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The public health insurance plan
Here is comment from Ezra Klein, who distinguishes different versions of the public plan idea and also links to further reading. Matt Yglesias comments in favor of the idea. Here is a Paul Krugman column. Arnold Kling is skeptical. Those are good introductions to the debate. On the economics, Ezra writes:
Rather, the theory here is simple: If you can't replace them, convert them. If the public plan works, then private insurance will work better as well. In this telling, the simple existence of the public plan forces a more honest insurance market: Private insurers need to offer premiums closer to their marginal cost, and they have to cut administrative costs, and they have to work on their reputation for cruelty and capriciousness. The existence of another option changes the market. Individuals will have access to private insurers, but they'll no longer be stuck with them.
I believe Ezra is assuming no direct cash subsidy to the public plan, lower marginal and average costs for the public plan, and some mix of market power and X-inefficiency in the private insurance companies. The existence of the public plan then "contests the market," which eventually lowers MC in the private plan and leads to lower prices and better service.
My question is what the equilibrium looks like. Say the public plan has a cost advantage (both MC and AC), as plan proponents suggest. If public and private plans are to coexist, the public plan must be attracting the higher-cost customers, namely the higher medical risks. (I am also assuming that the political equilibrium does not allow the public plan to reject these customers outright.) There is then market segmentation and it is not obvious that there are significant positive competitive pressures on private insurance companies.
Oddly, I believe in some models the public insurer constrains the private companies more tightly when the public insurer does not have an apparent cost advantage. Even here, the properties of the monopolistically competitive equilibrium would be very tricky.
You might wonder why the public plan does not attract all the low-risk customers and take over the whole market. I would say that either a) it does, or b) it is tailored toward the high-risk customers. Since public plan advocates sincerely and correctly claim the policy is not just a back door to single-payer, we are left with b).
Another question: is the "cruelty and capriciousness" of the private plans -- cited by Ezra -- driven by profit maximization? Presumably it is and again assume the government plan will not do the same. Why then would public sector competition force a private firm to throw out a profit-maximizing strategy? In fact "cruelty and capriciousness" would be a comparative advantage of the private companies and maybe it would be milked more strongly in a more competitive environment.
Another possibility is that the public company has a bigger cost advantage on AC than MC. For instance maybe it has a "head start" on the fixed costs, because everyone has heard of it, but its cost advantage for additional service dwindles at some point. The successive accretion of high-risk customers then threatens to put the public plan under (especially if there are lots of previously uninsured and they are high risks) and the public plan requires a subsidy simply to break even. I consider this equilibrium to be not totally unlikely.
Obviously I am missing some equilibria, but in many cases the public plan is mainly providing insurance to high-risk customers. There's nothing wrong with that (and indeed it is a major policy goal), but the resulting equilibrium needn't much improve the performance of private health insurance. I file this argument under "not yet established."
Posted by Tyler Cowen on June 9, 2009 at 07:30 AM in Economics, Medicine | Permalink
Comments
Ezra believes despite all the evidence to the contrary, that a public will be better. I don't where to begin with that assumption.
It is people like that, that make health care inevitable. Where is their critical thinking? How many times do we have to read about state health cuts in this recession or rats in bedrooms of the VA, to realize that most likely the Obamacare will be worse.
The last thing I want is to transfer the responsibility of my health care to a people who have been unable to balance a budget in well over 30 years.
Posted by: Marc at Jun 9, 2009 7:54:08 AM
"You might wonder why the public plan does not attract all the low-risk customers and take over the whole market. I would say that either a) it does, or b) it is tailored toward the high-risk customers. Since public plan advocates sincerely and correctly claim the policy is not just a back door to single-payer, we are left with b)."
Wouldn't small, private companies without bargaining power force their low risk employees into the public option due to the cost advantages.
Posted by: thehova at Jun 9, 2009 7:58:24 AM
Another question: is the "cruelty and capriciousness" of the private plans -- cited by Ezra -- driven by profit maximization?
He does say reputation for cruelty and capriciousness, although I doubt that the greatest problem facing private plans is public relations.
I notice that in the image of health insurers painted by the left, the health insurers don't maximize for their shareholders but for their managers ("greedy CEOs" - hence high administrative costs, see Ezra's comment), and the health industry is noncompetitive to begin with (hence private inefficiency, again in Ezra). Given this model, it is plausibly true that a public option can substantially improve the performance of private plans. But whether this model is true to begin with seems to correlate exceptionally well with one's political alignment ;)
Posted by: david at Jun 9, 2009 8:08:08 AM
Medicine has a highly evolved monetization mechanism. Like our actions in Iraq, it might be more rational just to smash it rather than try to reconstruct it.
Posted by: Andrew at Jun 9, 2009 8:11:18 AM
Your 'Felix Salmon' and 'Ezra Klein' links both point to the Ezra Klein article.
Ezra says:
"Moreover, public insurance is simply more efficient. Medicare holds costs down better than private health insurance. The substantially public systems employed by every other industrialized nation cost less and cover more than the American model."
Public systems in other nations are cheaper because they can dictate drug costs, reimbursement rates to providers, and coverage limits to patients -- a 'public plan' in the U.S. that had only a fraction of the market would not be able to do any of these things.
Another question: is the "cruelty and capriciousness" of the private plans -- cited by Ezra -- driven by profit maximization?
Eh, no--those outcomes are driven by financial incentives, which are largely the same regardless of whether or not the insurer is a for-profit enterprise. Which is why government health systems are quite well known for cruelty and capriciousness. My wife deals with a state Medicaid program all the time -- standard operating procedure is to lose paperwork and ask for it to be resent, to ask for 'additional information' to justify the care (without specifying what additional information). If she is persistent enough, usually, but not always, the coverage is provided. But such persistence requires a lot (unbillable) time spent making phone calls and writing letters and reports. Most providers are not so persistent, and coverage is not denied by a clear 'no' (which could be disputed--perhaps even by the patient in court) but by exhausting the provider's time and patience. (And it goes without saying that she is strictly forbidden from providing the relevant names and phone numbers to patients to allow them to take up the case themselves).
These kids of 'cruel and capricious' treatment delays are well-known in the UK and were, for example, what lead to the Canadian Supreme Court to strike down Quebec's ban on private insurance:
http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/1118315110253_28/?hub=TopStories
I don't know how Klein can possibly claim, with a straight face, that costs will go down and denial of coverage will become a thing of the past with a public option. It's laughable.
Posted by: Slocum at Jun 9, 2009 8:11:42 AM
This is welcome analysis. We need more of it. It is intellectually dishonest to assume an answer, as many do, when we can think it through a bit. We also have actual experience in Medicare of some models, both public and private. Surely there is information there to be leveraged.
Posted by: TIE at Jun 9, 2009 8:22:30 AM
I can think of no better words than 'cruel' or 'capricious' to describe government run health care (medicade and medicare) that we have already.
Posted by: drobviousso@gmail.com at Jun 9, 2009 8:29:24 AM
Could someone (Tyler?) point me to research that examines the health status of the uninsured as compared to those that are currently insured privately, on Medicare and on Medicaid? And perhaps how the expected risk profile of folks who would choose the public option compares to those that would not. I am not sure that the less healthy folks are the ones going without insurance.
Posted by: wintercow20 at Jun 9, 2009 8:34:31 AM
Wintercow20 brings up an interesting point. Aren't the vast majority of those uninsured in their 20's?
Posted by: thehova at Jun 9, 2009 8:48:41 AM
Where do these people think the cost savings are going to come from? Administration, profits, prevention, doctors/hospitals, fewer/less advanced/lower quality procedures, etc.? Longer waits isn't a recipe for lower overall costs. Government solution to reduce bureaucracy?(!!!) Are they just going to shift the dollar cost into lower human capital? Does anyone on the left start out identifying the costs that they want to cut rather than starting from the bureaucracy they want installed?
Posted by: Andrew at Jun 9, 2009 8:59:52 AM
"The inclusion of a strong public insurance option has become, for most observers I know, the single most recognizable marker for victory. If the public plan exists, liberals have won. If it's eliminated, or neutered, then conservatives have triumphed."
Apparently, Ezra Klein thinks the answer to my question is no. Well, in the words of John Conner, if we stay the course, we are all dead, even if we don't.
Posted by: Andrew at Jun 9, 2009 9:07:41 AM
Besides Medicare and Medicaid, the Federal govrnment also runs two other large health care programs, the military`s Tricare and the Federal Employees Health Benefits (FEHB) Program.
The CBO released a study - http://cboblog.cbo.gov/?p=282 -
of Tricare. I can't find any information on the overall
cost of FEHB to the taxpayers.
Prior to rolling out yet another plan, it would be good to examine the success (or lack thereof) of these plans.
Posted by: JohnBailey at Jun 9, 2009 9:40:05 AM
Hrm... most of the uninsured (or in my case, under insured) people I know are healthy young college students and workers are small startup companies. I bet a public plan would be in a good place to reach out to all those college kids... and I'd rather have cheap, crappy insurance from the govt that would still be there next year than from some company I've never heard of that might go under.
Posted by: A.M. at Jun 9, 2009 9:40:13 AM
Krugman: It’s a sign of the way the political winds are blowing that insurers aren’t opposing new regulations. Indeed, the president of America’s Health Insurance Plans, the industry lobby known as AHIP, has explicitly accepted the need for “much more aggressive regulation of insurance.”
Now, an incumbent in a highly regulated industry favoring new regulation is evidence for new regulation. I'm shocked, shocked that an incumbent would want regulation. That's soooo weird, huh. We like, don't even have a whole economics department that would explain that! Krugman doesn't even take his own advice that he liked so much he repeated it twice.
Posted by: Andrew at Jun 9, 2009 9:43:09 AM
As for "cruelty and capriciousness" doesn't each individual health insurance policy holder want their insurance to deign more care to other policy holders in order to keep the premiums down? It seems to me that the insurance companies pay for too much care which is the argument that some proponents of Gov. health insurance make when they make arguments that Gov. can control costs better by better tracking what does not work.
Posted by: Floccina at Jun 9, 2009 9:53:37 AM
Now the ("the," as in singular) government program IS competition. Krugman accuses the defenders of the hated insurers as "shouting down" the poor, meek, defenseless "public option." That the insurance industry didn't settle on a single form, the recommendation of a Neocon 15 years ago (Bill Kristol), such a minor reform, is proof they cannot change.
The left's blarney is the most impressive innovation we've seen in a while. I think they read '1984' and thought it was political guidebook. There is no other logical explanation than an embrace of NewSpeak. We may be in the shotgun spaghetti phase of progressive programs and it will be impossible to even explain their fallacies fast enough to stop them all.
Posted by: Andrew at Jun 9, 2009 9:55:24 AM
Klein: But that political insight didn't cancel out the policy insight: The private insurance market is a mess. It's supposed to cover the sick and instead competes to insure the well.
No, no, no. The insurance industry is a method for consumers to manage their risk. The sick have no risk of getting sick, they ARE sick! My apoligies, but if the leftists would stop torturing reality, I wouldn't have to multi-post.
Posted by: Andrew at Jun 9, 2009 10:06:11 AM
I can think of no better words than 'cruel' or 'capricious' to describe government run health care (medicade and medicare) that we have already.
Yes, it's SO cruel and capricious of them to cover my daughter's stay in the NICU, so that my wife and I didn't have to make a decision between chancing a fatal infection and paying thousands of dollars out-of-pocket, isn't it?
***
By the way, I love how people are saying that involving government in health care will produce even higher bureaucratic costs than the current system without a single shred of evidence. It seems to be an article of faith, rather than carefully researched opinion, that government is inherently inefficient in everything it does.
Posted by: Neal at Jun 9, 2009 10:07:25 AM
And what happens if people in better health (more wealth) stay with the private plan but their taxes go towards paying for the public plan? How long before wealthier, healthier people start voting officials out of office if they increase funding to the public insurance plan? I cast no aspersions on the healthy & wealthy. I will do the same thing if the time comes.
Posted by: Jon at Jun 9, 2009 10:09:57 AM
45 million people don't have health insurance - but of course all of them are college students.
The above comments show both the moral and intellectual bankruptcy of the libertarians. At what point does the number of uninsured become a problem? My guess is that when universities cease to offer coverage to tenured economics professors.
Posted by: Samis at Jun 9, 2009 10:12:10 AM
Tyler, wouldn't the equilibrium tend to a division in types of coverage? The public plan would cover all common and low-cost procedures, while private coverage would be for new techniques and elective procedures, etc.?
Posted by: Lee A. Arnold at Jun 9, 2009 10:26:44 AM
And what happens if people in better health (more wealth) stay with the private plan but their taxes go towards paying for the public plan? How long before wealthier, healthier people start voting officials out of office if they increase funding to the public insurance plan?
That's why a single-payer universal system is really the only stable solution. That way, healthy, wealthy people won't (selfishly) vote against health care because that would be against their own interests, too.
The other perspective is that healthy, wealthy people only constitute a fraction of the electorate, so unless they can effectively use propaganda they'll be outvoted anyway. (Unfortunately, they're good at effectively use propaganda - c.f. the Republican Party's ability to whip up moral outrage at progressive taxes in people who would benefit from them.)
Posted by: Neal at Jun 9, 2009 10:39:41 AM
Lee, isn't that the way it works in countries with single-payer systems? The way I understand it works in Canada (or at least Ontario) the government covers procedures deemed medically necessary, and you can buy additional coverage if you want to get stuff like cosmetic surgery or if you want to jump the queue.
Posted by: Neal at Jun 9, 2009 10:41:32 AM
Neal,
No evidence? Really? Have you heard of government? Being inefficient (and violent to boot) is what it DOES. A hammer costs me $10 and the government $500, and there's "not a shred of evidence" that government health care will suffer higher bureaucratic costs? Please.
Posted by: Noah Yetter at Jun 9, 2009 10:46:49 AM
All of the left's ideas are really strong in regards to health care. However, I am alive right now. I have a beating heart and I would like to be alive a lot longer. What country is then tasked with medical innovation if America employs the same rationing techniques as observed in Western Europe? Is Switzerland or more importantly Zurch supposed to provide all of the world's health care innovation? It seems like quite the burden to bear!
Posted by: John Pertz at Jun 9, 2009 11:08:36 AM
