Eleutherian

This post will focus largely on the effects of a so-called "public option" in health care. You can read my previous posts on health care here, and I plan to post comprehensive talking points on the health care debate in the future.

Here are the three takeaway points from this post:

1. Taxpayer subsidies or the expectation of subsidies will give a government-sponsored public option an unfair advantage over private providers.
2. A public option will primarily reduce costs through monopsony power.
   
3. The government will not set appropriate reimbursement levels to cover the costs of research and development, discouraging future investment.
   

From his past public comments, it is clear that President Obama wants any new health care legislation to include a public option, reasoning that consumer choice and economic competition will benefit. According to Harvard economics professor N. Gregory Mankiw's piece in the New York Times, a public option will have quite the opposite effect. Consumer choice and competition are typically achieved without a public choice. For example, a government option was not needed to create choice and competition among grocery stores, gas stations, or auto insurance providers.

Robert Reich, on the other hand, argued in the Wall Street Journal that a public option will act like any other not-for-profit health care plan, so there is no need to "coddle" the for-profit plans. However, Reich is a former Secretary of Labor in the Clinton administration, and I find it difficult to trust anyone in that position who wasn't smart enough to call for an end to the federal Davis-Bacon prevailing wage law.

As such, there is no way that a government option will act as a private nonprofit health care plan. Mankiw stated, "The public plan would have to stand on its own financially, as private plans do, covering all expenses with premiums from those who signed up for it." In other words, it wouldn't have access to taxpayer dollars. Even if this was the case (which it likely will not), the plan will still have the 'Fannie Mae/Freddie Mac benefit'. Mankiw describes this issue:

Fannie Mae and Freddie Mac, the mortgage giants created by federal law, were once private companies. Yet many investors believed — correctly, as it turned out — that the federal government would stand behind Fannie’s and Freddie’s debts, and this perception gave these companies access to cheap credit.

The mere expectation of taxpayer support will give any public option an unfair advantage against private health care plans. These taxpayer subsidies will prevent the honest competition Obama and other supporting politicians claim they desire. In other words, because mandating a single-payer system is not politically possible in this country, "...a public option that uses taxpayer funds to tilt the playing field may be an attractive second best," stated Mankiw. Reich either overlooks or ignores this aspect.

Reich points to the success of Medicare and Medicaid at limiting administrative costs. However, in a Wall Street Journal rebuttal, AEI's John Calfee stated that Medicare actually outsources many of its administrative services to private sector providers (I was unable to confirm this statement. If anyone has a source, please forward it to me or comment on this post). Additionally, we shouldn't be looking to Medicare and Medicaid as examples. They are a large reason as to why our country's health care finances are in shambles.

As for economies of scale, Calfee notes:

Aetna currently serves about 18 million subscribers, UnitedHealth Care serves between 25 million and 30 million, and WellPoint more than 35 million. That is more than is served by the health-care monopoly of Canada (population 33.6 million), and more than the entire health-care systems of most European nations. Once a plan reaches a few million subscribers, there may not be a lot of economies of scale left that can enable public plans to provide lower prices [emphasis added].

A government-sponsored public health care option will primarily control costs through monopsony power. According to Mankiw:

A dominant government insurer, however, could potentially keep costs down by squeezing the suppliers of health care. This cost control works not by fostering honest competition but by thwarting it....a monopsony — a buyer without competitors — can reduce the price it pays below the competitive level by reducing the quantity it demands [emphasis added].

Calfee adds that other nations' governments achieve lower prices through "monopsony, not superior skill [emphasis added]." Reich responds to such criticism by asking if a monopsony in health care is such a bad thing. Besides, Reich asserts, "no one has to choose it." This is a complete lie. The Congressional Budget Office (CBO) has already stated that a public option would force approximately 10 million people from their current, private insurance providers to the public "option". They will not have a choice.

Of the most dangerous effects of a public option in health care, monopsony power will reduce the number of doctors, health care professionals, and perhaps most importantly, research and development (R&D).

The United States accounts for approximately one-half of the worldwide profits that make continued medical R&D economically feasible. According to Calfee:

When other nations construct their health-care systems, they ignore the impact of their pricing policies on R&D incentives. As the dominant R&D funding wellhead, [the United States does] not have that option [emphasis added].

Since Reich and others want to look to Medicare as an example, we shall. Medicare takes a "destructive approach" to cost reduction by squeezing health care providers until too many refuse to accept Medicare patients. The government doesn't even attempt to set appropriate reimbursement levels to cover R&D costs.

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Shifting gears, I would like to point you to an article by David Brooks in the New York Times. He covers the insufficiently covered, yet laudable, Wyden-Bennett bipartisan health care bill. Senator Bennett is by far my favorite current member of Congress, and this bill removes the tax exemption for employer-provided health care plans. Spread the word.