Obamination: The Fallacy of the Public Option

Monday, August 17, 2009

The purpose of the “Public Option” in President Obama’s healthcare reform initiative is to keep the costs of medical care down.

One of two things is true: Either prices in the healthcare industry are currently determined by competitive market forces, in which case they are what they are and the government needs to stay out of it, or the prices we pay for medical services and pharmaceutical products are too high as a result of non-competitive forces ranging from benign market anomalies to outright monopoly.

Let’s assume it’s the latter. The solution then is NOT to have the government go into competition with the private sector, but to attack and regulate out the non-competitive influences which are keeping prices higher than a competitive market would dictate.

If, for example, the auto manufacturers were to collude to fix new car prices above competitive levels, would the Obama or any other Administration start a government owned and operated automaker to give the people a competitive, lower priced alternative? Of course not. Existing government institutions would use laws already on the books, and some new ones if necessary, to break up that monopoly. Don’t like my example? Make up one of your own, but the point will be the same.

What we have here is a President and a large segment of Democrats in Congress which President Obama’s election has emboldened who believe in the power of government through direct involvement in the economy to an extent which is neither supported by experience or consistent with the fundamentals of capitalism – and it’s making a lot of elected officials, businessmen and women in large and small companies, and a whole lot of us regular citizens justifiably uncomfortable.


Site Meter


8 responses to “Obamination: The Fallacy of the Public Option

  1. I think you are oversimplifying things. Your “one of two things” scenario overlooks a host of critical issues. Medical malpractice suits, the burden of caring for uninsured, uniform rates for both the healthy and the unhealthy, problems surrounding pre-existing conditions, etc. all, in way or another, complicate our health care system.

    I also don’t understand your logic that if prices are determined in a free marketplace then they must be fair. In an ideal world that is always true. In the real world it’s almost never true.

    Our health should not and cannot be traded on the open market. We wouldn’t need a government option if private industry fulfilled our needs. But the reality is that health care costs escalate every year, millions are uninsured, and by any quantitative measure (e.g., life expectancy, overall health, happiness quotient) we lag far behind our peers. Just like their customers, health care providers are fat and greedy. Someone or something has to trim the fat. If not the government then who?

    Finally, as a long time reader (and fan) of the wordfeeder there’s something I can’t quite figure out. Over the last say 25 years who has been the most famous, outspoken advocate of a national health care system? The answer: your favorite 2008 Presidential candidate. You praised Hilary Clinton endlessly during the primary season, warning us of the pending peril should we fall in love with the rhetoric of change. Why the support for Clinton, the universal health care superfan and not for Obama who has, from the very beginning, taken a far more conservative approach to health care than Clinton?

  2. Wow, blue jay. Quite the response. Here goes in the order of the points you raised…

    You’re absolutely right, there are many issues to be addressed by healthcare reform — none of which requires that the government go into the business of competing with the private sector which is my point.

    The Public Option is primary designed to offer services at prices which would discourage over-pricing by the private sector which is why my piece focuses on that one objective.

    Question for you… On what basis do you think the government will determine how to price the services it offers/underwrites? Think about it, about how unbelievably complicated a process it is to determine those prices — even though it’s something countless players in a free market do so routinely every day. Oh, you don’t like the prices the economy has set? Neither do I. The difference is, my solution is to attack the non-competitive influences directly.

    I agree, our healthcare system needs work, to put it very, very mildly. Perhaps President Obama and Congress could manage the development of the corrective legislation we need more discreetly, which I mean literally. Break down the questions we need to address into their specific categories and ask ourselves — including medical service professionals, underwriters and pharmaceutical companies — why the economy is failing to provide the affordable services all of us need. What we’ve done instead is attempt to address all our healthcare problems — many of which are not clearly defined or understood — in a single grabass piece of legislation. What a mess — from the same Administration you want to rely upon for a viable Public Option. We need to be taking our time to legislate solutions to this many problems in pieces and in stages.

    As for Hillary, I don’t know what she would have done this time around. What I do know is that she has one thing President Obama desperately needs, and can’t acquire fast enough… experience.

    Always a pleasure. Our differences notwithstanding, you can count on my vote when you get around to running for office. From the looks of things, the sooner the better.


  3. wf:

    I would offer a response to your suggestion that government ought not to compete with private sector the competition in the medicare context. While a significant majority of seniors opt to accept medicare, a minoritiy chose to utilize the available option (in some states) to have HMO coverage where the cost of the Part A coverage is paid by Medicare to the HMO while the recipient pays a “Part B” equivalent to the HMO and, in the view of some, get better coverage. This offered to show that government competition is not a death knell for private competitors.

    While your writing is generally good, the use of the automobile example is only a good example of why arguing by analogy is inappropriate. I personally would not want to purchase a government made automobile but, based on my parents’ experiences, would far rather have medicare in lieu of my current insurance program. And ask any vet what they think of the pure “socialized medicine” they received while in uniform!

    The problem with medical care goes beyond mere cost containment (which problem is exascerbated by admin and overhead of 21% in the case of private insurance while only 3% in the case of medicare) but goes to coverage (ie universal coverage without limitations or cancellation) and funding. We are the only industrialized country without universal coverage and WHO ranks the USA behind virtually every other industrialized country in terms of the medical care received by our citizens. Virtually every country ahead of us on that list has some form of governmental involvement ranging from single payor type insurance programs to fully socialized medicine where providers are employees of the government.

    The problem here is our worship of the mythological beast known as “free enterprise”. We have this ridiculous notion that free enterprise will solve all problems better than government and that government is incapable of program management. Its simply not the case. In fact, private enterprise (we’ve never had free enterprise) can’t be trusted where the profit motive is antithietical to public safety and trust. If it could be, we’d be decrying public police and fire departments, etc. Even those few states that have dabbled with private management of prisons have recognized that it just can’t be effectively delegated to private concerns because the profit motive is incompatible with public purpose. And not state, not even the bastions of antigovernment rhetoric in the “solid south” have ventured into private run schools systems.

    In the case of the “government option”, the closest analogy is programs like Unemployment Insurance or “FAIR Plan” fire insurance in California where private companies compete with govermnent progrmas where insurance is mandated (in the latter case by lenders).

    As to direct involvement in the economy, that has been a fact of life since 1933 at the latest. Goverment mandates unemployment insurance and generally manages it, retirement planning (social security), senior health care (Medicare), BAnking (FDIC & Federal Reserve management of money and interest rates), stocks and bonds (SEC), labor (NLRB & minimum wages laws), and so on and so on. While some may philosophically view this as the “straw that breaks the camel’s back” they are certainly correct in that the government option would only be a ‘strow’ in terms of more governmental involvement in the economy.

  4. Hi. Thanks for your comments, Amaturepol.

    For the record, I’m neither a Democrat or Republican. I’m a registered Independent which is something you can be in my state. The point is, my confidence in the private sector and concerns about the competence of the public sector have nothing to do with any personal political affiliation.

    They have, instead, to do with nothing more sophisticated than a practical sense of the role of government.

    Certainly, there are functions that are best managed by the federal government. Medicare, for example, may be one of them, although it’s not at all clear what private sector alternatives — subject to appropriate government controls — might be superior. National defense should never be privatized. (I’m even opposed to the use of contractors.)

    The government should control our banking and investment markets, but only to the minimum extent necessary to prevent non-competitive or other consumer-offensive behavior. And that, more than anything, is the key… “to the minimum extent necessary to prevent non-competitive behavior.”

    At the risk of being overly philosophical, I believe that capitalism gave birth to democracy, and not the other way around, that, in the beginning, equality of representation in government was essential to enable people to have control over their means of making a living and consumption. (Scary, huh?) I believe that government exists only to do for the many what individuals will have trouble doing for themselves. National defense, again for example.

    I think government is less competent, less creative, less motivated than a competitive private sector. And I believe the less authority we concentrate in any elected or appointed official, at every level, the better. I am, in other words, a minimalist when it comes to government.

    President Obama believes in the authority of government to do what the private sector has failed to accomplish. The point of my concerns about a public option is that there are alternative solutions — controls, subsidies and other programs short of outright involvement in competition with the private sector — alternative means of influencing private sector behavior which would be preferable, less costly and ultimately more effective at accomplishing the objectives of superior and universal healthcare.

    Whew. You’ll forgive me if that reads more pompous than it sounded in my head.

    Feel free to stop by again when you have time.


  5. First off, I’ll note that you and I probably agree far more than we disagree, especially as to an appropriate starting point, if not in the details. Rather than respond or refute, I’ll actual do more “fleshing out” of how I see your issue.

    The public option to me is, in actuality, less intrusive than the possible alternatives. And not in lieu of controls and subsidies which I think are essential regardless. For example the prohibition of pre-exisiting condition limitations, dropping of coverage etc, is an essential control to maximize availability of care. As to subisidies, with or without a public option there will be both direct subsidies to those who would otherwise be unable to afford coverage and indirect in the form of some tax benefits. There will also likely be negative subsidies in the form of income taxability, loss of deduction and excise taxes.

    But one of the major issues, after essentially universal coverage, is the need for cost control. The most effective way to force business to control its cost is to force competition wiht a lower cost competitor. Business will be creative to maintain their market share and will find a way to lower costs to meet that competition. If we attempt to control costs by regulatory structure, we would be requiring a complex set of price controls, and bureacratic limits that might actually increase costs. The only real “downside” to a gov’t option is the possibilitiy that it puts competition out of business and we are left with a single payor system. That has worked in the case of medicare, military dependents/retirees not located at or near base facilities and in other non-medical contexts (like workers comp in most states). I submit that such a result might actually be desirable once one gets passed the mythology of government run programs being inherently bad.

    All that being said, I agree more than I disagree (or did I already say that?). The problem with minimalism is the tendency to make the quantitative judgment based on yesterdays simpler problems rather than the more complex issues of today and tomorrow. The reality is we can’t allow banks to lend money without govern’t oversight, we can’t allow employers to force employees to accept less than minimum wage and pre-determined hours rules, and we can’t allow insurance companies to dictate cost structures and coverage limits.

  6. Hi. Speaking of agreeing and disagreeing, let’s talk about something you said in the paragraph beginning with “But one of the major issues…” “The most effective way to force business to control its cost is to force competition with a lower cost competitor.” (I fixed the typo, so you owe me one — one typo-fix, that is.)

    I agree, but I have a question: How does the government competitor know how to price what services?

    Is the government a large, medium or small volume operation? Are the prices it pays for professionals, staff and materials competitively determined? What costs of research and development and of pro bono care and community service does it include in its overall cost structure? What level of profits does it consider reasonable? In fact, what quality service provider are we talking about? And what, precisely, is the mix of services this public option provides?

    The trick is, to do this right, that is, for the public option to be an honest to goodness competitor that doesn’t screw up everything, it’s got to be, by definition, a private sector competitor. Even creating a public option by, heaven forbid, buying a private sector competitor would so taint that operation as ruin the experiment.

    You say, “If we attempt to control costs by regulatory structure, we would be requiring a complex set of price controls, and bureaucratic limits that might actually increase costs.” Again, you’re right. Controlling any market is a tenuous process, the say the least. That having been said, the test of the need for the public option is whether or not the concept makes any sense in any other context. Apart from the Administration’s desperate desire to get something passed, no matter what the quality of that legislation, why a public option in this case? We don’t generally use “public options” to protect the public against non-competitive markets. Why start now?


  7. wf:

    First, thanks for correcting the typo. 🙂

    We disagree on the nature of the competition. The real argument against a public option should be, not that government would make a bad competitor because it screws things up but that it would be an unfair competitor because its cost structure is lower than private businesss, i.e. it pays not taxes, has lower borrowing costs, unlimited capital and has no requirement to pay out profits to investors. This would be and actually is a good argument to make and is probably the real reason that private insurers are aginst it. But private insurers know that the public wouldn’t be against the public option if the public were told it would actually work and cost less than private insurance. Well that might not be completely true as the far right would demagogue the public optionby predicting a full take-over by the public option as equating to socialism.

    Separately, you ask how does government know how to set prices. I can’t answer how they know but they apparently do as they have been setting prices in Medicare for approaching a 1/2 century. Actually to be technically correct, as an insurer, they don’t ‘set’ prices, they set reimbursement limits which can act as a price limit in a majority of cases.

    I want to thank you for your rationality. Absence of mention of ‘death panels’, government take-over, government geting between me and my doctor and all the other red herrings used by the medical industrial complex to obfuscate the real issues and parroted by the ditto heads. If you have the time, i have a few blog postings and your comments would be appreciated.

    • Hi. I will stop by your blog later this evening when I have more time — although, fair warning, it will probably be with the TV on in the background just in case nothing I say makes sense.

      Two things… I don’t think you want to make the point that a Public Option “would be an unfair competitor because its cost structure is lower than private businesss, i.e. it pays not taxes, has lower borrowing costs, unlimited capital and has no requirement to pay out profits to investors.” The point you make is true, but equally so for every business in our economy. Public Options, by your own definition, aren’t real companies. You can’t be saying that profit serves no good purpose. Well, you can. You can say anything, but I doubt if you’re suggesting that. And you can’t be suggesting that Public Options become the new standard for correcting non-competitive and consumer-dangerous market behavior — monopoly, externalities, risk perverse behavior, etc. It’s not that a Public Option would be unfair, it’s that you can’t use it (the Public Option) to set a competitive standard. It doesn’t work. It’s a form of price fixing. (Uh oh. Am I beginning to sound like one of the nut balls you were thankful I wasn’t?)

      This is a real question, and not meant to be the least bit flip… You use Medicare as an example of government proficiency. How do you know that the price a competitive private sector would charge for Medicare or better services would be higher than the government’s cost of providing those same services? It’s similar to the question I have about the Public Option. Instead of competing with the private section as a means of imposing competition from above, why not use rules and regulations to make it (the private sector) more competitive by altering the structure of the market, by effecting competition from the inside? Suppose there is no Public Option. What would you do?

      Thanks again for your comments.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s