Thursday, June 25, 2009

A public option with private alternatives?

Here's a recent quote from President Obama on offering a public health care option:

OBAMA: Why would it drive private insurance out of business? If private insurers say that the marketplace provides the best quality health care; if they tell us that they’re offering a good deal, then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical.
I found this quote via Paul Krugman's blog where he cites Matthew Yglesias as catching "President Obama making sense on the public option." That quote made me wonder: How exactly is Obama "making sense"?

As Obama concedes in the next paragraph in the transcript, there are "some legitimate concerns on the part of private insurers that if any public plan is simply being subsidized by taxpayers endlessly that over time they can’t compete with the government." In other words, a public option is capable of driving the private alternatives under. Moreover, this possibility seems logical and Obama calls it "legitimate."

But, didn't he just call private insurers' position illogical? I have to disagree with Krugman. Obama's statement, "that's not logical" makes no sense at all.

Private insurance companies reasonably distrust a government competitor for two related reasons.

First, a public option will attract business away from private companies. How? Offer high benefit insurance plans at a low price. Lower prices and better insurance benefits are politically attractive; they might even get more funding and a clever name for the program. Such attractive policies lure more customers to the public option. Now, that's fewer people who buy private insurance. Logically, private insurance companies can't like that.

Second, a public insurance option will create new bureaucracy. Bureaucracies tend to expand, sapping taxpayer resources. Supposedly, we need a public option to discipline private insurance companies. I wonder who is going to discipline the government insurance company. If you say the regulator, I ask who disciplines the regulator? If you say Congress, I ask who disciplines Congress? If you say voters, there's a collective action problem: voters might all be dissatisfied, but it's hard to coordinate collective dissatisfaction.

A competitor who cannot be disciplined is surely a threat, right? My point is that there are plenty of reasons to fear a government competitor, and they don't have to be "Oh no. The government is going to make me better." That's the last thought I'd expect insurance companies to have.

More generally, government companies have incentive problems. Votes are the motive of politicians who fund a program; jobs are the motive for bureaucrats. From the perspective of anyone with control over a public insurance company (politicians or bureaucrats), more money to spend is a good thing. These incentives won't be fixed by a "healthy debate" because they are tangled up in the nature of bureaucracies. Expanding your domain is a perfectly natural temptation for a bureaucrat. No wonder private insurance companies see a public competitor as a threat.

To be fair, our current system for health care provision is a train wreck. Even Milton Friedman recognized this eight years ago. The Friedman article is a fascinating read on health care costs (Greg Mankiw linked from his blog). If you care to know more, read the Friedman article. Then, ask yourself: If our current "private" health care provision is a train wreck, what would adding a public option do to the mess we have on our hands? If your answer is "clean it up," I'm interested in hearing how you plan to keep the bureaucrats in check.


  1. "Offer high benefit insurance plans at a low price. " Isn't this the definition of good health insurance. IF (and yes it is a big if) the govt. plan di work in this manor, wouldn't that be a good thing. If the private insurance carriers are place out of business due to this fact I see no issue. People want better coverage. Also, it seems overwhelmingly like the major arguments against govt. based health insurance are speculative. There are many assumptions and "tend to be"s. I would argue that we could do this with any idea no matter what political party suggests it. Man the idea that this is a political issue is sad...right?

    Side-note: Sir, you have found yourself a subscribed reader. I plan to respond often. Maybe I should start a blog called "Thatyoungeconomist" responding to nothing but your posts. We would agree sometimes, disagree others... Ha, I like it!

    C. Schreiner

  2. Casey,

    Thanks for the comment. I look forward to more.

    High benefit/low price health insurance would be a *great* deal for individuals if the only price paid was the premiums.

    If the total cost of a government plan is really less (including taxpayer cost), then I have no problem switching to a public plan.

    On the other hand, my worry is that we'll start off by saying "this program will be self funded." If/when it doesn't work, the government will feel compelled to step in to make the benefits better or the prices to individuals lower.

    It's true that I'm relying mostly on instinct, but I just distrust government solutions. But, I think we have good reason to distrust government solutions.

    Remember Fannie Mae and Freddie Mac? That was a government solution for housing being too expensive. They ended up costing a lot. I'll write more on this. I have a couple of posts in the queue.


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