Should Public Plans Compete Against Private Plans in Health Care?

Two Wall Street Journal editorials have already tackled this issue — explaining the unfairness of public/private health insurance competition and the likely crowd-out of private insurance, based on a Lewin report. So is there anything else to say? Actually, quite a lot. Bottom line: It’s very hard to do this right; but if the advocates are intellectually honest, they can start with the State Children’s Health Insurance Program (SCHIP) and adopt a proposal Gene Steuerle and I made some years ago.

Here’s the background. Everyone is assuming that President Obama will keep his campaign promise to create a parallel system for health insurance. Those who don’t get insurance through an employer would have the opportunity to buy insurance in an Exchange. Details on how the Exchange would work are murky; and the clearer they become, the worse the whole idea sounds. But that’s not the problem. The deal-killing issue is whether one of the plans in the Exchange will be a government plan.

Two immediate questions jump to mind. What would it mean for a public plan to compete with a private plan? Why would anyone want that to happen? Let’s consider each of these in turn.

We are the Children

If competition means anything, it means the competitors compete on a level playing field. In thinking about what this might look like, some people point to the current arrangement under which private Medicare Advantage plans offer seniors an alternative to participation in conventional Medicare. The trouble with this analogy is that the playing field is in no sense level.

As an entitlement program, conventional Medicare has a blank check drawn on the U.S. Treasury. No matter how sick a senior gets, no matter how many resources are used in treatment, no matter how high the costs mount, Medicare can always count on the Treasury to pay the bills. No such blank check is available to private plans, however.

As a practical matter, it appears that some private Medicare plans are “overpaid” in the sense they are getting premiums that exceed the average expected cost for their enrollees. This fact is frequently trotted out by the critics who claim the field tilts in favor of the private players. Yet even if true, let us note that conventional Medicare’s funds are not limited to the average expected cost of the enrollees either. Conventional Medicare always pays whatever the doctors and patients happen to spend.

On a real level playing field, every player has the same chance to succeed or fail. This means that the (risk-adjusted) premium to be paid on behalf of every potential enrollee is fixed in advance. The only way a plan can get income is by attracting the enrollees along with their premium payments. But if every plan’s revenues are determined only by its success in attracting enrollees, then every plan can potentially fail. I would argue that if public plans can fail just as private plans can, they are “public” in name only and in reality indistinguishable from private plans.

There are other issues to be resolved in creating a level, competitive playing field. For example, you can’t have public plans enforce contracts by reliance on the criminal law (as Medicare does) while private plans are forced to use the civil courts. The law must be the same for all players. You also cannot allow the public plan to use the monopsonistic power of government to push down provider fees and have them set by force of law, while the private players must pay market rates. If the public plan is entitled to pay Medicare rates, private plans must have that same option as well.

A level playing field means that the public plan would have no advantage either with respect to generating revenues or controlling costs. That means that the public plan is not really “public” in any meaningful sense of the word. It would be just one more plan.

That leads us to the second question. The only rational reason anyone would want a public plan to compete with private ones is the belief that a public plan might (by reason of its publicness) be able to accomplish something private plans could not. But what would that something be?

To appreciate the difficulty, consider that in most places Medicare is administered by Blue Cross. But Blue Cross is also a private insurer in the commercial insurance market. Is there any reason to believe that Blue Cross (when running Medicare) can do something for the government that it cannot do just as well or better for the private sector (when acting as a private insurer)?

In a similar way, most women and children covered by Medicaid are in plans administered by private insurers. Is there any reason to think that UnitedHealthcare or Aetna can do something for Medicaid (in their role as Medicaid contractors) that they cannot do as well or better in their role as private insurance?

In all these cases, the answer must be “no.” An entity surely doesn’t get better or worse at something when it exchanges its private hat for a public hat, or vice versa.

What then is driving the insistence on having a public plan in the Exchange? One could argue that some Democrats on Capitol Hill are simply dedicated to the proposition that public/private competition is a good thing. But this premise is undermined by other evidence.

For the most part, advocates of a public health plan in the Exchange are some of the very people who are among the loudest critics of allowing private schools to compete with public schools for the same revenue dollars. They inevitably can be counted on to oppose using Medicaid dollars for private insurance. And many of them would like to kill the Medicare Advantage program altogether.

Granted, the left is very inconsistent on this issue. Paul Krugman has editorially railed against the “privatization” of Medicare (meaning Medicare Advantage) on numerous occasions. But I have never seen him complain about the fact that Blue Cross administers conventional Medicare. And most of the critics of the “privatization” of Medicaid are completely silent about the fact that most Medicaid is already administered by private commercial health insurers. Still, it’s hard to escape the conclusion that advocates of public/private competition are really rooting for a public-only health care system.

As a test of this hypothesis, consider the expansion of SCHIP which Congress passed in January. Estimates are that up to four million children will be added to the program as a result of the expansion; and half of those will drop their private insurance coverage to take advantage of free insurance from government. In their private plans, these children were able to see almost any doctor or go to any facility. Yet since most SCHIP plans pay Medicaid rates, the treatment options in the public plan will be much more limited. Not only are taxpayers getting hit with the cost of the program, in half the cases access to care is going to get worse.

So in keeping with the idea of public/private competition, why not allow the new money to follow the child. Let SCHIP programs across the country compete with employer plans and private insurance. Given a cost of about $2,000 per child, if a child chooses SCHIP, SCHIP gets the money. If a private plan is chosen, the money would go to the private plan.

If the proponents are sincere in their desire to foster public/private competition, let’s start with the SCHIP program and see how well it works.

Comments (18)

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  1. Tom H. says:

    Like the idea of starting the competition with the kids in S-CHIP. Who would want to be in S-CHIP if you could be in an employer plan or even in a standard Blue Cross plan.

  2. Joe S. says:

    There is no secret about what is going on here. The liberal Democrats in Congress want all of us to be in a government plan.

  3. Jill says:

    I think it is a good idea to have healthcare access to all, how to get it is another issue. I like the idea of letting the new SCHIP money follow the child. Seems it might work.

  4. ken says:

    Washington Post is panning the idea of a public plan in this morning’s edition here:

  5. John R. Graham says:

    WaPo is pretty much the only mainstream media outlet that is addressing the president’s agenda objectively (and I don’t mean just health care. On the other side, the New York Pravda is completely out of control.)

    Dr. Goodman notes that Medicare can use the criminal courts but private health plans only civil. The flipside of this is that the beneficiary has more leverage against private plans than Medicare. External medicical review and (often overweening) insurance commissioners and attorneys-general are always available to the consumer who has a grievance against his health plan. There is no such recourse to Medicare. In Canada, for example, if a patient or doctor think that a procedure is “medically necessary” but the provincial health plan just won’t pay for it, well, that is the end of the matter – unless the victims are well connected to the media and can generate a dust-storm that shames the government. See also

  6. Larry says:

    Really? Here are the author’s main points:

    1) Introduce competition to previously limited markets

    2) Reduce costs

    3) Drive quality advancement and innovation

    4) Serve as a benchmark for the insurance industry

    Again, I say really?

    1) They can create competition without essentially nationalizing health care (by the way how is nationalization competition). If there is an enforceable individual mandate then the issues of adverse selection will be eliminated. Small employers, rural employers and individuals will be able to purchase health care at what are effectively group rates just as large employers do.

    2) Public plans (Medicare and Medicaid) reduce costs because they have the legislative power to do so, but don’t. SGR (Sustainable Growth Rate) has called for a reduction in physician reimbursement every year for the past several and the Congress over rode the reduction in all but one year. Currently they would have to reduce the rate 21% to meet the formula. They won’t politics and political interest groups will prevail. And by the way, the providers make up for what they perceive as public plan shortfalls by charging private plans substantially more.

    3) Quality advancement and innovation are products of free enterprise, involvement of multiple viewpoints and the opportunity to profit from hard work and creativity. Are government bureaucracies creative? I will let you answer that question (think US Mail vs.Fedex)

    4) As far as serving as a benchmark, Medicare pays significantly less than commercial plans. Has this lower cost benchmark caused insurance rates to fall?

  7. Robert Blandford says:

    One advantage of a public plan is that it will likely be portable from state to state. It will likely follow the individual.

    Of course conservatives have argued for many years that private plans should be able to be sold across state lines, and hence would also be portable.

    Perhaps Republicans can extract portability for all plans in order to level the playing field.

  8. Lucy says:

    Thanks for this Health Alert.

  9. Don Levit says:


    Thanks for writing this informative article.
    I have been researching the history of Social Security.

    In particular, the House and Senate debates are very interesting.

    A similar question was asked when the congress was debating the merits of Social Security and unemployment insurance.

    Was it appropriate, or even constitutional, for the federal government to get into the insurance business?

    Apparently, the way around this obstacle of constitutionality was to place the payroll taxes and appropriations for the benefits in two separate titles (in regards to Social Security).

    In this way, the funding could be done with the left hand, and the appropriating with the right hand, and neither hand would know what the other is doing.

    And, since the congress does have the power to levy taxes and appropriate benefits, Social Security would be in a similar position to that of defense appropriations (and others): promoting the general welfare.

    Thus, the Supreme Court should have no objection to Social Security, for congress has as much authority to pass Social Security, as it does to fund any other general governmental expenses.

    I look forward to learning of any comments you may have.

  10. Ron Greiner says:

    Any parent that chooses SCHIP on their child is gambling that their child won’t get sick or hurt. Millions of children have lost their SCHIP insurance on their 19th birthday regardless of their medical history. Think about a child with MS and the Rx costing $30,000 a year.

    Informed parents can get HSA insurance on their child for less than $50 a month in most states. The coverage pays 100% after the deductilbe to $5 million including Rx and preventative. If the government wanted competition they could deposit the $2,000 into the child’s tax free HSA.

    Competition to the so-called private employer-based health insurance plans will distroy them. President Obama said the new government-based plan will be portable. Portability alone will kill employer-based plans. It’s about time employer-based plans stopped terminating coverage on employees that are too sick to work 30 hours per week.

    If you are on employer-based insurance get ready to kiss your plan goodbye. The government plan will simply be too much competion. The cataclysmic collapse of an industry is at hand.

  11. RON EDGE says:

    We have 60,000,000 uninsured Americans. Is Mr. Goodman suggesting that this has come about because of Medi-Care or any other Public Insurance plan?

    In the state of Washington, 2006, Mr. Mike McGavick(R) ran against Sen. Maria Cantwell(D). Mr. McGavick had been the “… Chairman, President and CEO of (the) Safeco Corp. from 2001-2005” when he resigned to make his senatorial run in 2006.

    During the campaign he cited his ability to “… make the tough decisions…” and to bring the same success to the State as he had brought to Safeco. He bragged that he had decreased Safeco’s pay-outs from premiums from 89% to 61%.

    Few of the public know that in the 70’s it was ILLEGAL for an Insurer to make ANY PROFIT from insurance premiums: they had to be payed out at the end of the fiscal year or used to lower premiums in the next. They received 300%, l think, tax breaks on funds overpaid.

    Point is, private Insurers are in the business of NOT insuring people against loss: they’re in the business of taking as HIGH a premium as possible and paying out as LITTLE as possible.

    60,000,000. ALL of them avoid doctor offices…. but how many are suffering needlessly, dying needlessly and now, with the USA on the verge of an epidemic / pandemic, spreading disease needlessly because they can’t afford— can’t pay— to see a Physician?

    And you want to eliminate Public Health Care?

    We saw the results of Neo-Con administrations the last 8-years.
    ONLY the top 10% had any growth in their lifestyles and most of THAT was garnered by the top 5%. The rest of us realized a little growth, with the majority, 65%, actually losing ground.

    And now, like MR. Goodman, they want more profit with less risk.

  12. Bob says:

    Greiner is right.

    A rarity is that John Goodman’s article is confusing. It ignores the fact that Medical Advantage is massive CMS subsidies to HMOs. This is giving money to corporate socialism as in, “give us your money and we will take care of you.”

    Politicians (and some of our conservative bretheran think that HMOs are private free enterprise, when they are no more than command and control socialism for the medical microeconomic sector.

    Trying to control inflation created by politically susbidized tax-free insurance using command and control corporations has already failed. Too bad that socialism always fails and can’t be fixed. The Medicare Advantage program is a good example. Massive corporate welfare checks from CMS has not and will not work. The Medicare Advantage program is the paradigm for the administration and congressional “public plan”.

    So time to preach to the choir. The answer is to return power in the medical delivery and insurance market to patients and families. HSA/HDHP insurance-is the way out of our dilemmas, but I fear it is on the congresional chopping block now that the public sector HOA pilot program was successfully killed last February.

  13. larry says:

    A “public option” is the code phrase for socialized health care. It is all about policical power for politicians who ration it out at tax payer expense, promising more, giving less and costing far more in time money and poorer care. When was the last time you got good service or good value from a government run entity. worse than that is the elimination of the competitive elements that give us the best healthcare and delivery system on the planet. At present American health care is the pressure relief valve for the world at least those who can afford to travel away from the dismal systems in their countries. Here is where and why technological advancement takes place (even if it happens in other countries for the American market) because there is still demand here. Nationalization takes that away.

  14. HD Carroll says:

    The fact is that Medicare in its current form and impact on the health care financing system, as it is, operates as an essential fraud – claiming to provide health insurance to the subject populations while somehow controlling health care costs. The resulting cost shifting occurs in an environment where, due to the structure and size of the government (read pusher) revenue supply (read heroin) to the addicts (read providers), the addicts must go get their supplement from the rest of society, as when real life addicts steal in order to get the funds to maintain their fix. This cost shift is a tax without true authorization, legitimization, or representation (at least not responsibility). IF the government programs were paying a “fair” rate of reimbursement to providers (leaving aside the issue of value for different quality of services), then why can’t the rest of society? If they are NOT, then why do we let them get away with it? Why aren’t the providers yelling and screaming? Because they are in a false sense of security from the “high” of their addiction – the steady drip drip drip of the revenue they receive, even though it keeps getting more and more diluted each time the Congress ratchets down payment schedules. And what will happen when a public plan paying a similar price fixing schedule to providers suddenly appears on the scene to enroll most of the rest of the population not already covered by Medicare? It will be too late for the providers to free themselves from their addiction, and there will be nobody left to cost shift to. We need a rational, fair, and transparent provider pricing system NOW for ALL payers, where supply and demand will be allowed to work in the marketplace where it has been distorted, disrupted, and abused out of all recognition by both public and private cost shifting. Medicare can still be a funding mechanism, but only to provide subsidy to recipients who use their subsidy to buy a plan in the private system. That way, the government actuaries won’t be subject to political pressure to force benefits, revenues, and expenditures (provider prices) to balance – the market will do most of that work.

  15. Stan Ingman says:


    Do you think it would not be good to crowd out private insurance? A very committed family practitioner I spoke to last week when asked about national health care reform, said she is not hopeful about the new reform discussion. She said we need to start over. For example, establish limits on specialty medical training, stop pharmacy companies from advertising on TV. Family practice is dying a slow death in USA.

    From my 40 years of comparing national health care delivery systems, the Canadians are far happier with their system than USA citizens, and private insurance companies do not play a significant role in their system. Canada delivers more care to more people per dollar spent than USA does, and rationing of care is far less than in the USA and access to care is much higher than in the USA.

    Corporate America is beginning to understand this and the single payer model may not be too far away. It may be done one State at a time. The decline of GM is one step perhaps toward a single payer system.

  16. Diego Sanchez says:

    Thanks so much for this. Keep ’em comin’ so that I don’t miss a thing.

    Take care and thanks again.

  17. Jay Diamond says:

    Dear John,

    After I completed reading your post, I realized that, inadvertently, you have done a most convincing job of making the case for the public option, which, as you described, will provide far more secure and comprehensive coverage than the private plans.

    You’ve got me convinced.

    I’ve emailed your post to everyone I know, and to various public servants.

  18. […] Greg Mankiw on the public health plan option. Best I've seen other than thoughts penned by yours truly. […]