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.