The "Public Option" For Health Reform Is No Option

Health insurance reform is in the Washington air these days. President Barack Obama gave a big speech in Wisconsin last week (which I plan to critique in short order), where he reiterated his belief and faith in a so-called "public-plan option." In the speech, he reassured the audience that, if one is happy with his current plan, he will be able to keep it.

He forgot to add, "...for now."

It is important to note that the phrases "health reform" and "healthcare reform" are conflated often, but they are not even what is being debated these days. What is being debated is health insurance reform. "Health reform" refers to modifying the physical well-being of an individual, and "healthcare reform" refers to the provision of medical and surgical services by hospitals, physicians, and other providers of healthcare. "Health insurance reform" is the financing of "health" and "healthcare." Of course, hearing the phrase "health insurance reform" is sufficient to cause one to be able to nod off on the middle of a rollercoaster, so it is not used.

In this post, I want to discuss the inherent problems -- from a liberty and economic standpoint -- with a "public-plan option." The public-plan option essentially means that, in addition to private-sector companies offering health insurance, the government will also offer a health-insurance "option" -- the purpose of which, it is touted, is that it will fill in the cracks where commercially-provided health-insurance plans fail to provide an option for certain people. (Typically, this means that commercially-available plans are too expensive for some people to afford.)

There are reams of information available discussing the problems with the government involving itself in health insurance, so I just want to highlight and briefly discuss the main reasons why I believe the public-payer option could, literally, ruin the level of quality, access, and cost of healthcare. (Not just health insurance, mind you, but healthcare.)

As with all things economic -- and government promises, for that matter -- it is important to think through how the various incentives will ripple through the system, and what impact they will ultimately have. Politicians love to promise programs that have short-term benefits, but long-term, crippling costs -- most politicians have zero economic or business education, so they are clueless about the long-term results of their legislation. They also know they will be out of office by the time the short-term benefits have withered away, so they do not have to pay the consequences of their decisions. In other words, they get to enjoy the one-night stand, but are never subjected to the walk of shame.

Government Has Intrinsic, Nonmarket Advantages

Once government enters a market, it becomes the 800-pound gorilla that cannot be moved. It's advantage is so overwhelming that it makes the 19th-century oil trusts seem like mom-and-pop shops. This intrinsic advantage manifests itself in multiple ways.

Government as price maker. A fundamental tenet of economics is that market players are either "price takers" -- in which case the normal process of supply and demand will ensure the market provides good and services consumers want at an acceptable price -- or "price makers" -- in which case the market player (or players) are so dominant that they can dictate the price, because there is insufficient competition, or insufficiently-powerful competition.

This has already happened with Medicare and Medicaid (government health-insurance programs for the aged and disabled, and the poor, respectively). Almost all companies that offer health insurance base their pricing for services and supplies on what is called the Medicare "fee schedule." The government reimburses hospitals and physicians for Medicaid patients at such a low rate that most physicians limit the number of Medicaid patients they accept -- or simply don't accept any Medicaid patients at all.

The rates Medicare pays physicians and hospitals are below market, so that many physicians and hospitals must make up the difference by charging private insurers and cash-pay patients higher amounts. This, in turn, has driven up costs to employers, the insured, and the uninsured. Additionally, physicians cannot afford to see many patients with Medicaid, so those very patients have limited options.

So, the government setting below-market payment amounts for every Medicare and Medicaid patient has had a cascade effect of driving up costs, especially for the uninsured, who can least afford high healthcare costs.

With the government entering the "traditional" healthcare-insurance market (i.e., non-Medicare, non-Medicaid patients), it will then become a price-maker for the rest of the insured (and uninsured) market, with the subsequent effect of driving up costs for private health-insurance companies. Those companies will be forced to set their prices at close-to-government rates (i.e., below-market rates) ... but will have the increased costs due to physicians and hospitals trying to make up their losses elsewhere. The combination of below-market payment, and increased costs, will force many health-insurance companies to begin operating at losses, and then to close their business.

Of course, the government -- as a purchaser of health insurance -- will insist that it "provide value" and "be prudent" with taxpayer funds -- thus justifying its strangling price demands.

Therefore, the short-term benefit ("affordable" health insurance provided by the government to fill in the gaps where commercial insurance plans do not offer plans) inevitably withers away because commercial insurance plans are driven out of business as they try to match government pricing, leaving the long-term cost -- only the government will remain standing in the health-insurance market.

Another consequence is that many people considering medical school will be driven away by the combination of a low salary (due to low payments by the government and insurance plans) and enormous school loans.

Government has unfair financial advantages. A government health insurance program has enormous, market-corrupting inherent advantages over a private-sector health-insurance company:

• Whereas a company must pay payroll, property, and countless other taxes ... the government can always raise taxes or deficit spend to offset any revenue shortfalls.
• Whereas a company must pay rent or lease costs ... the government can place headquarters on government-owned property, thus eliminating those expenses. Even if a company owns the land and building on which it operates, it must still pay property tax. The government is not a taxpayer -- it is a tax-consumer.

These factors are never considered or mentioned when advocates tout that Medicare has lower operating costs than private health-insurance companies. Of course they do -- the have a completely different, cheaper, taxpayer-subsidized cost structure compared to companies that must operate under tight fiscal discipline.

These financial advantages for the government can have the same ultimate effect as its role as price-maker -- private-sector companies cannot hope to compete with the government when the rules are being set by the government. As a result, they will be driven out of business.

Loss of Economic Liberty Thus Results

It is axiomatic that, once the government inserts itself into a market, politics ALWAYS trumps policy. Politicians, always on the prowl for solidifying their power base and ensuring re-election, will exploit the government's role in health insurance to reward constituents and interest groups ... without regard to the impact on sound healthcare policy.

Thus mandates enter the equation. "Mandates" are government decrees by which that the private business sector must abide, or else pay large fines or get out of that business line. Federal and state governments are famous for introducing mandates into health insurance, such as all health plans must provide coverage for alcohol rehabilitation programs or for alternative treatments such as acupuncture.

At first glance, it makes sense -- don't all leftist, statist policies start out this way? -- after all, shouldn't alcohol rehabilitation or acupuncture be available? However, what is unseen is that such mandates drive up the cost of health insurance, and many people would just as soon not include those types of coverage, in favor of reduced premiums.

However, keep in mind that every wrinkle of the tax code, and every perturbation of government rules and regulations, was created by a politician. And most politicians did not introduce these "enhancements" (i.e., mandates) without them also satisfying important constituents, or donors (i.e., special interests).

Therefore, be prepared that, when the "public-option plan" is rolled out, politicians will be unable to stop themselves from "enhancing" and "extending" the insurance program ... all in the name of insured Americans, of course. (Never mind that said insured Americans will have no say in whether or not such "enhancements" are even needed for their particular situation.)

And, of course, the mandates will add costs to everyone's health insurance -- it is unavoidable. For someone who is barely able to afford health insurance for himself (or his family), a premium hike might be the tipping point at which he will have to apply for federal assistance via enrolling in the public option. And a private-sector health insurance company loses another customer through no actions of its own. Multiply this scenario a hundred thousand, a million, or ten million times, and one sees how health insurance firms will be forced out of business. (Thus forcing potentially millions of Americans to the taxpayer-funded public option.)

As choice goes, so goes liberty. As the private sector goes, so goes liberty.

Next up is a critique of Obama's speeches to Wisconsin and the American Medical Association touting his health-insurance plan ... speeches where he plays fast and loose with the facts.