In the Nation's Interest

USGov Insurance, Inc.: A Bad Buy

The United States desperately needs health-care reform. Costs are too high and rising unsustainably fast, pricing too many Americans out of insurance coverage. The quality of care by and large does not justify this high price, with too many people, even those with insurance, left in poor health.

But we need to get health-care reform right. The stakes are huge. Health care consumes one dollar of every six spent in the U.S. economy - making our health-care sector roughly the size of the entire economy of France. Our health-care system is enormously complex, changing it is more so, and if we get it wrong, there will be large and irreversible consequences. It is the downside and the irreversibility that we should ponder before acting.

As an example of the key issues in the debate, some participants want the United States government to go into the insurance business, and sell health coverage to compete with private companies. This is an enormously consequential decision.

Two arguments by advocates of a government insurance plan are raised most frequently. The first is that some private insurers have left the market over recent years, leaving too few to generate true competition; a public plan would inject more competition into the marketplace. The second argument is that a public insurance plan could leverage the federal government's huge buying power, including that which it already exerts through Medicare, to drive down prices and profits in the private sector, making health care more affordable.

Alarmingly, these two arguments are inconsistent. The federal government's monopoly buying power would be of the scale of a nuclear weapon against private insurers in the marketplace. By one advocate's estimate, and depending on eligibility and design, the public plan would quickly insure more than 130 million people. Add in Medicare, Medicaid, and the Veterans health system, and the federal government would dominate health spending.

Such a potentially irreversible step must not be taken lightly. No private investor would choose to compete with a government firm that could cover any loss with a supplemental appropriation financed by the printing press at the U.S. Mint. The mere prospect of such unfair competition would deter private firms from entering the market, and encourage all existing firms to look toward the exit. Once those firms were gone, it would be nearly impossible to get them back. Insurance is not the kind of business that can be started in a garage after normal work hours; the point of insurance is to pull together large groups to share risk. Thus, the public plan "option" would most likely be just the first step in an irreversible government takeover of the entire health-insurance industry, and ultimately, through government price-setting, the entire health-care system.

And a health-care system dominated by a federal government health-insurance plan would not lead to quality, low-cost care. By definition, one entity - the federal plan - would make all of the decisions. With no competition, there would be no natural experimentation as different plans tried different approaches, and no pressure for innovation and improvement. Some might argue that this time, monopoly would be different; it would be the federal government, and the federal government would push for new, innovative models of care. But that has not happened with Medicare. Much more likely, with only one insurer through which millions of consumers would want to choose among all available doctors and hospitals, coverage would gravitate toward fee-for-service medicine - as it has in Medicare. And we all know through bitter experience what that model means: The more services, the more fees. That is why Medicare (though it provides coverage that is essential to the elderly) is universally recognized as the chief source of rising costs and deficits in the federal budget over the long run.

But some would see the future very differently: Let the new federal government health insurance plan dictate low prices - even prices below current costs - to doctors and hospitals. Let the government plan drive all private insurance out of business, leading us to a single-payer, Medicare-for-all system. If it holds down prices, isn't that what we want? Don't reports indicate that Medicare has lower administrative cost than private insurance? And couldn't a public insurance plan forgo earning a profit, thus saving even more money?

Importantly, government dictating lower prices is not cost control. It has adverse consequences in both the short run and the long run.

Even in the short run, government price controls in Medicare have not saved dollar for dollar on actual spending. When confronted with a lower price for a given service, physicians and hospitals have not surprisingly sought to recharacterize that service as one with a higher government-set price, or to provide additional services. A federal insurance plan for the non-elderly would be no different.

And in the long run, consequences would be truly perverse. Even in the best case, government's setting of thousands of different prices for various medical services creates unavoidable incentives for doctors and hospitals to deliver the services that pay the best, interfering with access to other services. This problem besets Medicare today, and Medicare has been forced to try to imitate the private sector to solve it. But of even greater concern, government's holding the overall level of prices down to control costs would stifle all of health care. It would discourage people from entering the medical field, building hospitals and other facilities, and inventing new technologies. No private investor would choose to put his money into developing a good or a service where the only potential purchaser could demand to pay a price that was below cost.

Other arguments for cost control through a government insurance plan fall just as flat. Medicare has lower administrative costs than private insurers, but Medicare has no costs for marketing and virtually no costs for enrollment; if consumers are offered any choice whatsoever, those costs would be present and would grow. Medicare's lack of monitoring and enforcement has allowed significant fraud; fixing that problem would increase administrative cost. And at the end of the day, the cost crisis in health care is not the result of administrative cost, but rather of the cost of treating individuals with multiple chronic conditions. Solving that problem would require more of what is now sometimes called administrative cost - in monitoring and coaching individuals in dealing with their conditions, outside of the doctor's office and using support personnel.

Likewise, eliminating profit in health care is not a solution to the enduring cost problem. Profit is the price that society pays for an incentive for providers of all goods and services to seek ways to offer higher quality at a lower price. If eliminating profit in health care would be a good thing, then it would be a good thing in haircuts, computers, restaurants, and automobiles. That system has been tried, and it has failed. Some would argue that health care is different, because it involves public health and safety. But the same is true of restaurants and automobiles (and even haircuts and computers, to a different degree). Some want to take the profit motive out of health care, so that it is provided selflessly, with only the welfare of the patient in mind. But even in a government-run single-payer system, every doctor will want to earn a "profit" - a living - and most likely, every seller of medical devices and pharmaceuticals will be private and organized to earn a profit.

In sum, a public insurance plan exploiting government's natural monopoly purchasing power would undermine what even some of its advocates want, and what the health-care system really needs: true competition. Those consumers who want the option of a public plan most likely simply do not trust private health insurers. What they and the nation need in health care is the same competition that drives higher quality at lower cost in all other products and services. Give every household - not just those without employer coverage - what Members of Congress have today: a choice among alternative competing private health plans (the federal government's employees plan offers a minimum of ten plans in every state - more than enough to guarantee effective competition), with enrollment guaranteed, no discrimination on the basis of pre-existing conditions, and an annual open season. If your insurance company does not treat you well, fire that insurance company, and hire another. Plans that deliver quality care will grow. Plans that do not will have to shape up to survive. Today's system does not offer that kind of consumer power, but a system driven by a dominant federal government insurance plan wouldn't either. We have the opportunity now to create a new system that will give individuals the power to choose the health insurance that they want. It will be a totally different world from what we have today. We should make the most of that opportunity.

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

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