Sunday, August 09, 2009

Review of the Health Care Proposals: Predation by Government Enterprises?

It is costly to stay up-to-date on the status of the health care bill specifics, but the broad picture seems pretty well agreed. The Kaiser Foundation provides good summaries, see here. As I read the proposals, I see these as the key features:

1. A mandate for all citizens to have health insurance (punishable with fines).
2. A mandate for all employers (except "small" businesses) to provide health insurance to employees.
3. Provide individuals with subsidies to buy insurance.
4. Provide "small" businesses with subsidies to provide insurance to employees.
5. Create "gateways" or "exchanges" through which individuals and certain employers would buy insurance.

Here are my issues, with the last one being the most serious.

First, if a key objective is to provide health care insurance to the currently uninsured and needy, the proposal will likely fail. The system is too complex. The people that I want to be covered by health insurance are likely to be excluded by this proposal simply because they will still not know what to do or how to get coverage.

Second, the proposal does not cut the tie between health insurance and the employer, in fact it increases the strength of that tie. If you want to increase portability of insurance, get rid of the employer-based nature of our current coverage. That would be a great move in the right direction. Do our employers buy car insurance for us? No. Not even life insurance, at least not most of it. Then why health insurance?

Third, the proposal is economic/social engineering at its worst. The proposal has a bunch of subsidies, the most insidious being those for "small" businesses. Now, I like small business as much as everyone, but I like big business too. Why should our health policy have built into it an advantage for some kind of businesses? Can you imagine how this will be manipulated in years to come? (As an aside, the proposals should be viewed in that light -- as living documents. Don't just take the current policy as the end of the road, but anticipate how it will change with political winds in the future.)

Fourth, and most serious I think, are the "gateways" or "exchanges" that will be created. Think of this gateway idea as a government-overseen consortium of insurers, all of who can offer different health policies to the individuals and employers who qualify to buy insurance through the gateway (a set that even in the current bill is set to expand over time, letting more and more employers and individuals opt into the gateway if they desire). At least in the House bill, there is a provision to ensure that there is a "public" or "community health insurance" option in the gateway. This public option will compete with private insurers. The problem is that the public option is likely to have a huge cost advantage over the private insurers, with the cost advantage arising from the likelihood that the public option will pay service providers (doctors, hospitals, pharma companies) a much lower rate than private insurers can. The version of the House bill that I just read clearly specifies that the public option will pay suppliers prices based off Medicare rates (that are very low compared to what private insurers pay). More on this issue below.

To the extent that the public option has a cost advantage, it is the stealth bomb of the health care proposal. We should expect the public option to be increasingly chosen. As that happens, suppliers will raise prices to the private insurers even more, making their cost disadvantage even worse, and the market share of the public option will increase even more. Sounds to me like a vicious cycle leading to a public monopoly -- hence my reference to predation by government enterprise. Give a government entity a cost advantage, and it will drive private business out.

I recognize there is a vigorous debate over this issue of the public option, and I do have some questions about the theory above. Why can the public option just piggyback on Medicare prices, while private insurers cannot? This is an interesting question. How can Medicare get such low rates today, while private insurers pay more? I suspect there are two factors, one being the sheer size of Medicare and the second being that health providers do not want to turn down Medicare patients for political reasons. These effects will apply just as strongly to the public option described above. Steven Pearlstein, whose editorials I normally find enormously enlightening, has one in the Washington Post today that seems to me to rather shrill and downright wrong. He says that Republicans are "propagating falsehoods" about the proposal, with his main point illustrated with this quote:
But there is no credible way to look at what has been proposed by the president or any congressional committee and conclude that these will result in a government takeover of the health-care system. That is a flat-out lie whose only purpose is to scare the public and stop political conversation.

Now my analysis above might be wrong, and maybe Pearlstein's assurances about House leaders ruling out "piggybacking off Medicare" might turn out correct, but to say that I am being disengenous or being a "political terrorist" by making the argument, well, that is just the kind of discussion around this major policy proposal that we do not need. Lighten up, Pearlstein. You just lost a bunch of credibility from this reader.

I can support a health care proposal that would provide base insurance for the currently uninsured. I suspect many would support that. Why not just create something that did that, and leave the rest alone? And, be honest about what the effect will be: the more people we provide with free health care (free to them), the bigger will be the national bill for health care. This is NOT going to reduce costs.

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