The 'Public Option' Health Care Scam

Why Obama's plan won't work


Some statements are inherently unbelievable. Such as: "I am an official of the government of Nigeria, and I would like to deposit $60 million in your bank account." Or: "I'm Barry Bonds, and I thought it was flaxseed oil." And this new one: "I'm Barack Obama, and I favor more competition in health insurance."

That, however, is the claim behind his support of a government-run health insurance plan to give consumers one more choice. The president says a "public option" would improve the functioning of the market because it would "force the insurance companies to compete and keep them honest."

He has indicated that while he is willing to discuss a variety of remedies as part of health insurance reform, this one is non-negotiable. House Democrats, not surprisingly, included the government plan in the 1,000-page bill they unveiled Tuesday.

It will come as a surprise to private health insurance providers that they have not had to compete up till now. Nationally, there are some 1,300 companies battling for customers. Critics say in many states, one or two insurers enjoy a dominant position. But market dominance doesn't necessarily mean insufficient competition.

Microsoft's dominance of software didn't prevent the rise of Google, and Google's dominance of search engine traffic didn't prevent Microsoft from offering Bing. If a few health insurance providers were suppressing competition at the expense of consumers, you'd expect to see obscene profits. But net profit margins in the business run about 3 percent, only slightly above the median for all industries.

There are reasons, though, to think that the president's real enthusiasm is not for competition but for government expansion. Free-market advocates want to foster competition by letting consumers in one state buy coverage offered in other states. If WellPoint has more than half the business in Indiana, why not let Indiana residents or companies go to California or Minnesota to see if they can find options that are cheaper or better?

But the administration and its allies show no interest in removing that particular barrier to competition. Maybe that's because it would reduce the power of state regulators to boss insurance companies around.

Nor does Obama believe in fostering competition in other health insurance realms—such as existing government health insurance programs. John Goodman, head of the National Center for Policy Analysis, suggests letting Americans now enrolled in Medicare, Medicaid and the State Children's Health Insurance Program (SCHIP) select a voucher to buy private coverage if they want. Don't hold your breath waiting for the administration to push that idea.

Supporters of the "public option" think it can achieve efficiencies allowing it to underprice existing insurers. But efficiency is to government programs what barbecue sauce is to an ice-cream sundae: not a typical component. Nor is there any reason to think Washington can administer health insurance with appreciably lower overhead than private companies.

Medicare supposedly does so, but that is partly because it doesn't have to engage in marketing to attract customers, which this program would. It also spends less than private companies combating fraud and unwarranted treatments—a type of monitoring that spends dollars while saving more.

As the Congressional Budget Office has pointed out, "The traditional fee-for-service Medicare program does relatively little to manage benefits, which tends to reduce its administrative costs but may raise its overall spending relative to a more tightly managed approach." False economies are one reason Medicare has done a poor job of controlling costs.

But a public program of the sort Democrats propose doesn't have to control costs, because in a pinch it can count on the government to keep it in business. Competition is healthy, but how are private companies supposed to compete with an operation that can tap the Treasury?

Students of the Obama economic policy will also note a curious consistency in its approach to economic issues. Some problems, like the near-collapse of General Motors and Chrysler, came about because competition worked very well at serving consumers and punishing poorly run companies. Some problems, such as high health insurance premiums, came about because competition allegedly didn't work so well. In both cases, the administration proposes the same solution: more federal spending and a bigger federal role.

Will introducing a government-run insurance program work? After all, that Nigerian financial scam works. Just not necessarily the way you hope.