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President Obama and other leading Demo-crats have proposed creating a new governmenthealth insurance program as an option for Americans under the age of 65, within the contextof a new, federally regulated market—typically described as a “National Health InsuranceExchange.” Supporters claim that a new govern-ment program could deliver higher-quality health care at a lower cost than private insurance,and that competition from a government pro-gram would force private insurers to improve. A full accounting shows that governmentprograms cost more and deliver lower-quality care than private insurance. The central problemwith proposals to create a new government pro-gram, however, is not that government is lessefficient than private insurers, but that govern-ment can hide its inefficiencies and draw con-sumers away from private insurance, despiteoffering an inferior product. A health insurance “exchange,” where con-sumers choose between private health plans withartificially high premiums and a government pro-gram with artificially low premiums, would notincrease competition. Instead, it would reducecompetition by driving lower-cost private healthplans out of business. President Obama’s vision of a health insurance exchange is not a market, but a prelude to a government takeover of the healthcare sector. In the process, millions of Americanswould be ousted from their existing health plans.If Congress wants to make health care moreefficient and increase competition in healthinsurance markets, there are far better options.Congress should reject proposals to create a new government health insurance program—notfor the sake of private insurers, who would besubject to unfair competition, but for the sake of American patients, who would be subject tounnecessary morbidity and mortality.
Fannie Med?
Why a “Public Option” Is Hazardous to Your Health
by Michael F. Cannon
_____________________________________________________________________________________________________
Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of
Healthy Competition: What’s Holding Back Health Care and How to Free It.
Executive Summary
No. 642August 6, 2009
Introduction
President Obama,
1
Senate Finance Commit-tee chairman Max Baucus (D-MT),
2
and otherleading Democrats have proposed creating a new government health insurance program as an“option” for Americans under the age of 65. Thisprogram would operate within the context of a new, federally regulated market—typically described as a “National Health InsuranceExchange.” House Speaker Nancy Pelosi (D-CA)
3
and four House caucuses representing more than100 Democrats
4
have stated that a new govern-ment health insurance program modeled onMedicare is the sine qua non of health carereform. Sixteen Democratic senators have signeda letter signaling their support.
5
Senate Health,Education, Labor, and Pensions Committeechairman Edward M. Kennedy (D-MA) has pro-posed legislation that would create such a pro-gram,
6
as have three key House committees.
7
Others have suggested that Congressshould adopt a different model. Senate BudgetCommittee chairman Kent Conrad (D-ND)and Sen. Charles Schumer (D-NY) have pro-posed that Congress create one or more health-insurance “cooperatives,” although eachendorses different structures and different lev-els of government support. Cooperatives aremember-run health plans that already exist inmany areas of the country; for instance, GroupHealth Cooperative already covers 580,000 Americans in the states of Washington andIdaho.
8
Schumer proposes that Congressspend $10 billion to create a single nationwidecooperative, which would be governed by a fed-eral board and endowed with the power to useMedicare-like price controls.
9
Conrad proposesmultiple cooperatives
10
with start-up subsidiesin the neighborhood of $4 billion.
11
Advocates of a new government healthinsurance program claim that governmentprovides coverage more efficiently than the pri- vate sector. University of California–Berkeley political scientist Jacob Hacker writes:The public Medicare plan’s adminis-trative overhead costs (in the range of 3percent) are well below the overheadcosts of large companies that are self-insured (5 to 10 percent of premiums),companies in the small group market(25 to 27 percent of premiums), andindividual insurance (40 percent of premiums).
12
Supporters claim they are willing to put gov-ernment to the test by having it competeagainst private plans in the context of a new government-run “exchange.” President Obama claims that a new government program “givesconsumers more choices, and it helps keep theprivate sector honest, because there’s somecompetition out there.”
13
The House Demo-crats’ legislation would create a “public healthinsurance option” that would be “self-sustain-ing and compet[e] on [a] ‘level field’ with pri- vate insurers.”
14
Columnist E. J. Dionne writes,“The public-option idea . . . would allow theUnited States to move gradually toward a gov-ernment-run system if—
and only if
—a substan-tial number of consumers freely chose to joinsuch a plan. The market would test the idea’sstrength.”
15
A full accounting, however, shows thatgovernment programs are less efficient thanprivate insurance. Administrative costs arehigher in government programs such asMedicare, because they avoid administrativeactivities that increase efficiency and incurother administrative costs that are purely wasteful. Government programs also sup-press innovation, and thereby reduce thequality of care for all patients, whether pub-licly or privately insured.The central problem with proposals to cre-ate a new government program is not thatgovernment is less efficient than private insur-ers, however, but that government can hide itsinefficiencies and draw consumers away fromprivate insurance, despite offering an inferiorproduct. If the government plan’s premiumsreflected its full costs—and private insurancepremiums reflected only their actual costs—there would be no reason not to let the gov-ernment enter the market. As Dionne sug-gests, the market would test the idea’s
2
The centralproblem withproposals tocreate a new governmentprogram is thatgovernment canhide itsinefficiencies anddraw consumersaway from privateinsurance, despiteoffering aninferior product.
strength. Yet government possesses both thepower to hide its true costs (which keeps itspremiums artificially low) and to impose costson its competitors (which unnecessarily push-es private insurance premiums higher). Itmakes no difference whether a new programadopts a “co-operative” model or any other.The government possesses so many tools forsubsidizing its own program and increasingcosts for private insurers—and has such a longhistory of subsidizing and protecting favoredenterprises—that unfair advantages areinevitable. This is in no small part becausesupporters of a new government program
want
it to have unfair advantages.
Literally Ousting Patients from TheirHealth Plans
In a speech to the American Medical Association, President Obama reiterated a promise that he has made repeatedly since the2008 presidential campaign:No matter how we reform health care,we will keep this promise to the American people. If you like your doc-tor, you will be able to keep your doc-tor, period. If you like your health careplan, you’ll be able to keep your healthcare plan, period. No one will take itaway, no matter what.
16
After the Congressional Budget Office estimatedthat as many as 15 million Americans could losetheir existing coverage under Senator Kennedy’slegislation,
17
the Associated Press reported,“White House officials suggest the president’srhetoric shouldn’t be taken literally.”
18
Indeed, a new government program wouldliterally oust millions of Americans from theircurrent health plans and threaten their rela-tionships with their doctors, as employerschoose to drop their current employee healthplans and as private health plans close down. ALewin Group analysis estimated that Obama’scampaign proposal would move 32 million Americans into a new government-run plan.
19
Lewin subsequently estimated that if Congressused Medicare’s price controls and opened thenew program to everyone, it could pull 120 mil-lion Americans out of private insurance—morethan half of the private market.
20
The share of Americans who depend on government fortheir health care would rise from just over one-quarter to two-thirds.
21
Many of those millionswould be involuntarily ousted from their cur-rent health plans—much like President Obama suggested ousting 10 million seniors
22
fromtheir private Medicare Advantage plans andforcing them into the traditional Medicare pro-gram.
23
Yet even those who voluntarily chose a new government program over their existingcoverage would do so not because the govern-ment program provides better value for themoney, but because the government programwould hide some of its cost. A health insurance “exchange,” where con-sumers choose between private health planswith artificially high premiums and a govern-ment program with artificially low premiums,would not increase competition. Instead, itwould reduce competition by driving lower-cost private health plans out of business.President Obama’s vision of a health insuranceexchange is not a market, but a prelude to a government takeover of the health care sector.In the process, millions of Americans would beousted from their existing health plans, and allwould suffer the consequences of government-run health care.
Is GovernmentMore Efficient?
Supporters of a new government programnote that private insurers spend resources on a wide range of administrative costs that govern-ment programs do not. These include market-ing, underwriting, reviewing claims for legiti-macy, and profits. The fact that governmentavoids these expenditures, however, does notnecessarily make it more efficient. Many of theadministrative activities that private insurersundertake serve to
increase
the insurers’ effi-ciency. Avoiding those activities would there-fore make a health plan less efficient. Existinggovernment health programs also incur
3
PresidentObama’s visionof a healthinsuranceexchange is not amarket, but aprelude to agovernmenttakeover of thehealth caresector.
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