Robert Reich on Public Option
President Obama and Secretary Kathleen Sebelius, whose biographies indicate zero experience in the private, wealth-producing sector of society, believe that they can launch a new "public" health plan to "compete" against the private sector. They claim that this will keep private insurers "honest." It's an interesting position for a President who also claims that he is not interested in running a car company. Imagine if he proposed a new Government Motors, in order to keep Toyota and Honda honest! What's so unique about health insurance, that it needs government "competition," an idea repellent in other areas of American life?
Robert Reich, Bill Clinton's Labor Secretary, has the answer in today's Wall Street Journal. According to Mr. Reich, a "public option" (actually a swamp of new government bureaucracies, ready from "day one" for perpetual taxpayer bailouts), would "squeeze" the profits of private health providers. It is dead easy for government to "squeeze" profits. But that is not a valid goal of health reform. A valid goal is to squeeze the profits of providers who fail to satisfy patients' needs, and allow those who do to earn increased profits. Patients are capable of doing this, but government is not.
Mr. Reich claims that the government would have economies of scale larger than private insurers. No doubt it does, but it also has massive diseconomies of scale that far outstrip its advantages. That's why we would never let the government set up a "public option" for groceries, housing, or clothing: We all know that it would fail to provide quality or choice. However, its failure would not lead to extinction but perpetual taxpayer bailouts.
Mr. Reich repeats the fallacy that Medicare's administrative costs are lower than private plans. This argument refuses to die despite the fact that it is preposterous: In a 2007 study, Benjamin Zycher of the Manhattan Institute showed that the oft-cited 3 percent figure refers only to administrative costs reported directly in the Medicare budget. Including federal administrative functions performed by other agencies, raises the figure to 6 percent. Zycher also includes the hidden economic costs of the federal tax system, which raises the administrative cost of Medicare to a minimum of 25 percent of Medicare outlays. That is about double the 11 percent to 14 percent administrative cost of private health insurance.
Linda Gorman points out that if the government really wanted to allow the private sector to compete with government bureaucracies, they'd allow beneficiaries of Medicaid, Medicare, SCHIP, and other government programs to take those dollars as vouchers and spend them as they saw fit.
Nevertheless, Mr. Reich has a point: Americans lack true choice of health insurance. Senator Charles Schumer believes that "one or two private insurers have a stranglehold on the entire market." Actually, it's worse than that: In the employer-based system, most workers have no choice of plans. If we reformed the tax code to give families who purchase their own insurance the same tax relief as employees, they'd have a lot more options.
Thanks for clearing up the Medicare administrative cost fallacy. This nonsense keeps getting repeated over and over — so it needs to be killed many times.
These guys are complete hypocrits.
Robert Book at Heritage makes another interesting point about Medicare administrative costs. They are usually reported as a percentage of total claims paid, even though admin costs depend mostly on the number of claimants and not on the size of the claims.
Since Medicare recipients are either elderly or have end stage renal disease, their claims are much higher than in the general population. Thus the total of claims paid is not a valid denominator for comparison.
Simply reporting administrative costs on a per-capita basis shows Medicare to be more expensive even without the other corrections you mention.
“Simply reporting administrative costs on a per-capita basis shows Medicare to be more expensive even without the other corrections you mention.”
Piggy backing on that, insurance companies (and non-insurance options like health care sharing ministries) also have cost of acquisition for new customers/members. Medicare’s cost of acquiring a new beneficiary is nearly zero. They come to you, no advertising necessary. The public option would be similar in that stat.
Just as Mr. Obama appreciates the benefits of competition in health care with a ‘public option’, he should surely appreciate the benefits of competition in K-12 education with a’ private option’. Say, vouchers.
These two industries are related (besides being the two most costly sectors of our economy) Both private health care and public education are “3-party” systems that interfere with the normal relationship that exists in all standard 2-party transactions. Direct accountability between the buyer and seller is lost with such 3-party systems. In govspeak, buyers and sellers are called consumers and providers. The third party go-between is called the “payer.” Either the government (taxpayers) or employer-paid insurance becomes the middle-man. Introducing a third party clears the way for special interests to 1) pressure/bribe/corrupt politicians to maintain their protected status and, 2) line their pockets with excess profits.
If Obama sincerely desires ‘bipartisan hope and change (hold on, let’s give him the benefit of the doubt here), it is high time to insist that any public option in private health care be irrevocably tied to a private option in public education.
The focus should be on eliminating 3-party systems.
another example, “Cap & Trade” is about introducing a 3rd party system into the energy sector. Imagine the potential for corruption and higher costs that will bring.
“Bart”, I quite agree. I think this is also a good rebuke to those who believe that consumer-directed health care will not reduce administrative costs of health insurance.
They argue that because the sickest 1% of people account for 50% of all costs, while (at the other end of the distribution) one half of the population have trivial annual health costs, we cannot really save money by allowing patients to spend their own money directly for non-catastrophic costs.
While the spending on actual medical and hospital services is very skewed, the spending on insurance-administration is surely much less so, indicating significant administrative savings from consumer-directed health care.
Thanks, John.
Back to the public option, obviously this would not create a functioning market. If anything, it would preclude one from ever existing.
The fact that insurance markets are dysfunctional is primarily the fault of the federal government, not of the insurance companies. Government’s role should be to facilitate markets by setting up rules to promote transparency and discourage cheating. Instead we have a system where market participants need to chisel to survive, and nobody has any idea of what anything actually costs, how risks are determined and adjusted, or how well the companies actually perform. And on top of this we have the tax code.
It’s not reasonable to blame insurance companies for these problems, or to expect them to take actions that would put them at a competitive disadvantage. Instead, federal government should focus on doing its job, namely creating the business and regulatory environment that would allow for an efficient market. Then they wouldn’t have to worry so much about costs– that should ultimately be the consumers’ job. And insurers could do their job without being undercut by unscrupulous competitors.
National health insurance company– what next? Are they going to start building cars and running banks?
Hey John,
I’m a “wealth producer” too. I run a small business. Tell me how your wonderful HSA can work for me.
I’m 55, I have a pre-existing condition and I’m not rich. Explain to me the following:
1) Where can I “buy” an HSA?
2) What will it cover and what would it cost a person like me?
3) Why are you against Freedom Of Choice when it comes to health care?
I await your answers, John…