Understanding How Bureaucratic Systems Work

I am one of very few capitalists you know (probably the only one, actually) who is intensely interested in understanding who gets what under socialism. At the other end of the spectrum, almost every socialist I know is focused only on the idea of socialism and has very little interest in discovering how socialist systems actually function.

So, what you are about to read, I am afraid, is something you are unlikely to find in any other place.

Suppose the government nationalizes the school system and makes schooling available for free. Without knowing any institutional details, could you predict in advance which students will end up in the classroom of the best teacher? How about the worst teacher? And how will the other students be sorted in between?

I certainly could not predict with any accuracy. But I can almost guarantee you the students will not be distributed randomly. I can also almost guarantee you that the distribution will not be independent of the parents’ income, wealth and social status.

Similarly, suppose the government nationalizes the health care system and makes medical services available for free. Without knowing any institutional details, could you predict in advance which patients will be seeing the best doctors and entering the best facilities? How about the worst doctors and the worst facilities?

Again, I can virtually guarantee you that the patients will not be distributed randomly and that the distribution will not be independent of income and social status.

Brother Can You Spare a Dime


What brings all this to mind is a post by Uwe Reinhardt at the Health Affairs blog the other day:

In the ideal world envisaged by the policy-making elite left of center of the ideological spectrum, the individual’s health care experience is independent of that individual’s socio-economic class… Access to needed and locally available health care is viewed as an individual’s inherent right… Rationing health care by income class has no place in this picture. Heavy government involvement to enforce the implied redistribution of income does.

Now, this is interesting on several levels, so let me make four quick points. (1) I am not aware of any serious proposal (as opposed to, say, daydreaming) made by anyone, anytime, anywhere, to make health care available to people in a way that is truly independent of socio-economic class; (2) I do not believe it is possible to design a system in which access to care is independent of socio-economic class; but even if I’m wrong about that (3) I am fairly confident that no country in the world is seriously trying to do it; and (4) there is nothing in the science of public choice which would lead me to believe that any country ever will do it.

Health care is a complex system in which 300 million potential patients, 800,000 doctors and countless other paramedical personnel interact in complicated ways. Government cannot possibly control, or even observe, most of what goes on. The best it can do is change a few parameters. But after they adjust, people will mainly pursue their own self interests just as they did before the change.

Economists have spent 200 years developing tools that enhance our ability to understand the complex system we call “the economy.” But we have very few tools to understand complex bureaucratic systems — especially the health care system. So with humility, I will cautiously propose three principles:

  1. On the demand side, the same skills and attributes that allow people to do well in the marketplace also allow people to do well in bureaucratic systems. (The idea that the market favors one group of people and bureaucratic systems favor a completely different group is an illusion.)
  2. On the supply side, if providers cannot ration based on price, they will ration based on other considerations and these other considerations almost always will favor consumers with higher socio-economic status.
  3. Provided they have the money (or can make sacrifices to get the money) the price system is almost always better than bureaucratic systems for consumers with low socio-economic status.

Take the market for restaurants. A poor person in Dallas can have dinner at any of thousands of restaurants in the city without any bureaucratic hassle. Granted, he could drop a week’s pay at some of the pricier establishments. But if he is willing to make the sacrifice, no bureaucratic obstacle stands in the way. Yet this same poor person is probably trapped in a Medicaid system in which about his only option is the Parkland Hospital emergency room or one of its satellite clinics. And his children are probably trapped in poor-performing public schools without any avenue of escape.

Think about that. In the capitalist restaurant sector, the individual has easy access to everything the market has to offer. But in the socialistic health and education systems (defended on the grounds that poor people need them), the individual has almost no choice whatsoever.

Here is the little understood (and surprising) bottom line: Markets do not empower rich people; they empower poor people. In a bureaucratic system, the rich person will find his way to top-notch doctors and he will find a way to enroll his children in one of the best schools. But a poor person almost never can be assured of these results unless he can pay with money.

Before I move to a consideration of the evidence, consider one more assertion Prof. Reinhardt makes about other developed countries:

All these nations have an escape valve for a small, moneyed minority who either buy private insurance or, in the case of the UK and Canada, travel outside their countries’ borders to get health care either not available to them at all in their country or for which they must wait in a queue. But for the great bulk of the population in these countries — 90 percent or so — the health care experience of the individual is largely independent of their socio-economic status.

Now, if I had read only the literature on why there should be public education and had never taken a close look at how it actually works, I would be tempted to say the same thing about America’s public schools. After all, about 10% buy private education and everybody else is part of the free system. Yet (as I hope everyone knows), public schools do not offer equal opportunities to all children. Nor does socialized medicine.

My foreign language limitations have constrained my ability to delve deeply into what’s happening in a lot of European health systems. What I know most about are the English-speaking countries — Britain, Canada, New Zealand (socialist systems) and Australia (a mixed system).

Of these, Britain has made the greatest effort to find out who gets what from the health care system and why. In fact, contrary to my earlier assertion that socialists generally have very little interest in understanding how socialism actually works, the Brits seem to have an obsession about studying inequality of access to care. Here’s what I wrote in Lives at Risk:

Britain’s ministers of health have long assured Britons that they were leaving no stone unturned in a relentless quest to root out and eliminate inequalities in health care. But more than thirty years into the program (in the 1980s), an official task force (the Black Report) found little evidence that access to health care was any more equal than when the National Health Service was started. Almost twenty years later, a second task force (the Acheson Report) found evidence that access had become less equal in the years between the two studies.

Across a range of indices, NHS performance figures have consistently shown widening gaps between the best-performing and worst-performing hospitals and health authorities, as well as vastly different survival rates for different types of illness, depending on where patients live. The problem of unequal access is so well known in Britain that the press refers to the NHS as a “postcode lottery” in which a person’s chances for timely, high-quality treatment depend on the neighborhood or “postcode” in which he or she lives.

“Generally speaking, the poorer you are and the more socially deprived your area, the worse your care and access is likely to be,” says The Guardian, a staunch defender of socialized medicine. Scholarly studies of the issue have come to similar conclusions.

Now if I substituted “education” terms for “health” terms, I could leave all the other words pretty much the same and I believe I would have a very accurate description of the public school system in the United States and in the other four countries as well.

C’est la vie.

Comments (25)

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  1. Stephen C. says:

    Great post. One of your best.

  2. Clark D. says:

    You are right. Almost everyone else is ignoring this. Espcially all the propagandists for ObamaCare.

  3. Devon Herrick says:

    I spoke with a man from India, who explained that India has a health care system where people patronize the medical establishment that best meets their needs and fits their pocketbook. Granted, the rich have access to a level of care that probably surpasses that of most insured Americans. But, because of the free market (and lack of third-party payment), the prices for whichever level of care you wish to purchase are less that they would be under a bureaucratic system — whether that system is insurance or government.

    When you see systems that claim to guarantee care for all, people with money tend to opt for private facilities because the public ones are so bad.

  4. Laurence Brody, MD says:


    RHIP This stands for Rank Has Its Privileges. I learned this as a military doctor. Everything is equal: All doctors are equal, All patients are equal except if there is military rank or another political exchange mechanism.

    After a period of time in universal care for military servicemen and dependents under a single payer system, it became obvious to me as a young physician, that the amount of actual work performed by my colleagues was diminishing and meticulously minimized. We call it productivity today, but basically it was that if you had influence you got better service, and if you had no influence you got a left over interest, which ended every day at the minute duty time ended.

    A high ranking officer could get the best of care day or night, but at the other end of the political spectrum, you got what a corpsman could offer. It will happen under a single payer system. I saw medical services traded for airplane flights and all sorts of “off the books” transactions. Doctors eventually would prefer to treat a sore thumb rather than get into a diagnostic problem, which could take hours and many tests to sort.
    A covert barter system of favors developed since all money was equal and distributed by government.

    Society will basically have to make a choice: Have government provide illness care/education OR save, invest and pay for it privately, but retain a choice and freedom to move to favorable provision of health care for your needs. Who knows more about what you need: your legislator or you!

    John, forget 800,000 doctors. They will be replaced at the lower skill margin by nurse practitioners, RN’s, physician assistants, helpers ect. After all, medical care is not necessarily physician care. Also, young doctors coming into practice today are a generation burdened by debt, which will not be painlessly repaid. They will be an indentured class.

    p.s. I was drafted, so it can be done again. Or like the plan popular at the time, the Berry Plan, a doctor exchanges medical school debt for years of service where and when they send you and for how long.

    Thanks John for bringing this back into consciousness.

    Laurence Brody, MD

  5. Chuck R. says:

    When in discussion with a liberal about health care, I often say: “Look, it looks as if we’ll eventually end up someplace that looks an awful lot like the UK–most people will have access through a government-funded and/or run system of clinics and hospitals. Those with resources, will buy up. And, unless we are going to jail doctors for servicing the well-off (as Hillary planned to do), the best docs and hospitals will choose to serve the ‘elite.’ What people don’t talk about is what most people will be left with, which is a system of under-performing people and institutions, metering out health care according to a set of rules (a.k.a. rationing).

    Let’s make sure we understand that reality before we agree that’s where we want to go. The alternative is to unleash market forces on cost containment through quality. There will still be income-based differences for certain, but in the end, everyone will be better off in a system where the market is the determinant of what gets done and who gets what.

  6. Philip Porter says:

    Today we see that housing values mirror the quality of the public school system. The wealthy can buy better public schooling by purchasing a house in a better neighborhood. With universal health care, being in better health care markets will have the same effect. One effect is that people will pay for better health care locations rather than shopping directly for better health care.

    Like the cadre of professional accountants employed by private citizens to figure out the complex income tax system, there will develop a professional class of experts in the intricacies of the health care bureaucracy. A second effect is that you will pay for quality health care access rather than paying directly for better health care.

    When the lines for, say, kidney transplants are shorter in CA than in TN because the bureaucracy can’t possibly manage supply decisions with precision, those with the money to move will get better service. Of course the politically driven bureaucracy won’t manage supply decisions with precision. They will allocated more kidney transplant surgeons to CA because it is wealthier. Once again, you will pay for quality health care access rather than paying directly for better health care.

    You are exactly right John, money buys political allocations just as it buys private allocations. The difference is that what we buy from the political sector, while allocated roughly the same, is inevitably an inferior product.

  7. Bruce says:

    So true. So true. You are right on the mark, John.

  8. John R. Graham says:

    With respect to Canada, Profs. June E. O’Neill and Dave M. O’Neill found that the income-gradient of health (the term academics often use for the phenomenon Dr. Goodman addresses) “is at least as prominent in Canada as in the U.S.” (http://tinyurl.com/ycmyx96).

  9. Virginia says:

    What I don’t understand is why it’s so darn important that everyone be “equal.” Sure, we should all start with equal rights, but after that, “equality” creates whole host of problems.

    Equality in practice is impossible to achieve. Trying to do so spends valuable resources on a wild goose chase.

    It’s interesting to think: How much more could we achieve if we didn’t spend so much time worrying about how to level the playing field?

  10. Harry Cain says:

    An excellent reminder of some of the consequences of what we do. In a similar vein I remember reading somewhere, re the U.K., that the socio-economic gap in health status that exists here (i.e., health status correlates quite positively with income and education) also exists in the U.K. — to the same degree and has not changed since the introduction of the NHS. This reminds us both that health status derives from much more than health care and that “making the best healthcare available to everyone whenever they need it, with no economic barriers” is a pipe dream.
    And incidentally, John, I loved your combination of the piece on interstate sales of health insurance with “50 ways to leave your lover!” So I say to the Dems in Congress, “Slip out the back, Barack!” “Get a new plan, m’man! Do leave the key, Pelosi!” (I’m a retired old man who has time for this stuff!)

  11. Stan Ingman says:

    John .. As you know there are many forms of socialism and capitalism . I have been around long enough to remember when private health care insurance and HMO were a socialist or even communist plan to rule American in 1950s. We have had some form of social capitalism since the country was invented– thank Heaven.

    Direction of history around the globe is some sort of blend social protection capitalism or social capitalism or regulated capitalism . In the last ten years we have seen mostly the failure of capitaliam it seems..e.g. Enron, Banks, Wall Street, etc. So, we are trying to make some correction to our sick social capitalism. Health care reform is only one part and it looks like it will happen this week. Most corporations, even insurance companies , physicians, health care professionals, health care planners, economists seem to agree it is needed and go along with reform . I predict by Fall that 51%+ of population will be in favor also.

  12. Mitch Pearlstein says:


    Terrific piece.


  13. Frank Timmins says:

    This is a well thought through post John. Thank you. It is good to see someone examining what the sacred cow of “equal access” really means in actual practice. As you point out it is merely a pipe dream – impossible to achieve. All you can do is change the entity receiving the extra pay. Instead of paying the provider of the service one pays the corrupt bureaucrat overseeing the process, but one still pays extra for better service. It sure seems more advisable to take care of the surgeon operating on one’s brain rather the the one making the surgeon miserable. I sure would like to see Prof. Reinhardt’s comment here.

    Mr. Ingman, having been around the health insurance business since before HMO’s were authorized, I can assure you that they (HMO’s) are indeed a form of socialism, and the results of the majority of HMO experiments have had the same dreary failures as the history of socialism itself. Half measure socialism in the healthcare industry is one of the reasons we now find ourselves in this healthcare crisis. We have in effect mutated the effective application of true insurance to some grossly ineffective hybrid that we call “prepaid healthcare”, and the entitlement mentality it has fostered leaves us with a public in the same shape as an unweaned 3 year old puppy.

  14. Tom H. says:

    This is a devastatingly good post.

  15. John Baden says:

    Even though you say “ I am one of very few capitalists you know (probably the only one, actually) (John, Surely you know better!)who is intensely interested in understanding who gets what under socialism.”

    I think you know I’ve been thinking and writing about this for years, i.e., “…who gets what under socialism.”.

  16. John Baden says:

    Great piece of economic anthropology! Marion J. Levy anticipated this analysis in his two volume work Modernization and the Structure of Society (Princeton, 1966). As he explained, wealth and differential, privileged access to scarce resources are never random. And for reasons you indicate, this is true across time and cultures.

    Further, you buttress my old argument that economics is best understood as a subset of evolutionary biology (or behavioral ecology).

  17. Ralph F. Weber says:


    My son is 6’7”, and went to school in Canada. In the 9th grade, he missed basketball tryouts. In the 10th grade he was told that anyone who was not on the team last year would not be on the team this year. In the 11th grade he was told they were not looking for tall kids because they had to give the short kids a break. In the 12th grade he was told they did not have enough jerseys. SO he never played basketball in high school.

    He suffered a head trauma in Canada, and waited 3 hours to get an x-ray and was discharged with no CT or MRI.

    He ended up getting a full free ride to UT Dallas in pre-med and business, but transferred to California after a year, and has just been accepted into George Mason for graduate studies in economics.

  18. Gerald Musgrave says:

    Within the US educational system we have a natural experiment. One result is an international disgrace and the other is the dream of every other nation. In one, very few parents would let their children participate and other every parent wants their children to attend. One is the K-12 system the other is college education. As John says, the failed system is what the Obama system plans to emulate. The higher education system parallels the one John and I advocate for health care . It is driven by individual choice and competition.

  19. Patrick says:

    I’ve learned the (and still learning) that when something is too hard to get done, maybe it’s a sign it’s not to be.

    Once, when buying a home, it was one problem after another, and I finally said, if we were meant to get this home, it wouldn’t be this hard. I’m sure we’ve all bought something, with multiple problems, then looked back and said – there were plenty of signs we shouldn’t have followed thru with the purchase.

    Reminded me of this health care bill. If it is the right thing to do, why are they having so much trouble getting it passed? It seems to be one problem after another – 15 months worth so far. An more to come if it becomes law – legal challenges, etc.

    We’re all more impressed with the person who will admit it’s not working, accept they are wrong/defeat and start over than the person who won’t admit they are wrong, won’t accept defeat, and just keeps pushing so they won’t be wrong or lose. Too big of an ego to admit their idea’s aren’t popular.

    People dislkied Bush’s stubornness on issues like security, terrorists, etc. When will someone publisize Obama and Pelosi’s stubbornness in not listening to the 72% of the public that says stop or start over on healthcare.

    Like the decision to buy a home, just not this home, we need to reduce the cost of healthcare, just not this ‘reform’.

    How do we get this message to the people?

  20. Dr. Robert W. Geist says:

    Good analysis by John Goodman.

    We must remember that, other than size and power, there is no significant difference between corporate (HMO/MCO) and national socialized (NHS/MCO) controlled health services. The formal cartel arrangements between a NHS and government abroad are far bigger and more powerful than the formal cartels in the US between many corporate health services and public sector Medicaid HMO progams (with fixed government fee schedules) and the informal CMS HMO-Medicare Advantage programs with, for the moment, massive subsidies and serious cost over-runs.

    All cartel systems say the same thing: “give us your money and we’ll take care of you”. The music of “coverage means care” stopped for some Medicaid patients long ago and predictably will stop for Medicare Advantage patients, when the “payer” partner hands out a bag of care money that’s half empty. ObamaCare has ramped up the “coverage means care” music volume to include both public and private sector markets. The potential insurance corporate cartel partners are at this moment spending advertising millions to “play”. [Some would argue that the AMA is a play-thing haplessly spending its future].

    ObamaCare is a means to create a US cartel system with power to franchise insurance-providers (HMOs and agent ACOs) and fix prices of services and insurance (both HMO premiums-benefits and agent ACO capitation rates). Cartel systems are an old discredited and defunct capitalist plot to enlist government in market control “for stability” (code: monopoly). These centralized command market controls were avidly adopted, always for some “greater good”, by every modern socialist government (Soviet or Fascist) or mixed socialist government (Western democracies). Too bad that the single goal of national socialization, i,e., total mobilization, to win a war of survival (WWII) does not work when there are millions of individual goals in peacetime microeconomic sectors. All those socialized microeconomic systems (mixed or not) failed in the last century–after 1980 in the West and after 1991 in the Soviet Bloc. This makes it curious that a command and control system that no economist would recommend for any other microeconomic sector today, is now the favored policy maker “cure” for whatever ails our own US medical microeconomic sector.

    The question is why don’t socialized microeconomic systems work? What is the common factor by which all command and control systems failed? Goodman has said it well, but here is my favorite paraphrase of what the liberal economist John Cassidy wrote: no central authority, however brilliant the managers, can accomplish the functions of freely determined prices for the allocation of labor, capital, and human ingenuity (Cassidy J. The price prophet. The New Yorker. February 7, 2000:44-51.)

    The other historical and economic references for what happens in planned microeconomic sectors and the fate of nations unable to deregulate (the old Soviet Bloc instead imploded) are: Yergin, D, and Stanislaw J. Chapter 5, Crisis of Confidence. In: The Commanding Heights. New York, NY: A Touchstone Book. Simon and Schuster; 1998:128-129, 137. Landes DS. Chap. 28. Losers. In: The wealth and poverty of nations. W.W. Norton & Company, New York, 1999: 495-499. McNeill WH. Part II. The human condition: an ecological and historical view. In: The global condition: conquerors, catastrophes, and community. ‘Princeton , New Jersey; Princeton University Press, 1992:127-131.

    So when next we hear about health care nirvanas abroad dominated by government controlled health services and budgets, they nonetheless are cartels having serious cost problems (inflation hidden by global budgets, queues, and infrastructure erosion) and diminished quality of care. The rhetoric of “equity and fairness” becomes Orwellian sophistry where not true.

    We have the same problems in the US dominated by less powerful insurance corporation controlled health service delivery and budgets. Classic cartel formation, capitalist for profit or socialist for “equality” and “fairness”, even if run by good willed authorities, will not “cure” medicine’s cost and quality problems or in the US mean that a government cartel “partner” might not be co-opted by the corporate. But more important, complex regulated command and control microeconomic systems don’t work–something that applies in equal measure to the medical microeconomic sector.

    Goods and services can be distributed with money or by political agents. One method works and the other does not. A complex “coverage” system is neither money nor care. In contrast, it ought to be relatively simple to make sure that everyone has money for health care whether from a job, savings, or a safety-net subsidy. This just might work, since we have tried everything that does not.

  21. Maryanne Kuzio says:

    Isn’t your article about health care randomization just as relevant to the present health care system, if not more so?

    Thanks for sharing your thoughts.

  22. Sean says:

    John, You make the point that the wealthy will always be able to find better care. Assuming that their status and influence will make it possible in a private or public medical system.

    My question would be that if the well to do are certain to get the highest quality of care, why would it matter for them which system we follow?

    Unfortunately the uninsured children born everyday will never have the ability in a private system to make even the most basic of care a realistic possibility.

    And if the care given to those of a higher status will remain at a higher level of quality than that of the less fortunate, why would we continue to pay a far greater rate per service provided than the other countries you mentioned?

    You see sir, it is not the private system that we use. It is in fact the profit system that we use. In any system the goal should be treatment while maintaining costs. Instead, ours is profits while debating treatments.

    I hope you have an idea on how to improve our private system. Because even the worst care for the less fortunate is preferred over no care at all.

  23. […] barrier to care. I have previously argued that whatever rationing system is in place, people with higher socio-economic status will have an advantage in overcoming […]

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