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In the Nation's Interest

Health Care: Thinking Through A Public Option

CED's Senior Vice President and Director of Research Joe Minarik discusses the President's remarks on a public plan:

Now, the public plan I think is [an] important tool to discipline insurance companies. What we've said is, under our proposal, let's have a system the same way that federal employees do, same way that members of Congress do, where -- we call it an "exchange," or you can call it a "marketplace" -- where essentially you've got a whole bunch of different plans... here's a public option that's not profit-driven, that can keep down administrative costs and that provides you good, quality care for a reasonable price -- as one of the options for you to choose, I think that makes sense...

Why would it drive private insurers 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.

Now, I think that there's going to be some healthy debates in Congress about the shape that this takes. I think there can be 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 just printing money.

So there are going to be some I think legitimate debates to be had about how this private plan takes shape. But just conceptually, the notion that all these insurance companies who say they're giving consumers the best possible deal, that they can't compete against a public plan as one option, with consumers making the decision what's the best deal. That defies logic, which is why I think you've seen in the polling data overwhelming support for a public plan...

President Barack Obama
Press Conference
June 23, 2009

A public insurance plan as an option under a new health-care system is proving to be a major point of controversy. With all respect to the President, his remarks on the subject at his June 23 press conference do not reflect several important issues.

The first key point is the potential counter-productive role of government in supporting a public business enterprise in competition with private firms.

The President rightly cites the danger that the federal government would subsidize its own health insurance company to give it an unfair advantage against others. The President surely is correct that the Congress would not pass, and he would not sign, a law that explicitly authorized continuing subsidies for a public insurance company. The public would not accept that. However, this issue is really much more subtle.

There would be ill effects from the prospect of an emergency public subsidy, even if there were no pre-authorized public subsidy in law. What would happen if a new public plan underpriced its policies in its early years, and then found itself short of cash? Estimates touted by public-plan advocates indicate that a public insurance option quickly would cover well over 100 million lives. Would the Congress and the President stand back and allow the public plan to go out of business, given the resulting pain and disruption? Likely not.
This contingency is important, because virtually everyone (except single-payer advocates) agrees that the health-insurance market needs the maximum possible competition, to hold prices down and stimulate innovation. Prospective private investors in the health-care market must consider not only what a new health-care law says, but also how the government might react to contingencies. Would private investors who thought that they had better ideas in health care put their money at risk if they believed that a government insurance enterprise might undercut them in price, thereby taking a larger share of the market, and then successfully turn to the taxpayers for a desperation bailout? If that prospect deterred investment, competition and innovation, then the entire health-care system would suffer.

But outright cash government subsidy is not the only way in which legislation might give a public plan a counter-productive market advantage. Some public-plan advocates want legislation to (1) command doctors and hospitals to accept public-plan patients at (2) below-cost prices based on Medicare's fee schedule. These advocates argue that this is a valid way to force private insurers to innovate. In fact, this is a sure way to eliminate competition - and the resulting innovation - purely because of government regulation, with no valid rationale on the basis of either the relative efficiency of the public plan, or the relative inefficiency of its private competitors.

Some public-option advocates take the simplistic view that if a command-and-control, Medicare-pricing-based government plan is cheaper, it is therefore by definition better and more efficient. This view, of course, is totally wrong; it equates price controls with cost control. Merely using the force of law to command doctors and hospitals to work below cost distorts the economy and wastes resources. It will drive out of business more innovative and resource-efficient plans that would be cheaper were it not for the power of government, reducing competitive forces and costing more in the long run.

Thus, when the President says that it is "illogical" that an inefficient government could drive private firms out of business, he misses the point that even an inefficient government enterprise can win in the marketplace by exercising the power of the sovereign, thereby destroying competition, innovation and process improvement.

A second question is judging the performance of a reformed health-care system on the basis of the performance of private insurance in the current system.

It certainly is arguable that the performance of private insurers in today's health-care marketplace is deficient. However, the problem may well lay more in the marketplace than in the insurers. Today's health-care marketplace is not competitive. As CED documents in its statement, Quality, Affordable Health-Care for All, fewer than 25 percent of all insured private-sector employees have a choice of more than one insurance carrier. Employer-based health insurance exhibits many of the properties of a monopoly business.

But the President himself cites favorably the Federal Employees Health Benefits Plan (FEHBP), which provides a choice of competing carriers and plans. The FEHBP achieves a high level of customer satisfaction. But it does so without offering a government insurance plan; rather, it uses private plans competing against each other on the basis of quality and price, marketing to cost-conscious consumers (who can save money if they choose a less-expensive plan). Under the FEHBP, every consumer has a choice of at least ten competing private insurance plans from at least six competing insurance companies - and in most parts of the country, the range of choice is significantly greater. Even though the federal employee population is large, it is only a small fraction of the total workforce. With a nationwide system of health-insurance exchanges for all consumers, the number of alternatives surely would be greater still. CED believes that such a system extended to all consumers would greatly magnify the forces of competition on private insurers and achieve even better results. Empower every single consumer to fire his or her insurer if it falls down on quality or price, and the health-care market will be totally transformed - without resort to a government insurance company.

The President refers to a public-plan option as potentially having lower administrative costs, an alleged advantage of Medicare. However, Medicare's low percentage of administrative cost has come at the expense of a high rate of fraud and unjustified reimbursement. As just one example, on June 23, the Justice Department announced 53 criminal indictments against individuals making false claims to Medicare. FBI Director Mueller said that there are 2,400 open health-care fraud investigations. Medicare's low rate of administrative cost likely results because the program is under-administered, with insufficient oversight of claims resulting in higher total payouts - creating an exaggerated statistical ratio of low administrative costs to high payouts.

Finally, the President cites polling data favoring a public plan. Probably most thoughtful observers would agree that this is a question of sufficient technical complexity that it should not be decided by a public-opinion poll. But beyond that, as the Washington Post noted on June 24, 2009, polling results on this issue are sensitive to the precise question asked, and to the associated issues that are presented:

Survey questions that equate the public option approach with the popular, patient-friendly Medicare system tend to get high approval, as do ones that emphasize the prospect of more choices. But when framed with an explicit counterargument, the idea receives a more tepid response. In the new Post-ABC poll, 62 percent support the general concept, but when respondents were told that meant some insurers would go out of business, support dropped sharply, to 37 percent.

Private-insurer abuses were highlighted in a Congressional hearing this week. Regulation of insurers has often been ineffective, as CED has argued in its policy statement. The broad policy reforms that we recommend would remedy this defect. For one example, probably the most frequent allegation against private insurers has been the denial and revocation of coverage. Providing all Americans with guaranteed issue and guaranteed renewability of coverage, as CED proposes, would end all of these abuses at a stroke. For another, insurance companies are alleged to use "fine print" in their policies to limit reimbursements and increase policyholders' required co-payments and deductibles. Stanford University, which has implemented a system similar to what CED proposes for the nation as a whole, already requires that private insurers who wish to compete for their employees' business must agree to uses standardized policy language which prevents such abuses. Consumer protection is necessary in every part of the economy, and health care is no different, and no less amenable to appropriate regulation.

In sum, a public plan would not be just one more competing health-care option. Creating a public insurance company that would compete on a truly level playing field would be difficult if not impossible. And it is questionable why policymakers should take that risk given that competition among private plans in a truly reformed marketplace would be more than sufficient to improve the quality and affordability of health care. With this divisive and dangerous issue off the table, Washington could move much more quickly to true structural health-care reform.

Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development.