What Advocates of Public Plans Don’t Know About Public Plans

No one should have to read left wing health care blogs. I wouldn’t wish that on my worst enemy. But if you’ve committed some sinful act for which penance and atonement are in order, it’s one way you can seek redemption. Once there, you will find words like “betrayal,” “sell out,” and “caving into the [health insurance company] death merchants.”….. (What can I say? They don’t mince words.)….. The left is devastated by the realization that Barack Obama is going to toss their cherished “public plan option” under the bus the minute he finds it to his advantage. The realization is devastating.

By public plan, the left envisions a Medicare-type plan for young people. They argue that it will lower costs and put competitive pressure on private insurers to become more efficient.

So here is an exercise for the reader: Comb through everything you’ve ever read on this subject and see if you can come up with even one reason why a public plan would be more efficient than private plans.

I can only think of one. And it has nothing to do with efficiency. A single-payer (or a very, very large payer) could use its monopsony buying power to force providers to accept lower fees, in the same way a monopoly seller can extract higher prices from consumers than they would pay in a competitive market. This is the argument used by Paul Krugman and by the Physicians for Socialized Medicine (or whatever they call themselves these days).

The trouble is, this is not what Medicare does. Although, I suspect most people on the left are completely unaware of it, Medicare is actually operated by private contractors — more often than not by Blue Cross. Is there something Blue Cross does for its Medicare enrollees that is more efficient than what it does for its private sector enrollees? Not that I’m aware of. If anything, it’s the other way around.

Moreover, when Medicare pays 25% to 30% lower fees to providers, that has nothing to do with Blue Cross or any other private contractor. Blue Cross does not negotiate Medicare fees with doctors. These fees are set by the federal government. Blue Cross just pays whatever fees the law requires.

Now, I do not favor government setting doctor fees. But as a matter of logic, the government could set fees for every insurer, not just Medicare. And since most private insurers pay the same way Medicare pays, this would be administratively easy.

So let’s recap:

  1. There is nothing a public plan can do that a private plan cannot do as well or better, especially when the public plan is administered by the private plans.
  2. The lower fees paid by Medicare have nothing to do with the way it is administered or anything to do with “efficiency.”
  3. The lower fees also have nothing to do with bargaining or monopsony power.
  4. Lower fees could be set by the government for private payers along with public payers.
  5. This would be a bad idea and it would have bad consequences but it is completely independent of the idea of a public plan.

Comments (18)

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  1. Nancy says:

    Very good. Well reasoned. A ray of sanity in an otherwise very irrational national health care debate.

  2. Neil H. says:

    Good post.

  3. miles zaremski says:


    PLEASE explain the following: would you agree that if there are more regulations on the insurance industry by way of no pre-existing condition precluding coverage; no rescission absent fraud once care has been rendered; no cap on coverage and limits on out-of-pocket expenses, the industry will have more exposures? The more exposures, the higher the risks, the more payouts in claims, irhgt? If there are more payouts, that means less revenues; less revenues, the less that goes to the bottom lone, right? Now, with all this having been said, how, then would you think that the insurance industry is going to get more revenues??? Well, how about, gulp, raising charged to employers, employees and consumers. Which, then , gets back to why there must be a stiff and strong mechanism (public option?) to compete with insurance companies. Please, please, explain all this to me, and the rest of your readers?

  4. Steve Austin says:

    Comment to Miles:
    I was with you all the way to the point where you jumped from higher claims = less revenues The two are independent of each other, although you are right, more revenues would be needed to offset the higher claims. All this to say it’s hard to believe our President is oblivious to these realities. He is an intelligent man with some very scurrilous advisors who surely know that just saying private plans can exist does not meant that they will be able to or even choose to try. In the end, OB1 will get his long-awaited public option by default as all the private insurers will be left with mandates their premiums won’t allow them to support. I’m sure he knows that but doesn’t dare let on.

  5. HD Carroll says:

    Note the relative success of Maryland’s “all payer” hospital charge structure. This is to a large extent a beta test for what should exist throughout the country. All payers, INCLUDING Medicare and Medicaid pay the same hospital rates for the same services at the same hospital. The result? A set of “bill masters” that reflect the reality of cost plus a reasonable operating margin, not the usual situation where billed charges are 300-400% of “cost,” and “net received” revenues are all over the map depending on whether the payer is a government plan or private plan, and how much “clout” the private plan has. Oh, by the way, those Maryland rates paid by Medicare and Medicaid are, of course, materially MORE than what standard Medicare and Medicaid payments would be. Why did the feds agree to the waiver? Because they turn the cost curve on average cost increases in the hospital sector. Why? Because of the order and consistency that exists in such an all payer system (whether you allow the providers to set their own rates or have them set by a commission). It shows that the mess our current system is in was essentially created BY Medicare’s fraudulent price fixing for political purposes. Carriers are right to fear the unfair and illegitimate advantages a “public option” would have in the provider price setting and forced conscription power. However, I contend it is the pro-government/single payer people who are afraid to have the government compete in a FAIR provider charge environment, because once the pricing metric is established fairly and consistently, the relative values of all the other aspects of different systems will be there for everyone to measure and see for themselves.

  6. R Allan Jensen says:

    Re:: Steve Austin’s Reply to Miles.

    Let’s all just keep in mind that intelligence has little to do with this reform debate. The far left of the Democratic party simply doesn’t care if they are helping anyone or what they propose makes any sense. They want nothing less than to create a dependent voter class (think “electoral clients”) that will keep them in power forever.

    Proof:: if they had any concern for doing the “right” thing, reading any one of John’s blogs would set them straight. As our lobbyist said yesterday in a presentation, this is about being “fair” (as they see it) and not about the “math.”

    And, I am cynical enough to believe that your last comment about damaging the private market to create a de facto default to the public option is exactly what the left has been doing incrementally for decades through mandates and regulations on private insurance. Think about everything from EMTALA and Stark to an incredible array of mandates in states like NY and NJ.

  7. Ralph Weber says:

    Let me ask 2 questions:

    1) If HR 3200 has a provision for the mandatory provision of end of life counseling, and some people call this a “death panel”, and this is labeled as unacceptable, and lies, and scare tactics. Meanwhile private insurance, which has no such mandates is allowed to be labeled as “death merchants”. Why is that more acceptable?

    2) Since according to CMS and the US census bureau Medicare costs $522 per enrollee in administrative costs, while private insurance costs $468 where will the savings come from? It seems to me that if you move 200 million Americans into a plan which costs $54 more in admin costs, not to mention the other non medical costs of medicare, that it will cost a whole lot more.

  8. Mo says:

    Medicare works the same way as a single-payer option. Price-fixing on behalf of a small portion of the population raises costs for everyone else.

  9. Don Levit says:

    I wonder how many providers would be willing to accept Medicare-type reimbursements, if there are no private insurers to pick up the slack?
    The left seems to enjoy bashing the mean for-profit insurers, as if they are the only entity involved in the for-profit system.
    Even not-for-profit organizations are allowed to pay reasonable compensation to employees, vendors, etc.
    What is reasonable compensation?
    Well, for employees, that would be enough to have a little discretionary income to have a bit of fun.
    So, how are all the savings going to materialize if everyone wants (and needs) a little profit?
    Don Levit

  10. Chris Ewin, MD says:

    Remember that many physicians have small businesses.
    The source of the reimbursement doesn’t matter if the revenues continue to decrease. If expenses rise, they choose to close their practices early or change professions.

  11. Bart Ingles says:

    …Yet some continue to insist that the public option is mandatory. But why? I can see where some liberal members of Congress would demand it purely as a matter of face– they’ve been promising it too long to back down. And I’ve given up looking for reasons behind what comes out of Pelosi’s mouth. But what’s Krugman’s real motive, if not as a lead-in to single-payer?

  12. R Allan Jensen says:


    Don Levit Says:
    September 16th, 2009 at 1:32 pm

    I wonder how many providers would be willing to accept Medicare-type reimbursements, if there are no private insurers to pick up the slack?


    Don wins today’s gold star. A lot of docs have been realizing this and their STATE associations have been butting heads with the AMA because of this.

    The sight of the AMA selling the farm over Medicare and Medicaid reimbursements while they blithely ignore the impact of the disappearance of their cost-shifting fall guys (private insurance) is comic in the Greek tragedy sense.

  13. Richard says:

    Of course the public option and the 8% penalty tax for businesses that did not cover their employees was the means of migrating more people into the public option. It is not really an option. It is the proxy for single payer. The net efffect of an expanded Medicare system is to make public utilities out of the commercial insurers. The real point of the fight is that the administration attempted to run a 500 billion haircut to Medicare and they expected the AARP would keep the seniors in line. In return AARP would get to sell more MEdicare Supllement insurance as more seniors would be pushed back from Medicare Part C into the regular Medicare indemnity system. When did our President become a the Prime Minister of the Democrat-Labor party? When did he lose control of the legislative process? Why does he feel he needs to comment on Kanye West’s conduct? If he can’t deal with Fox News, why should we feel confident he can deal with the Iranians?

  14. Roy Patterson says:

    The first thing we need to do, to reform health care, is to get the lawyers out of health care. Fear of Malprectice lawsuits has forced doctors to run un-necessary tests, x-rays,and MRI’s, just to protect themselves from lawsuits.
    The first thing Congress need to is to pass Malpractice reforms. Limit health care lawsuits to $250,000 per case, like in California. Doctors, then can practice medicine instead of law.

  15. Jennie Fiedler says:

    The problem with private insurers is they keep too much for themselves. I do not like that almost a quarter of every premium dollar I pay goes into their pocket, when a decade ago they only got to keep about 2%. My parents never had huge medical bills, because they had insurance. My costs go up by the hundres and sometimes into the thousands of dollars every year. Coverage decreases, while premiums and out of pocket expenses increase. I think its corporate and investor greed, not sick people that drive costs up and this whole mess could be cleaned up by either going single payer and forcing health insurance companies out of business, or reenacting consumer protection laws that force insurance companies to service their customers first, themselves second. Either way would work for me, I’m just sick of seeing so much of my already modest yearly income going towards private jets, bonuses, exhorbitant executive salaries and huge Wall Steet payouts instead of paying my health claims.

  16. Richard Styvaert says:

    A comment to Jennie Fielder: Morningstar an investment evaluation service ranks the health care industry 87th in profitability with a average profit margin of about 3.5%. How you make the Grand Canyon leap to 25% or a quater of every premium dollar needs to be explained before you assert it again.

    But of course, in his last talk to a joint session of Congress on HealthCare Reform— Obama railed on the monopoly power of one health care provider in Alabama, who he asserted had over 90% of the health care business. Factually that was latter shown to be only 75% percent, and the particular health insurer had high ratings from the premium payers according to a state agency in Alabama who conducted the survey. Obama’s fast and loose concern for the truth did not stop there. State authorities in Alabama and others pointed out that the profit margins in the latest reporting years in Alabama–for the so called monopoly health provider [see Obama’s own words] was 6/10th of one percent. Obama needs more people like you making the [false] case for his version of health care reform to insure its failure.

    But the biggest farce is the demand by Obama for “waiver of pre-existing conditions”. Wouldn’t it be nice if we could present ourselves to our auto or fire insurance carrier with either a completely destroyed auto or the smoking remains of our completely destroyed home and demand an application form to apply for insurance and a reimbursement check on the grounds that Obama is president, so you must accept our request to process a casualty loss claim despite the previously existing condition of either our wiped out auto or the smoking remains of our home. Socialist Utopia here we come!

  17. Don Levit says:

    Excellent points.
    I believe it is a bit simplistic to blame insurance companies to a great extent for premium increases.
    Much of the literature I have read suggests that premiums have increasesd fairly commensurate with the costs and utilization of care.

    We must first look at ourselves when assessing blame.
    Unfortunately, the mirror is uaually the last place we look when peering inside the human heart, which can be a bit tricky.

    There is one huge fundamental flaw in the way health insurance premiums are priced: they pay for only the current year’s expenses.
    Pay-as-you-go is not the way for paying for liabilities that increase with age.
    It doesn’t work for term life insurance, and works even less efficiently for medical insurance.
    Don Levit

  18. Justine says:

    You don’t seem to understand the bill, dear. No one is ofrfieng socialized medicine. The government doesn’t control hospitals or pricing. Pricing is controlled by the hospital administrators and HMO’s. You should really read the bill instead of freaking out about issues not included or suggested.