"The public option is displacing private insurance."


What happened when Florida instituted a government-run insurance option in response to rising property insurance premiums? Alex Tabarrok points us to the following history lesson by the Independent Institute's Randall Holcombe:

After Hurricane Andrew hit Florida in 1992 some Floridians were having difficulty purchasing homeowners' insurance.  (The reason: rates are regulated, and at the regulated rates some properties are too great a risk.)  So, the state government formed Citizens Property Insurance Corporation, which is owned and operated by the State of Florida.

As originally envisioned, Citizens would charge rates above those charged by private insurers, to make Citizens the insurer of last resort.  Nevertheless, Citizens found plenty of customers.

After two bad hurricane seasons in 2004 and 2005 property insurance rates in Florida rose, and in his campaign for the office, current Governor Charlie Crist promised voters that if elected he would see that their property insurance bills "dropped like a rock."

One tactic he used was to change Citizens' rate structure so it was competitive with private insurers.  His idea, like President Obama's idea with health insurance, is that with a public option, private insurers would have to keep their rates in line or risk losing customers to the government insurer.

That's what's happened in Florida. Today about 30% of homeowners' policies are written by Citizens, which is the largest property insurer in the state.  It's about to get bigger too.  The largest private insurer, State Farm, had a rate request rejected last year, and now is pulling out of the state altogether (for property insurance; they'll still insure your car).  As the largest private insurer pulls out over a three-year period (that period negotiated with the state), Citizens will get an even larger share of Florida's property insurance.

Everybody in Florida knows Citizens is a fiscal time bomb.  Already, every Florida insurance policy (on homes, boats, cars, etc.) pays a surcharge that goes to Citizens, but Citizens still doesn't have sufficient reserves to weather a major hurricane.  When one comes, Florida taxpayers will be on the hook for the bill.

The legislature knows this, and actually passed a bill last year that would have done a great deal to solve the problem by partially deregulating rates private insurers could charge.  State Farm would have stayed in Florida had that bill taken effect, but it was vetoed by the Governor.  The public option is displacing private insurance.

Now, it's not clear that something similar would happen immediately if the House's variant on the public option for health insurance became law. According to the CBO, under the House bill, the public plan would actually have higher premiums than private insurance options, and only about 6 million people would be enrolled. But if Congress eventually decided to "fix" this by forcing premium rates down by, say, pegging reimbursement fees to Medicare, as many of the most liberal legislators want to do now, it's more than plausible that we could see a similar situation develop in the health insurance market.