Three Dirty Little Secrets in the Public Health-Care Plan - Columns - American Issues Project

Three Dirty Little Secrets in the Public Health-Care Plan - Columns - American Issues Project

The Obama administration insists that the health-care reform plan that has received failing marks already from the Congressional Budget Office must include a public plan for health insurance coverage. Only a public plan can stoke competition with the private market insurers, HHS Secretary Kathleen Sebelius told the Associated Press this week. That must come as a shock to anyone who understands that any private market, including the health-insurance market, provides competition within itself and between its participants. In fact, the entire idea of private markets is to ensure competition, efficiency, and value for consumers.



Critics have accused the administration of including the public plan in ObamaCare as a stalking horse for a single-payer nationalization of the health-care sector in the US. Sebelius and the White House both hotly deny it, but Sebelius' answer as reported by the AP demonstrates exactly how the stalking horse would drive private insurers out of the business entirely:

Sebelius said that President Barack Obama does not want to drive health insurers out of business, but make them more competitive by offering working families and small businesses the option of a public plan without the high overhead costs of marketing, administration and profits.

Without “the high overhead costs of marketing, administration, and profits”? Does Sebelius really promise that anyone – government or private insurer – can offer plans without any administration costs at all? Who will handle the claims? Who will pay the doctors? I doubt that any high-ranking government official has ever made such a clueless claim about business in any context, let alone the highly-regulated market of health insurance.

First dirty secret of a public plan: Any plan has to involve administration costs, even if it operates on a non-profit basis. The obvious examples here are Medicare, Medicaid, and the Veterans Administration plans. Costs have skyrocketed under both government-run plans while cutting back on the benefits both afford their patients, thanks to miles of red tape handled by legions of bureaucrats. Doctors get paid less and have to spend more to invoice for their services in Medicare and Medicaid, which has more of them refusing to take new patients under either plan.

However, a government-run plan can hide those costs by simply hiding them elsewhere, in the short term. Sebelius and Obama will juggle the books to make a show of solvency while they undercut the private market insurers, who have to pay their employees to process claims, handle member services, ensure compliance with miles of existing government regulations, and in some cases offer a small margin of return to their investors, who put up the money and risk for the insurance plans in the first place.

How much profit are we talking about? At the height of the economic expansion in 2006, the American health-insurance sector only averaged a 3.9 percent margin on its overall revenue. They aren't burning $100 bills in the executive offices to light cigars, despite the administration's sniffing reference to “profits” as an obstacle to be overcome rather than the reward for efficiency in a competitive market.

And that in itself is remarkable, considering the second dirty little secret of a public plan. While Sebelius and the White House disdain and completely misunderstand the private market, the private market in fact subsidizes the already-existing public plans of Medicare and Medicaid. A correspondent from within a major insurer explained to me exactly how that works:

At a recent leadership meeting, our CEO mentioned that the providers are very nervous about the government program expanding. Currently, the government dictates to a provider how much they will be reimbursed for a given procedure. That reimbursement does not cover the actual cost, which leaves the provider to spread the remaining portion of the cost to the rest of the people who have insurance.

If the government program were to expand, the number of privately insured people to absorb that extra cost would shrink, driving up the cost of insurance for everybody else. Eventually, two things would happen.... First, nobody could afford the non-government program, and secondly (and this is what the providers are truly afraid of), providers would not be able to cover their costs. This would drive them to bankruptcy. We would then either be in a position where there are no health care providers, or the government would have to nationalize them as well.

Many providers now refuse to take new Medicare/Medicaid patients because the plans don't cover their costs to provide services. Those who do wind up charging their other patients more to cover their losses. The private insurers bear the brunt of that business practice now, which is bad enough. If the private insurers disappear, though, providers will not recoup the losses at all, and will go out of business altogether.

Instead of having a robust health-care system that rewards providers and insurers for their work, the public plan and its inevitable market-killing characteristics will create an artificial shortage of health-care providers. Everyone will have coverage, but it may take months or years to get treatments, if at all. That is not a worst-case, hypothetical scenario, either; single-payer systems around the world share this commonplace result.

When the administration talks about cost control via public plans, they really have no idea of the real costs of health care, and the real contribution a free market makes. In this case, they're about to kill the golden goose, and they're completely unaware of it. And that's the third dirty secret of Obama's public plan.