Monday, August 10, 2009

Yes, the "Public Option" is a Trojan Horse

One of the many pieces of disinformation floating around about the the American Affordable Health Choices Act of 2009 -- the House health care bill that everyone is screaming about -- is that critics of the bill claim that the bill, or Obama himself, would "ban" private health insurance. As far as I know, no one is saying this. The actual objection is more complicated that this, and as far as I can see it is true. It is that the economics of the plan itself will tend to systematically crowd private plans out of the marketplace.

These are the relevant provisions of the bill:

1. It would require all Americans to have health insurance.

2. It would expand the Medicaid program to cover all adults with incomes below 133 percent of the federal poverty level (FPL) ($29,300 for a family of four), and provide premium subsidies for people living between 133 percent and 400 percent of the FPL (i.e., $88,000 for a family of four).

3, It also requires most employers to contribute to the cost of coverage for their workers.

4. The bill also establishes an “exchange” that presents a selection of health coverage alternatives
including a newly created public plan that would compete with private insurers for enrollment.

One reason this plan will tend to crowd out private health insurance is obvious to anyone who is used to thinking in terms of business and economic principles. My father was a small business man, and the first business principle I can remember him telling me, when I was about ten years old, was "you can't compete with the government." The main reason this grundsatz is true is not, of course, that the government is more efficient -- producing more benefit per unit of cost -- than you. It is that it has a way to hide its costs from the consumer: you can only charge people for services, but it can tax them.

As you can see from #2 above, the new system will give its product to a lot of people for free. It will also be able to -- and of course, will -- sell its product to a lot of other people at a below-the-market price. This will result in an avalanche of customers out of the private insurance market and into the public option, since they will be able to get roughly the same services at lower cost (to them).

The avalanche will be multiplied by the fact that about two thirds of Americans with health insurance get it through their employers. Your employer decides what your insurance options are. Under the plan, employers will have powerful incentives to take employees who now have private coverage and simply dump them into the cheaper (to them) public option. This study by the Lewin Group estimates that the new system would very quickly result in almost half of covered Americans losing their private health insurance. (They also estimated that if the feds imposed medicare-style price controls and opened the public option to everyone, the number of Americans who depend directly on the government for their medical care would rise from about one quarter to two thirds.)

This would mean that Obama's oft-repeated claim, "if you like the insurance you have, you can keep it," is a gross falsehood.*

"But all you are saying, really, is that the public option would tend to out-compete the private one. What's wrong with that? Aren't you in favor of competition?"

The answer is that competition is only a good thing, ordinarily, because the consumer has to pay the producer's costs. Since the consumer is looking for the best deal, the result is efficiency: most benefit per unit of cost. If the producer can shove costs onto others, the result is inefficiency. The result is a rising dollar cost that is only felt at tax time -- and reduced services, reduced quality, under-capitalization, and a lot more time spent waiting in line.

This sort of "competition" lures rational agents who are looking for the best deal into a situation that on the whole is far from the best.

* According to an AP story dated June 15, 2009, the White House stated that these words, repeated endlessly, "should not betaken literally." See footnote 18 of this report.


Peter L. Winkler said...

The pubic option was already removed from the bill in committe chaired by Max "Monybags" Baucus. If the plan ever ges to Obama's desk, it will be a watered down nothing that will undoubtedly have provisions to funnel more money into the pockets of the health insurancec companies. That's the purpose of requirng everyone to have health insurance, i.e, join a HMO.

Whenever Congress passes a bill with "Reform" in it's title, it guarantees another transfer of wealth upward.

Lester Hunt said...

Well, the notorious 1,017 pg. House bill has a government-run insurance program in it, and so does the compromise the blue dogs agreed to on July 29, so when you say that it has already been "removed from the bill," that sounds like something of an exaggeration. Right now, the only actual bill that exists is the House bill.

Otherwise, I agree with your assessment. In my state, big pharm is running an intense TV campaign in favor of the plan. That, in my opinion, is a very bad sign, as far as who is going to profit from it, and at whose expense.

pappy d said...

Even without an infusion of tax dollars, a government monopoly health care system might theoretically be expected to cut health care cost by 15% through cuts in administration (private bureaucrats).

I think competition is a moral good in the marketplace but who cares what's efficient to the people's interest? What's more important to a successful businessman or politician; his enemies or his friends?

Big pharm recently got passed (at 3 a.m. on a voice vote) a bill which forbids government buyers for Medicare & the VA from negociating drug prices on the basis of the huge quantities they buy. So I expect you're right about that, too.

Lester Hunt said...

I believe Barack is a dog person.