Putting Private Insurance Out of Business

Over at Think Progress, Matt Yglesias takes me to task for saying that the so-called public option in the House’s health care bill “would all but eliminate private insurance and force millions of Americans into a government-run system.”

Yglesias apparently still buys into the myth that the public option is, well, an option.

For people who receive health insurance through their employers, which is to say the vast majority of the Americans who currently have health insurance, the House bill would change very little. Or, rather, the biggest change would simply be the confidence that if, in the future, you cease to get health insurance from your employer (maybe you’ll lose your job or want to change jobs) that you’ll still be able to get health care. What’s more, of the minority of Americans who would be getting health care through the new “exchange,” the majority will probably sign up for private health insurance and everyone will have the option of doing so. If the government-run public plan is, for whatever reason, vastly more appealing than the private options then it will dominate. But if you believe the government can’t run health care well, there’s no reason to think that will happen. Whatever you think of that, though, the basic fact is that even if the public option does dominate the exchange most people will still have private employer-provided insurance.

That might be true if the new government-run program were going to compete on anything close to a level playing field.  But, because the public option is ultimately supported by the taxpayers, the playing field can never be level.   True, the bill does say that the new program is supposed to be self-sustaining, covering administrative and benefit costs entirely out of premium revenues.  But remember that Medicare Part B was originally supposed to support 50 percent of its costs through premiums.  That has shrunk to the point where premiums pay for less than 25 percent of the program’s cost.

And the government has a myriad of ways to prevent the true cost of the program from showing up in premium prices.  For example, the government-run plan will not have to pay state or federal taxes, and unlike private insurance plans, who can be sued in state courts, the government-run plan could only be sued in federal court.

At the very least, the program carries with it an implicit guarantee against future losses.  Suppose the public option prices its products too low and loses money.  Can you imagine that Congress is simply going to let it go bankrupt, go out of business?  Would a Congress that has bailed out banks and automobile companies because they are "too big to fail" resist subsidizing the government's insurance plan if it began to lose money?   Even without the actual bailout, such an implicit guarantee has a value. For example, the implicit guarantees behind Fannie Mae and Freddie Mac were estimated to have saved those institutions $6 billion per year.

All of this means that the government-run plan would be significantly cheaper than private insurance, not because it would out-compete private insurance or because it was more efficient, but because it had unfair advantages.  The lower cost means that businesses, in particular, would have every incentive to dump workers from their current health insurance plan into the government plan.  And, if other provisions of the bill make insurance more expensive, as is likely, the incentive for employers to shift workers to the government plan would be even greater.   Estimates suggest that nearly 90 million workers could eventually be forced into the government plan.

As Robert Samuelson, dean of economic columnists, writes in the Washington Post, “a favored public plan would probably doom today's private insurance.”

Samuelson is right.  There is nothing “optional” about a public option.  And that is just the way the Left wants it.