Thursday, August 20, 2009

I do not understand the public plan

Part of the reasoning behind a public plan is that it will put public health care to a rigorous market test. If millions of customers voluntarily flee traditional insurers and sign up for the public plan, so much the better; if not, fair enough.

Yet I cannot see any good explanations of why the public plan should have even a modest chance of outcompeting traditional insurers without subsidies. Proponents' arguments include (in italics):

Since it doesn't need to make any profits, the public plan will be able to charge less for the same care.

Why, then, are nonprofit insurers not already dominant, since the exact same reasoning applies to them?

The public plan will not waste so much money trying to deny coverage to sick people.

This confuses the possible gains from a world where the public plan is the only option—and competition does not produce zero-sum games like denying coverage to the sick—and a world where the public plan is forced to compete with existing insurers, which is the one actually under discussion. Insurers are not idiots who foolishly spend more money than they make by working to deny coverage. They do it because it saves them money. If the public plan refuses to play such games, it will be uncompetitive—end of story.

The public plan will have lower administrative costs and save money by using its bargaining power to push down payments

I put very little stock in hypotheses that could just as easily apply to government involvement in any industry. To make a serious case for the public plan, you can't just offer generic arguments about why the government might be good at running a business. You need to provide specific points about why the special economics of health care make a government plan more competitive. But while there are economic arguments for why a government monopoly on health care might be more efficient, these do not apply to the case where a public plan is merely an equal, subsidy-free competitor to existing plans.

So what? If you're right, then a public plan with no subsidies will fizzle out, and we'll be back to where we started. What's the harm in trying?

Frankly, I don't find guarantees of no subsidy credible. This isn't because I think proponents are dishonest schemers who will provide subsidies the instant everyone else stops looking. To the contrary, I think they are perfectly honest in their belief that the public plan will operate subsidy-free. Even the best of intentions, however, cannot make this outlook believable.

Imagine that the government sets up a public plan. It needs to choose a price for the plan. At any price, however, it will be disproportionately frequented by sick patients taking advantage of the public plan's refusal to deny coverage; in fact, the higher the price, the sicker the pool of customers for the public plan will be, since at a sufficiently high price the only people with an incentive to purchase the plan will be the ones trying to escape massive medical bills.

The adverse selection problem here is so overwhelming that there is almost certainly no price at which the government can break even. But this will only be discovered after the public plan has already swung into operation, and millions of people have signed up. What does the government do now? Throw up its hands, announce that the plan isn't solvent, and force millions of customers who have placed their trust in the public plan to join the ranks of the uninsured? Of course not. Subsidies are inevitable.

There is one complication. If, as described in my last post, new rules against denying care for preexisting conditions cause all insurers to rachet down their coverage to whatever minimum is defined by law, a public plan that also offers this minimum will not be at any particular disadvantage. Of course, it will not have any advantage either, but it may survive without subsidies. Under this scenario, however, the government already has control over the extent of all insurance coverage; the public plan is merely a direct manifestation of an insurance system that has effectively been nationalized anyway.

In other words, the public plan is only viable if it barely matters.

7 comments:

grandmute said...

Well put. One of the main problems of the health insurance market is that an abundance of (relatively) small insurers makes it difficult for any one insurer to reap the most possible efficiency gains from risk pooling. Throwing another insurer, run or merely blessed by the government, into the existing market will do nothing to fix this.

frank.grupt said...

The real threat and promise of the public plan stems from the fact that in many states, there is little real competition among private insurers. A public plan would offer competition to the private plans.

Anonymous said...

Frank got it. You see the idea is mostly a way to instill markets where they have died, and right now noone can enter the healthcare market and shake things up because the speccail intrest groups have everything neatly wrapped up. What the public plan will do is be big and strong enough to make the other guys start playing ball. The other parts are just icing on the cake. Oh and there is the possibility that it could be really good, then be realized to be better than what the fearmongers would have one believe, and everyone would be better with it, so it bcause defacto single payer and then the goverment just flips the switch and changes its revenue stream... Presto chango we are ~Canada!

MKW said...

Frank and Anon,

If increased competition is what you're after, why is creating a government-run insurer more attractive than simply modifying/reducing current regulatory barriers (such as eliminating the prohibition of interstate health insurance purchase) that have largely driven the market to the place it is now. Perhaps the public plan is more politically pragmatic, but it doesn't seem like the Democratic majority is handling it too well.

Kyle said...

Perhaps:
1. Low income people would be subsidized. Using that market share a public plan could bargain down costs for everyone.
2. If you think that insurance has a tendency towards natural monopolies (or more likely, there's a need for regulation, but that tends to limit entry), then a public plan serves as a replacement for regulation.

Anonymous said...

The administrative cost argument misses what happens when there is a large player (and the govt is already the largest player in health care) -- standardization of processing, which is the largest cost of admin in health care.

Additionally, most health insurers were non-profit for most of my lifetime. The laws were relaxed to let them become for-profit during the Reagan administration. The big beneficiary of for-profit health care has been management, which earns more than 10,000 times as much, on average, as when they were non-profit. As in many industries, management capturing a disproportionate portion of benefits is a market distortion.

Anonymous said...

Try http://krugman.blogs.nytimes.com/2009/07/25/why-markets-cant-cure-healthcare/

In short, uncertainty, imperfect information, and the fact that healthcare is much more central to (physical and psychological) well-being than almost any other good.