result will be that people who are at high risk will have either very expensive or no insurance, while people at low risk will pay little. Is this “efficient”? Sure. Is this an outcome that you would consider socially desirable?

I’m not suggesting the US system works like that, reality is obviously more complicated, but reading that other thread, I get the idea that I, and others in countries with single payer health care, have fundamentally differing goals from those who oppose it.

In my opinion, the ultimate policy goal of the health care system should be that in a rich developed country, every single person, no matter what the circumstances may be, should have access to reasonable health care, and that no one, again no matter what circumstances, should have to live in fear of not having enough money to see a doctor and get whatever medical treatment he/she needs.

Is there a role for competition and the private sector in health care? Of course. Most countries, to my knowledge, have large private health care sectors while having single providers of health insurance, or some such. There are lots of places/circumstances in such a system where private sector competition can increase efficiency. However any system or framework that isn’t striving towards that above stated policy goal, that DOES allow even a single person to live in fear of not being able to afford medical treatment, has simply failed the test and is unacceptable no matter how “efficient” it is.

I get the feeling that many of you Americans simply don’t believe this to be a worthwhile goal, or at least, a pretty low priority, and are willing to deny health care to fellow citizens if that meant lower taxes for themselves. I don’t really know what to say to that.

Social Security is run on 1/2 of a percent of income. It works extremely well . It is a huge program and that is why business wants to privatize it. Ten or 15 percent of that pie would be huge.
I saw a program on the Challenger a couple days ago. They said privatizing much of it was the reason it became more dangerous. Cutting corners to make money can be a perilous idea.

You may want to read up on OMB Circular A-76, establishing federal policy for the competition of commercial activities.

There are extensive required studies for attempting to outsource government activities to the private sector. The current administration was hellbent on selling out the government to private industry until Congress, backed up by competition results, found federal employees more often than not, can do their own jobs better, faster, cheaper than private industry. In addition, many of the studies are unable to quantify the knowledgebase and brain drain when an agency contracts out. Almost always, government outsourcing decisions are based on only dollar issues, without regard to non-monetary data.

The US federal government is big. Wide brush painting of government efficiency/inefficiency doesn’t do anyone any good. The devil is in the details. The US military has been using outsourcing for years. It’s been effective and efficient. It’s also been grossly fat, inefficient and without oversight, as recent debacles with Haliburton and other contractors have illustrated.

Yes, I’m a federal employee and I have been involved in outsourcing. Outsourcing is not what it’s often touted to be, and outsourcing does not address federal contractors who do work the federal government doesn’t do anyway.

Making it more difficult of late, the current administration has been caught out “cooking the books” when comparing government work vs. outsourcing. A simple Google search may reveal just some of the shoddy attempts to outsource government activities to the private sector.

This issue is more worthy of GD than GQ because the topic is sensitive with many Dopers on both sides of the issue, even when politics are kept out of the discussion.

Yes, I’m a federal employee and I have been involved in government outsourcing. I’ve seen areas where outsourcing makes sense across the board. I’ve also seen areas where the actual dollar savings cannot add up against the brain drain, and areas where outsourcing creates no value savings, even when the books aren’t cooked.

I would suggest expanding horizons to include federal contractors who spend your tax dollars when outsourcing isn’t part of the picture. I’m referring to work contracted by the federal government because the government has little to no expertise in a particular area. That is a massive growth area with little to no oversight no one seems to want to talk about.

I think that is unavoidable, unless you resort to forcing people into your health insurance scheme. If you expect people at low risk to subsidise the people who are at high risk, you’re eventually going to hit a price point where the gap between what they pay and what they use outweighs the perceived benefit of spreading their risk around, and they’re going to drop out of the system.

I’m sympathetic to what you said in your post, but I don’t understand this. What is it about the health insurance market that keeps it from being like the hypothetical pie market you previously mentioned? Why wouldn’t the insurance company that gives the best coverage for the lowest price have a competitive advantage and so make the highest profit?

One possible answer that comes to mind is simply that health insurance matters are so complicated and hard to understand that most people aren’t equipped to make intelligent decisions about health coverage. (I’m encountering something like this right now, as chronicled in a thread in IMHO.) If this is a genuine problem, then perhaps it would prevent the company with the best coverage from winning the competition, because consumers would be in no position to judge what constitutes “best coverage.”

But is that what you’re talking about? Or is it something else?


Part of it is inability to judge “best coverage.” Compare to shopping for a car: you know that you do a lot of solo highway driving, say, and gas mileage is more important to you than number of passengers. So, you can shop around, eliminating some models, and find what you want. But when you pick insurance, you need to know what disease you’re going to get – hard to predict. Plus, you buy the insurance, it’s not like you can take it for a test drive, or borrow your cousin’s to see how they work. The legal description of coverage is very, VERY disjoint from the actual administration of the plan. Many years back, we had a plan that wouldn’t pay for a gall-bladder x-ray because they only paid for x-rays if something was broken. Was that written in the policy description? If it was, it was in tiny print no one would ever see. And what the hell? Doesn’t pay for an x-ray of an arm if it turns out it wasn’t broken? So how do you know whether to take the x-ray??

It’s also difficult to judge cost – remember that the typical health insurance policy in the US involves deductibles, copayments of varying percentages, etc. So, if you run up $10,000 in health care costs, how much do you have to pay and how much does the insurance pay? Not an easy answer. Depends on which costs, which illnesses, which treatments, etc. For the elderly, it depends on the coordination with Medicare (an administrative nightmare!) So, not only can’t the average person judge service, you can’t judge cost, either.

Insurance is not like other products: you pay the premium, but you don’t get the product/service until later. By then, it’s too late. There’s no trade-in or resale value for an insurance you don’t want. In the past, there was lots (and LOTS) of room for fraud, and that’s why insurance is regulated. However, even so, the medical insurance companies (and related HMOs, etc) have enormous protection against being sued, so there’s essentially no legal recourse if you’ve been screwed.

And one other element comes into play. Insurance companies don’t just make profit by offering the best sounding product at the lowest price. They make profit by reducing their expenses – that is, by denying claims. They’d rather spend a couple hundred dollars for bureaucrat-administrators to deny claims, than spend a few thousand dollars paying a claim. Sometimes, it’s just causing headaches: ut if a few of the insured gets confused by legal and medical double-talk, accept the rejection (as it were) and pays the bills themselves, the insurer has saved big bucks.

Also, of course, there’s the time-value of money. The insurance company that delays payments to doctors or hospitals makes more profit than the company that pays promptly.

The competitive strategy of offering highest service for lowest cost doesn’t work well for the consumer, when it’s (a) difficult or impossible to judge highest service; (b) difficult or impossible to judge cost; © the service is susceptible to enormous subjectivity; and (d) there’s no legal recourse.

The private sector is more efficient at some things, and government is more efficient at other things. In situations where the rules of supply and demand actually work, the private sector wins every time. The government will never be better at designing and manufacturing the next iPod or gym equipment or shoes or anything like that.

Where the unregulated or poorly regulated private sector fails is when it’s involved in areas that are immune, or at least partially immune to the rules of supply and demand. Health care, public infrastructure like transportation grids, vehicle insurance, and energy production are examples of areas where the private sector can not and MUST NOT be allowed to run amok with little or no regulation, and that we would all be better off if government completely controlled.

Banking is kind of a different beast. It’s an industry that needs to be tightly regulated, but I don’t think the government should be the primary lending facility in the nation. On the other hand, the government should never shield banks from the consequences of their bad investments. I’m more afraid of what will happen when banks realize there’s no consequences for bad decisions than I am of massive bank failures. Bank failures are a GOOD thing. Only banks that make sound financial decisions should stay open.

Another thing often forgotten is the effect of size on efficiency.

This has nothing to do with whether an organization is “government-sector” or “private-sector” or “volunteer-sector” or whatever; it’s simply a reflection of the difficulty of communication within the organization, and of coordinating its various parts. A government bureaucracy of 100 000 people will be less efficient than a private-sector company of 100, but that’s not because government is less efficient than private; it’s because 100 000 are less efficient per person than 100.

This partly explains why centralized national-scale planning in the second world didn’t work very well: it simply couldn’t. The system was too big. Even a small country is bigger than almost all companies.

This happens in the physical world as well. As microprocessors become more complex, a greater and greater percentage of their area is given over to the wires and paths of internal communications. And as buildings become taller on the same site, more and more of their volume is given over to elevators and stairwells.

So when people compare government agencies to private-sector organizations, they should be comparing organizations of the same size and number of people.

I’ve lived this comparison; the company I work for grew from 79 people when I started to well over 500, and has become much less efficient. I spend more time coordinating things among people and chasing down information now than I did in similar jobs when I started.

Short answer? Yes.

Longer answer? What’s wrong with being inefficent? In a representative democracy, you want some inefficiencies. Government, by consciously choosing winners and losers, is introducing inefficiency for a reason, usually in order to gain an alternative good that is more highly valued at that place in time.

Markets and businesses should be as efficient as possible because efficient markets are effective markets. Governments, however, don’t need to operate under those rules-- which is good for them, because it’s tough (I’d argue impossible) for government to operate with as much efficiency as any market-based entity. It simply doesn’t have the same incentives as business does, because even in a democracy, voters are not the same as consumers making economic decisions.

Anyway-- I don’t want an efficient government. I want an effective government.

Oh, and to add-- much of the blame for our current troubles are in wanting a market to work like a government. If that’s bad, than I’d believe that the opposite-- wanting government to act like a market-- probably has quite a bit against it as well.

Because the flip side of the pie market is that the pie makers are only going to make enough pies to marginally break even, and no more. People who can afford pies get it (and since the market is free, at the lowest price and highest quality) and people who can’t don’t.

The analogy is a bit of a stretch but basically what I’m getting at is that in your pie market, the ultimate goal is not for everybody to get pies, only that the number of pies is distributed efficiently. The ultimate goal of the national market for health care IMO should be that everyone gets health care and that no one should be left in fear of not being able to afford life saving medical treatment. Now, just like the real life situation with pies, it is possible that in a free market, pies/health care are so cheap and people so rich that basically everyone who wants a pie/health care get’s one, in which case a free market would be the best solution, as it is for pies, but that basic raison d’Etate needs to form the basis for any policy proposal. Excluding certain people from the health care system is simply not an acceptable solution, no matter how much money it saves.

The example I was going to offer.

I used to rail about the waste, inefficiency, and competence within my federal office. But long ago I realized each of my friends in the private sector could make similar complaints. Remember, Dilbert isn’t set in a gov’t office.
ISTM that ensuring access to basic health care seems like the type of area in which the gov’t might well do a better job than for-profit industry.

There are inefficiencies in both government programs and businesses. The difference is that the inefficiencies in the private sector are only a concern to the stockholders – a relatively small number – whereas the inefficiences in the public sector are a concern of the taxpayers – essentially everyone.

No one complained* when AIG went out on expensive junkets for its senior staff – until they got a bailout. Then it was public money, and the outrage filled the air.

*Not even most stockholders, who saw the profits and didn’t care that money was being wasted.

Granted, but how “efficient” (in terms of total output from the system vs total input to the system) is the 100,000 person organization vs. 1000 organizations of 100 each. Economies of scale do exist in many circumstances. The large organization might have a central database where the small organizations might have everything in Excel files or on paper, just for instance.

The big issue is whether society wants universality or efficiency. Looking back to the early part of the 20th Century, private industries such as utilities simply did not serve rural areas because the cost of laying down an infrastructure eliminated their chance of turning a profit for generations. Only through regulated monopolies (phone companies) or straight-out government ownership (Tennessee Valley Authority) were many small town/rural residents able to get telephone service or electricity. Even today, FedEx still uses the U.S. Postal Service for final delivery in some areas.

Another example is special needs. It may be more efficient for private schools to compete for the best and brightest students, but there will be a significant portion of poor students who can’t afford tuition, as well as special needs students whom private schools can’t cost-effectively handle.

Whether health care should be universal or efficient is, of course, the heart of the debate.

True. You have to balance ‘efficiencies of scale’ against ‘inefficiencies of scale’. It may be that there’s a better way to organize large-scale operations than a centralized command structure, for some purposes. And the work done with robots where the desired behaviour emerges from the interaction of semi-autonomous lower-level entities comes to mind.

Just look at any government agency and you can see, the employees are very inefficent. Look at the salary levels. You will find in every case the government employee is getting higher wages and MANY more benefits than a similar job in a non-government agency.

Because there is no competition and you can’t do anything about it. Look at the sloppy dress, the attitudes, the sense of entitlement government workers have. Very few have the same work ethic you see in non-government posts.

Why? 'Cause they don’t have to.

I call complete BS. Even the average file clerk in a government job makes less than a private sector counterpart. When you get into management positions, the spread between private sector and public sector salaries turns into a chasm. Hell, the President of the United States makes less than $600,000 per year.

Maybe the real answer is to, say, break up the country in 50 different divisions, and let them run things themselves. Avoids all of the central command and control issues that way, and could stop stupid people in big cities from interfering with simple people in rural areas, and vice versa. We could further divide these 50 divisions into other administrative units on a smaller scale and much closer to the actual customer. Not efficient monetarily due to the multiple hierarchies, but efficient, nimble, and responsive in the proximity to the customer.

Really, why the hell is everyone clamoring for a national system? Look towards to your own state first, for crying out loud.

While most posters have tried to keep the answers factual, the nature of this question is probably better settled in Great Debates. Moving it.

samclem General Questions Moderator