posted by Frank Pasquale
The great defense of PMFs, at least by advanced Western militaries, is that they save money. The evidence on this is at best patchy, and for a good reason: the number of officers monitoring contracts has fallen while the value, and number, of contracts has risen sharply, and there is very imperfect competition (and much reported cronyism and other abuse) in the market. Government Accountability Office investigations suggest that at least three-quarters of the billions in savings that the first (early 1990s) wave of DOD outsourcing was supposed to generate never happened, and the situation has probably grown worse since then.
There have been very few if any good studies of the real long-term economics of military outsourcing, although much anecdotal evidence suggests lost institutional capacity, fraud, and waste. The amount of money the Army thinks one contractor alone (Halliburton) has overcharged it in Iraq exceeds the aggregated constant dollar cost of a number of successful American wars. The improbability of some hypothesized savings becomes obvious when one considers the fact that in these service businesses ex-soldiers earn between twice and ten times what they had earned as government employees. Market perversity seems especially striking when one considers a second fact: the military trains, at very great expense, highly skilled employees whom it then permits to work for private competitors, against whom it must bid if it seeks to retain the services of such employees when they are most desperately needed, in time of war.
I worry about the same dynamic happening in some sectors of health care. Innovations in the private sector can lead to great new opportunities for care. But they can also effectively “bid up” the price of personnel to the point where publicly funded programs can no longer afford them. If the government hadn’t already subsidized medical education so much, this wouldn’t be so troubling. But when it has such an extensive role in shaping and training the physician workforce, it might want to think about conditioning such “givings” on some requirements to serve a certain percentage of Medicare and Medicaid patients.