Dr. Kristian Niemitz is the Editorial Director and Head of Political Economy at the Institue of Economic Affairs
Imagine you are a seller. Of something; it doesn’t matter what, for now. Beer. Poetry. Advice on how to pair tapas with sherry and vermouth. Translations into Icelandic.
You have a choice between two (otherwise similar) markets. In Market 1, there is one huge buyer who accounts for close to 100% of market demand (=a monopsony, which, for the non-economists, is like a monopoly but on the demand side). In Market 2, there are a large number of small and medium-sized buyers, none of them big enough to have a detectable impact on overall market outcomes. Which market do you prefer?
Up until this point, it would seem like a complete no-brainer. Of course you would prefer Market 2. In Market 1, you are at the mercy of that one single buyer. In Market 2, you can choose between lots of different buyers. If one of them offers you a price or conditions that you consider unattractive, you just sell to a different one.
Monopsonies are great if you are the monopsonist, or if the monopsonist is, in some way, acting on your behalf. But they are not so great if you are a seller. That, at least, is what the Economics textbook says. It is also what the Health Economics textbook says, specifically in the context of single-payer healthcare systems: the single-payer is a monopsonist who can keep costs down, because medical professionals and suppliers have nowhere else to go. If so, the same should logically apply to a ‘National Care Service’, that is, a nationalised social care sector, and idea that is currently being floated (although we have no details yet).
There’s one problem with the monopsony argument, though: actually existing monopsonies don’t always act the way the textbook model would predict.
I noticed this a few years ago in the context of a doctors’ strike. A colleague suggested to me that we should use this strike as an opportunity to reach out to disgruntled doctors, and make the idea of free-market reforms in healthcare more palatable to them. We could tell them that the NHS is able to keep their wages down because it is a monopsonist, and that they would be better off in a pluralistic market system. It sounded like a good idea to me. Until I looked up the numbers on medical salaries in the OECD, and realised that the evidence was not on my side. British specialist doctors, in particular, are not badly paid. Sure, you can find countries where their peers do better, but these are richer countries where everyone is doing better. If we express medical salaries as a multiple of national average salaries, British specialists actually do quite well. Not exceptionally so, but enough to disprove the idea that the NHS acts as a wage-suppressing monopsonist.
Graph: Remuneration of specialist medical practitioners as a multiple of national average wage, 2024 or latest available year
-OECD Data Explorer
So what explains the difference between the textbook model of monopsony behaviour, and the behaviour of the NHS as an actually existing monopsonist? And what would a National Care Service be more similar to – the textbook model, or the NHS?
I know what you’re thinking: isn’t the issue simply that the textbook model assumes a commercially driven monopsonist, or at least, a monopsonist that acts like one? Isn’t the issue simply that the NHS is a political enterprise with soft budget constraints, which simply has no interest in making use of its monopsony powers?
But that is not quite right. American pharmaceutical companies that do business with it very much do see the NHS as a tough negotiator that knows how to make use of its dominant position – that is why the issue of drug pricing always comes up in UK-US trade negotiations. In their dealings with drug manufacturers, the NHS behaves exactly like the textbook model of a monopsonist.
So why does the NHS use its monopsony powers so selectively? Why does it use them to suppress drug prices, but not wages?
The economic literature on monopsony behaviour emphasises the proximity of ‘outside options’. Monopsonies are rarely absolute: you can be a monopsonist in one market, but that still leaves sellers with the option of exiting that market altogether, and selling elsewhere. But that cannot be the answer to the above question. Accessing outside options is much easier for an American drug company than it is for a British doctor. For the former, ‘accessing the outside option’ means bypassing the UK market (at least for a while), and prioritising the French, the German and/or the Japanese market instead. For the latter, it means emigrating to Australia. The NHS has much greater monopsony powers over its domestic medical workforce than it has over international drug companies. And yet, it uses those powers against the latter, but not the former.
To make sense of this pattern, we need to move beyond pure Economics, and take a Political Economy perspective. Forget conventional measures of market power, and instead, let’s think about the political standing of different stakeholders.
Drug price negotiations are usually not high-profile, but when the issue does come up in the context of trade negotiations, it is always presented as absolutely scandalous that drug companies want to make money. ‘US-UK drug deal could result in 229,000 excess deaths in England, analysis suggests’, reported the Guardian last month. In that context, there is no way the public would ever side with the drug companies against the NHS.
In contrast, doctors’ strikes are usually presented as a conflict between ‘the NHS’, and an unsympathetic government (which probably secretly hates the NHS, and wants to privatise it). In that context, the public will, of course, side with the doctors. In economic terms, the British government may have monopsony power, but the political economy of the health service prevents the government from using it.
Where does this leave our hypothetical future National Care Service?
A National Care Service would not have the same sacred status as the NHS, even if it were technically part of it. ‘Our National Care Service, the envy of the world, no other country has social care’ – that won’t happen. But a monopsony social care provider will nonetheless change the political economy of social care in other ways.
In his Golders Green speech, Andy Burnham told the assembled care workers that they should be among the best-paid people in the country. People may not take that entirely at face value, but if you set up expectations in that way, you will not be able to pivot to a policy of pay restraint later.
Burnham’s expectation-setting may not even be the main issue here, though. Burnham said that, because he knows that it’s popular. There are plenty of surveys on the popularity of different professions, and the results are exactly what you would expect. People like doctors and nurses. People hate politicians, journalists and business leaders. Care workers are not specifically included, but it is not wild speculation to say that they would be seen as more similar to the professions at the top end of the popularity distribution.
Burnham talked about how this popular group should be highly paid, but he did not blame anyone in particular for the fact that they are not. Because, in the current system, there is no specific person, group of persons or institution that you could blame. Nobody ‘decides’ how much social care workers should be paid. If you think they should be better paid, there is no specific person, group of persons or institution that you need to convince. It is an impersonal market outcome.
In a monopsony, it would no longer be. If we had a National Care Service, people would – correctly – start to see pay levels in the social care as the result of a political decision. There would be someone who makes that choice, and that someone would get the blame if they made a choice that people don’t like. For that reason alone, a National Care Service would almost certainly lead to higher staff costs in the sector without any concomitant productivity gains, or increases in our willingness to pay.
The fragmented nature of the social care sector may, in fact, be a good thing, because it de-personalises decisions in the sector. In a National Care Service, these decisions would become heavily personalised, and we would be placing impossible demands on those persons.
Terrific piece! Drug-makers just want to make money, while doctors are caring people who deserve a high salary as a reward for their saintliness: people's ideas about right and wrong make a huge difference.
But it seems an exaggeration to represent emigration to Australia as the only exit option open to doctors. I have often heard of doctors (perhaps typically women) reducing their hours worked. And in the long run bright young science-inclined people have to choose career paths to pursue. So a monopsonist NHS has to worry about suppressing salaries to the point of reducing supply. And NHS patients will notice a shortage of medical personnel more readily than a shortage of drugs, because they reckon they know how easily they should be able to see a doctor, whereas they have no real idea of which drugs (or other therapies) they ought to be getting because they're not doctors. So the NHS has to worry more about overusing its monopsony power in the former than in the latter case. That's my ten cents anyway!