Don’t Quit Your Day Job – Personal Finance, Economics and Investing

Government participation in the private insurance market is a trojan horse for a single payer system.

The debate that needs to happen is not private options versus a public option in insurance, it’s private options versus a single payer system.  No, private insurance  will never go away completely, but any public option will soon become much larger then originally planned under a public option.  Private insurance will become relegated to supplemental programs which build on top of (and react to the inefficiencies of) a government run plan.

The Can of Worms is Open

Of this series of articles that I have been writing, this is likely to be the most controversial.  Yes, I know there is potentially a series of restrictions that could be placed on any public option which would prevent it from growing ‘too’ (however you define it) large.  I do not believe that these restrictions would be properly formed in any bill that emerges.  Any monopsony (which is what a public option is) that dictates prices to sellers creates price distortions which will be passed on to private plans (just like Medicare today) which eventually will be forced to leave the market since there are no more profits to make.

Really?  Private Plans Can Compete With Government?

A thought exercise for your consideration:

You are considering starting a widget factory. You are highly trained in widget making and administration, but you are an unknown commodity in the widget community.

There is one other widget maker in the world, UncleSamCo.  UncleSamCo, historically, has run their widget making assembly line inefficiently.  However, UncleSamCo has some interesting abilities.  Even though it is inefficient, it can make up for losses by printing money.  It can dictate prices to the suppliers of raw materials.  Its huge size allows it to borrow money at a very low rate.  It has the ability to levy taxes.  Can you compete in this market?

The answer, of course, is a resounding no.  Is there a way to control for all of these anticompetitive advantages?  Most likely the answer is yes, but in practice there will not be a control.  The cost of debt is already a major disadvantage.  Glance at the borrowing costs for Humana, WellPoint, and Aetna (The Investing in Bonds site doesn’t allow these prices to be quoted on external sites).  Note their long term bonds all trade over 6.25%.  How about for the government? As of 6/26, the yield on 30 year treasuries was estimated at 4.30%.  How can a private company compete with an entity that can borrow at 2% less over the long term, and can even levy taxes (or cause inflation)?

Fundamentally, to allow competition in this  ‘market hybrid’ based solution, it would be equivalent to tying the government’s hands behind its back.  If we want to allow a single payer system, let us discuss it on its merits.  Pretending the public option is anything less is disingenuous.

How the Crowd Out Would Proceed

The Crowdout – from the Moonstone Archive

Any health care reform will be paid for by some combination of an increase in taxes on current medical benefits, mandated coverage (the healthy subsidize the unhealthy to a degree), additional taxes on loosely related items (say, cigarettes or unhealthy food), and cost savings from supposed efficiency increases.  On their own, any of these options have their supporters and detractors.  However, I will assume that in any bill that comes to a vote will contain both:

• Some form of taxes on current health care (maybe over a certain premium price)
• Mandated enrollment

(You may not like those assumptions; please leave your both your comments and complaints).

1. The public option will begin, and insure a small subset of the general population as planned.
2. The public option will reimburse for procedures and doctors at a rate lower than current private plans (this is the biggest assumption, but Medicare does this now)
3. The disparity between private and public plan reimbursement rates will increase as private plans pay the difference in the true costs of practicing medicine.  This eventually will drive up the premiums of private plans.
4. Premium price increases will cause additional taxation of benefits (the idea behind the taxes is to start taxing once a certain plan cost is hit) and companies will slowly start to scale back their investment in corporate plans.
5. As more and more companies drop their private plans, the remaining plans will become more expensive as they are now subsidizing more people on the public plans.
6. Eventually, company purchased health care will become an anachronism… only highly compensated employees will retain private plans.

Is this all bad?  Maybe, maybe not.  I will not use this article to discuss what I feel could allow a market based system to work (maybe next?).  I only wish to argue that a public option will quickly become the option for the vast majority of people.  The Lewin Group estimates that a public plan would mean a reduction of 119.1 million people on private insurance, and an increase of 131.2 million people on the public plan.  What about the private insurers left?  Read on.

Two Solutions to Scarce Resources

No matter how you frame the problem or your opinions on the subject, there is no way to deny that that medical care is a scarce resource.  There are exactly two ways to allocate scarce resources:

1. Allow the market to set the price of resources accordingly
2. Ration the resources accordingly.

If the United States population has decided a market based solution will never work, necessarily the burden of allocating medical care will fall to the second option.  This is where I see the private insurance market competing… again, assuming doctors aren’t forced to practice in the public system.  If a doctor feels his value would be more in a private system, he could opt out of the public system and work for a private plan.  These private plans would exist, like they do in Italy today, to cover things above and beyond what a public option offers – whether in type of medical solution, or to compete on speed.  In this style of system, basic needs could be met under a public plan, with supplemental coverage offered in the market.

Of course, if doctors are mandated to practice in the public option, this creates the potential for a black market in medical care.

Who’s Right?

I’ll leave that for the reader to decide.  I hope I have convinced you that the argument is actually private versus single payer, instead of what has been disseminated widely as a public option.  As the population of the greatest country in the world, (I know, I know, ‘citation needed’.  We’re certainly not in soccer!) we are qualified to discuss the balance between the access to care and the cost of care without the options on the table being shrouded in mystery.  Let’s have this conversation in a logical, reasonable manner.

Ace of Spades image sourced from www.flickr.com/photos/33854765@N00/3244338370.

Related Posts

1. Health Care Reform Part 4: Prescription
2. Health Care Reform Part 2: The Problem with Estimates
3. Health Care Reform Part 1: Lies, Damn Lies, and Statistics