Health Care, Pooling, and Monopsony
At a recent press conference President Obama had this to say about the public health care option he is floating as part of his proposal for reforming health care and its impact on private health care options,
Now, the public plan I think is a 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. If you like your plan and you like your doctor, you won’t have to do a thing. You keep your plan. You keep your doctor. If your employer is providing you good health insurance, terrific, we’re not going to mess with it.
But if you’re a small business person, if the insurance that’s being offered is something you can’t afford, if you want to shop for a better price, then you can go to this exchange, this marketplace, and you can look: Okay, this is how much this plan costs, this is how much that plan costs, this is what the coverage is like, this is what fits for my family. As one of those options, for us to be able to say, 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.
Does this make sense? I don’t think it necessarily does. After all we don’t need a government grocery store, a government video store, or government car dealers (hmmm, scratch that last one), to keep prices reasonable and affordable (and even with cars we still don’t need the government to keep prices reasonable). So why would this government plan be able to offer the same types of coverage at a lower cost? What is the basis for this belief?
President Obama mentions lower administrative costs? Is he thinking that the plans in this “health exchange” will be like Medicare? But the question then becomes, why are Medicare’s administrative costs so low? Is it, at least in part, that Medicare doesn’t have to screen out for pre-existing conditions? If that is the case, then the overall costs might actually higher (lower administrative costs, but higher costs in terms of treating people with pre-existing conditions), this would preclude the viability of the public option since as President Obama already notes, the private options are too expensive. An even more expensive public option is not going to be anymore attractive.
If the above is true, the only way for the public option to become viable is for it to use taxpayer money—i.e. subsidies. But here we have another problem as seen by the following exchange,
Q Won’t that drive private insurers out of business?
THE PRESIDENT: 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.
It is quite logical if the public option is subsidized by taxpayer money. In that case, private insurance providers who are seeking to maximize profits will not be able to compete if the public option plan is priced too low due to the subsidies.
The only other possible way for the public option to be cheaper and not rely on taxpayer money is if there health care insurance providers have market power and are engaging in some type of price discrimination when it comes to charging firms for employee benefits. However, even here there are possible alternative policies to creating a government run health care plan that would have tremendous pressure to use taxpayer money to fund. For example, if there is market power and price discrimination the solution is to promote more competition not reduce it. To do this would require identifying and removing barriers to entry into geographic regions for the health care insurance market. And it is quite likely that the barriers are a result of state, local and the federal governments. Various regulatory requirements may restrict entry and thereby grant incumbents in the market power to raise prices and restrict output.
And we have to keep in mind that there are going to be tremendous pressure on whatever entity is in charge of this new program and politicians as well. Rent seeking is how most people in DC make their living—finding ways to acquire income that they have not earned.
Now, by the way, I should point out that part of the reform that we’ve suggested is that if you want to be a private insurer as part of the exchange, as part of this marketplace, this menu of options that people can choose from, we’re going to have some different rules for all insurance companies — one of them being that you can’t preclude people from getting health insurance because of a pre-existing condition, you can’t cherry pick and just take the healthiest people.
Here is one possibility: the public option has only those with pre-existing conditions or is dominated by such people. After all, suppose we have two plans a public plan and a private plan. If you are healthy then the private plan may look okay. If you have a pre-existing condition you can’t sign up for the private plan unless it wants to go into the public option pool. So private plans might still exist, but “skim the cream” off the public pool options. This might “significantly lower administrative costs” but it will likely result in significantly higher premiums. In this case, the public option pool will provide no discipline for the private market as they really are no longer in competition. Further, the public pool option could end up being very expensive and the pressure to subsidize it will increase even more. I’d argue it would be almost certain that the government would subsidize it with taxpayer dollars. Now, a subsidized public pool very well could look more attractive to people on the private plan. Thus, it is basically a way to backdoor for a single payer system run by the government. And once there are no more private plans, then the government can start reducing the supply of health care.
Because once the government is the dominant player, possibly even the only player, it is now a monopsony. And a monopsony can dictate price in the market place. Now that might sound good at first glance, but let us go back to fundamental economics. If you set the price below the market clearing price what happens? Supply is less than demand. You have less of whatever good in question has a monopsony. The reason for this is simple and pretty much inescapable. With the price below the market clearing price firms that would otherwise be earning profits and producing no longer earn a profit and shut down, and firms that are shut down produce nothing. This should not be a shocking result. A market where there are many buyers and sellers is part of the definition of a competitive market. Competitive markets tend to have lower prices and more output than markets with less competition.
In the end, I can see all of this reducing the amount of health care people have access too, and maybe that is what needs to happen. However, I think it is dishonest to pretend that people can have more health care and pay less for it and reduce growth rates of costs all at the same time. That is not logical.
Photo by Flickr user Brooks Elliot, used under the Creative Commons License.