The belt-and-suspenders of the Kennedy-Dodd health care bill

There is much debate about whether a health care reform bill should include a government-run health insurance plan, a so-called “public option.” Advocates argue that such a plan can compete fairly with private health insurance, and that this competition would “keep insurers honest.” They also argue that more choices are a good thing.

I fall in the other camp. I think that government cannot compete on a level playing field with the private sector. Government always has advantages because of its sovereign power. I also think that in most markets there is a range of private health insurance plans competing for business, and so the addition of one more plan is not worth the downsides of government involvement. (I believe that competition is flawed because for most people their employer shops for health plans. I prefer a system in which individuals are shopping for health plans.)

The government cannot compete on a level playing field with private firms:

  • Fannie Mae and Freddie Mac had competitive advantages relative to their purely private counterparts. They leveraged those advantages to the gain of their management and shareholders until they collapsed and jeopardized the entire financial system.
  • Ford Motor Company was not bailed out. It is now disadvantaged relative to GM and Chrysler, which benefited from government oversight, funding, and effective rewriting of bankruptcy rules.
  • Government-provided terrorism reinsurance is preventing private reinsurance from returning to the marketplace.
  • Most physician- and hospital-reimbursement structures are based on the methodologies of the largest payor in the market, Medicare.
  • Government-run direct student loans are now crowding out the guaranteed student loan program, in which private banks and financing firms offer loans. The government advantage comes from control over small details of the program that give direct loans a competitive advantage.

(I would appreciate further examples if commenters have any. Updates are in green.)

The ultimate fear of having a government-run “public” option is that it will crowd out private health insurance, and that ultimately most Americans will be getting their insurance from the government.

At the same time, I hope that opponents of Kennedy-Dodd and the developing House Democrats’ health care bills don’t miss a critical point. Even if the public option is successfully stricken from this legislation, the Kennedy-Dodd goals will be largely achieved by other parts of the bill.

Separate from the Kennedy-Dodd language that creates a new public option, other language in the bill:

  • Gives a government-appointed Medical Advisory Council the ability to determine a standardized package of minimum benefits;
  • Establishes three tiers of standardized copayments and deductibles, as well as the total dollar value of benefits included relative to an industry average;
  • Mandate relative premiums for people with different risk profiles;
  • Gives the Secretary of Health and Human Services authority to set a maximum percentage of administrative expenditures and profits for health plans;
  • Requires plans to provide incentives for certain models of delivery of medical care; and
  • Gives State “Gateways” authority to redistribute resources among health plans to account for the risk distribution of their beneficiaries.

If the government determines benefits, cost-sharing, relative premiums, expenses, and profits, and can take funds from one health plan and give them to another, then the insurance function is governmental.

The ultimate fear of a public option would be immediately implemented by other parts of the Kennedy-Dodd bill. Health plans would turn into a version of Fannie Mae and Freddie Mac: they would have (regulated) private profits but public purposes. (A friend points out that the Fannie/Freddie comparison doesn’t work well here. F/F are more about “private profit but public risk.”)

This is a smart tactical move by the authors of the bill. They have a belt (the public option) and suspenders (government control of private insurance). They achieve their policy goal even if they lose the public option.

Killing the public option is essential, but it isn’t enough to prevent government-run health care.

70 responses

  1. Not my words but I lost the name of the author.

    “I challenge the AMA leadership to cite a single example of an industry where involvement by the government has lead to the elimination of private enterprise. This has not been the case with the creation of public police forces in the second half of the 1800’s (private security companies still exist), we have a robust system of public and private colleges existing the same market, and bookstores still sell books despite the presence of public libraries. A mix of public and private enterprises in the market is a truly American solution to ensuring equal access, as well as competition to drive quality improvement. In fact, the creation of the public health insurance option will *increase* competition, as demonstrated by the AMA’s own studies showing that 94% of health insurance markets only have 1 or 2 providers in the market.”

  2. @jharp – Passenger rail service. But more to the point, the entry of the government in the form of a “public option” will drive private insurance into mostly high-end niche markets. A good comparison is the public school (K-12) system from which the poor and many middle class can’t escape versus the generally superior but expensive private schools. The vast majority will be stuck with an inferior (in terms of quality and availability of care) “public option” while individuals who can afford it will simply pay to get better care.

  3. The biggest thing to date is Social Security. It was invented and private individual retirement funds disappeared. USPS is also a government monopoly that refuses to let anyone else carry a letter. Milton Friedman said monopolies produce high prices and low quality and I know of very few exceptions to this metric.

    Government run public insurance will tend to fix prices. Fixed prices cause shortages as can be seen in Canada’s doctor shortage. Shortages also mean rationing and the first people to experience rationing will be the baby boomers where expenses are greater than in the younger years, statistically.

    Government run public insurance will also be politicized like GM and Chrysler (Obama promises Detroit mayor GM won’t be moving HQ; car dealerships that were destined to be closed are pulled back by a call from Barney Frank; and more). All decisions in the Health care industry will be
    second guessed or subject to the latest ballot box ground swell. To understand that, just look at the adjustments to Social Security since it was inacted in 1935.

  4. I think you should clarify your statement about the “ultimate fear” of a public plan. If most people are publically insured, and the minority remainder privately ensured, so what is so ultimately terrible — everyone has insurance? Most people have insurance that is cheaper than the private sector would willingly provide?

    To put it another way, public insurance is exactly what proponents of a public option want to see; simply stating that the worst thing a public option will cause is public insurance is not a persuasive argument in the least… quite the contrary really.

    Fannie and Freddie lending practices leading to the sub-prime crisis is not substantiated by publically available facts (they started late, in 2005, and were less vigorous.) It was private banks that escalating the issuing of sub-prime loans (leading to the eventual financial meltdown), with the quasi-public companies eventually following suit.

    • There are examples both for success & failure of government run agencies, the argument can go and on ! However there is no doubt about the practices of Freddie & Fannie. Both of these government supported agencies shopped around their risky mortgages primarily on Wall St. Sure some banks got greedy and got burned. That does not negate the fact that these mortgages were bad to begin with. Couple that with the obstinate position of everyone who fell on the side of these agencies that " everything is OK" when the accounting principles were challenged by congress & the President (Bush). This could have been cut-off or at least minimized if certain parties had not stood in the way. Barney Frank, Christopher Dodd, Chuck Schmuer and many others stood in the way. Whats wrong with having an oversite committee?

  5. Question for those categorically against public economic companies as being inefficient: Costs skyrocketed and utility stayed the same as telecompanies and utilities (california particularly) transitioned from public to private. These examples at the least show that the assertion that the private sector is more categorically more efficient is false.

    Can you name supporting examples from American economic history, where an industry switched from public-private resulted in much greater private efficiency (or becoming public resulted in less efficiency)?

  6. Jharp, nice strawman. Where did Hennessey say that Private participation would be eliminated? He said that they would be crowded out. There is a difference.

    While police have not completely eliminated private security forces, it is noteworthy that most poor urban communities are pretty dissatisfied with their Police force. And no private firm can offer them a competing product because those communities have had their money taken in sales taxes to pay for the police force. So in that case, the public service is crowding out private competition. As others noted, a similar phenomenon exists in public schools, where people have their money taken through taxes, are given public school and then forced to pay additional fees on top of the taxes to send their kids to private.

    I’ll be interested to see what rules are constructed around acceptance of the “Public Option”. Currently, if my doctor gets sufficiently angry about my insurance provider’s policies and payments, he can drop them (with the obvious impact to his patient count). Will doctors be allowed to do the same with the Public Option? If not, that will be a pretty blatant example of stacking the deck against private insurance providers.

  7. In some other comment threads, the tone of this debate has devolved from what readers of this blog are accustomed to, and from what I find acceptable.

    There is a great debate going on here among a few commenters, but both sides are weakening their cases by resorting to personal insults. That has not happened in this thread, but we’re approaching the line.

    I challenge you to win the argument while respecting the other person’s point of view, especially if you disagree with it.

    Be warned: in the near future I will be scrubbing this comment thread and excising all comments that violate my comment policy.

    Henceforth, repeat offenders will be banned from further comment.

    I encourage impassioned policy discussions in which we don’t insult each other. There are plenty of other venues, in real life and on the web, where invective is welcome.

    Please help me elevate the debate.

  8. hbramlet: A Police force is required to enforce law. You’re really making the case that America would be better off without a publically funded Police to enforce its laws, and instead rely on private security forces as in an anarchy?

    You should re-think your stance against public schooling as well. History is not well disposed to the educational status of countries that do not have public schooling (for instance, majority of people are illiterate).

    I guess if you are arguing that a public option for health care is an evil as it is akin to a public option for schooling, or a public option for law enforcement, well I really have no argument. I can live with health care being just as evil as public schooling and law enforcement…

  9. Public health care is about ensuring that even the poorest and least fortunate can get help in times of need.WWJD?

  10. “Jharp, nice strawman. Where did Hennessey say that Private participation would be eliminated? He said that they would be crowded out. There is a difference.”

    Why do you think they’d be crowded out?

    Are you admitting that most would prefer the public option? And why is this a bad thing?

    And if private insurance is so wonderful why are you afraid of a little competition?

  11. Ed Bradford
    June 11th, 2009 at 5:23 pm · Reply

    “The biggest thing to date is Social Security. It was invented and private individual retirement funds disappeared.”

    Please Ed. You can’t be serious.

  12. Curious-

    You seem to be arguing facts that I’m not disputing. The original argument is whether or not a Publicly Sponsored Entity can crowd out Private investments. You want to argue whether or not- in specific cases- it was a net benefit to society.

    While it may or may not be better to have Public Law enforcement protecting poor neighborhoods, it is a fact that those poor neighborhoods are (in most cases) not happy with their service and that no private entity can offer a competitive alternative. The same is true for Public education. The only Private schools that can compete with public education are those that target parents who can afford the taxes that subsidize public education as well as the tuition for private education.

    If the government wants to take over health insurance for all but the rich, then they really ought to come out and say so (and argue on those merits). But Jharp’s original quote suggests that the government will offer people more choices and preserve free choice, when (as you seem to acknowledge) it will actually have a competitive advantage and chase most private interests out of a majority of the market.

    Can you please explain to me when California’s power and telecommunications infrastructures transitioned from Public ownership to Private? If we are going to understand what happened, I need specifics.

    AVS – I doubt that anyone has a problem with helping out “even the poorest and least fortunate”. But this new Health Care regime extends far past those people and provides aid and public alternatives to the middle class as well. We ought not sell a massive subsidy to the middle class and competitor to the private sector as helping the helpless when it is so much more.

  13. peloisireidobamasuck
    June 11th, 2009 at 5:49 pm · Reply

    “Quit asking for cradle to grave care and take responsibility to pay for your own things in life.”

    I have never taken a dime in entitlements. As a matter of fact I have a successful business that I started 25 years ago and have always paid my fair share.

    I’m actually looking at what is best for our country.

  14. jharp, security services & police departments don’t compete, they complement each other. And only rich individuals & businesses can afford private security services, which is in line with the other critiques of your example. as I noted in my previous comment, people can skip the long wait times and bad hospitals and the rest IF they can afford to buy private health insurance or travel to another country.

  15. “Ford Motor Company was not bailed out. It is now disadvantaged relative to GM and Chrysler, which benefited from government oversight, funding, and effective rewriting of bankruptcy rules.”

    Not to mention the unions. The UAW now owns one of Ford’s competitors, but also controls Ford employees. Interesting to see how that will play out.

  16. ” if unfair competitive practices causes private entities to bail on the market, it leaves the Public Entity a monopolist which seems to give everyone the willies.”

    Because innovation and care for the customer will be reduced under a govt monopoly. You will take your health care and like it because you don’t have a choice. Unless you have a LOT of money to buy into the remaining private plans. Or fly to India and pay cash.

    Let me also issue a challenge: which government monopolies are efficient and excellent and treat customers well?

  17. “Let me also issue a challenge: which government monopolies are efficient and excellent and treat customers well?”

    The military. I’d put our guys against any private entity.

    The National Parks.

    The air traffic control system.

    I”l try for some more.

    • The military is a special case as we have an all volunteer force made of individuals motivated by idealism and ideology.

      People want to defend or fight for their country, and really in THAT case, only a "public option" (as it were) could satisfy these people.
      If you consider this a matter of choice, I'd argue that this issue of choice is a big one that helps elevate our military over others staffed mostly by conscripts.

      On the other two, the fact that the de-facto gov't monopolies do a decent job doesn't mean that private sector counterparts wouldn't/couldn't do a better one. There is no "control" to determine that.

      In cases where there are such controls (eg the US Postal service vs. FedEx, or say the VA Medical system vs any private system) the gov't systems don't end up looking so hot.

  18. Public schools may be another example of where the government cannot compete with the private sector.

    This analysis found that DC Public Schools spent around $24K per student while the average spending per student across DC area private schools was about $14K. And still parents wanted to use vouchers to send their kids elsewhere.
    http://www.cato-at-liberty.org/2008/04/07/the-real-cost-of-public-schools/

    Some other sources seem to think that on average public schools send more per student than private schools, but I haven’t found anything terribly authoritative. Maybe I’ll dig around some more and see what I can find.

  19. If proving the existence of crowding out was your argument’s only intent, I don’t know who you were arguing with, since nobody here asserted crowding out is impossible. I apologize as far as I mistakenly understood you to be discussing the article, or anything any commenter had said about it.

    For what you suggest beyond the simple existence of crowding out, namely that any and every public entry into the market will necessarily “chase most private interests out of a majority of the market”, I heartily disagree. As above, the idea that the existence of social security chased “most private interests out of a majority of the market” of investment is laughable.

    The police force is a terrible example of asserting a crowding out effect — by law only police can perform many services needed to provide security, such as unauthorized entry into private residence. In other words, the dominance of local police forces is due to legislative fiat, rather than some nebulous economic advantages conferred by their status as government entities. This would only have meaningful analogues to the health care issue, if by law, every single city was required to cover its citizens health care needs under a public plan even if they had a private plan, and furthermore by law denying private plans the ability to provide necessary coverages.

    I suggest you google the history of publically owned telecommunications and utilities in this company, there is really too much ground to cover here.

  20. “Let me also issue a challenge: which government monopolies are efficient and excellent and treat customers well?”

    And right back at ya.

    What private monopolies are efficient and excellent and treat customers well?

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