House Speaker Nancy Pelosi has declared that any health care reform must include a new government-run health plan, modeled after Medicare. Democrats contend that no one would be compelled to choose the government-run plan, and that a “public-plan option” would improve choice and competition in health-insurance markets.
Choice and competition traditional Republican buzzwords give the idea an aura of common sense. But Republican Sen. Mitch McConnell states that this idea is a deal-breaker: Republicans cant support any legislation that contains it in any form.
Given the public momentum that exists for health care reform, Republicans and moderate Democrats wont be able to oppose everything that comes their way. Theyll have to draw a line in the sand somewhere. Still, as modest as it may sound, the Democrats “public-plan option” is worth fighting against.
Such a proposal will make things worse by reducing (not increasing) competition, increasing red tape and exacerbating inefficiencies. Indeed, it could spell the beginning of the end of private insurance.
From a distance, allowing the public and private sectors to compete seems perfectly reasonable. Outside of health care, a variety of thriving government-financed organizations compete with the private sector.
Consider the state university systems, many of which boast world-class institutions. Students have the freedom to choose between state colleges and private universities. At the end of the day, postsecondary education is better for the choice Harvard is strengthened by UCLA.
Choice, of course, isnt the only factor. Well-run public institutions have (relatively) strong, independent leaderships that are not micromanaged by centralized bureaucrats. They also compete with private-sector rivals. When a public or private university underperforms, it loses out, in talented professors, in students (and their tuition dollars), and in research grants.
No one doubts that health care needs competition. State markets are often dominated by one or two health-insurance carriers. Offering people more options would be useful.
As HHS Secretary Kathleen Sebelius pointed out in her confirmation hearing, some states already offer government-run plans for state employees that compete with private insurance. Its worked in Kansas, she assured members of the Senate Finance Committee, and it can work for the country.
Administration officials are clear that the “public plan” would operate like Medicare, and therein lies the problem. Medicare isnt bound by market pricing it sets prices, it doesnt negotiate them. Medicare pays fees to physicians, hospitals and other providers based on an agreed-upon list of services and compensation drawn up by a committee mandated by Congress.
Conservatives often joke about central planning in health care. With Medicare, its no joke: There really is a government committee, the Medicare Payment Advisory Commission (or MedPAC).
Private health insurers, by contrast, negotiate directly with providers.
Lets return to the university analogy. Remember that universities are bound by certain market realities: UCLA needs to pay a good wage for a talented professor. After all, a particularly bright chemist or nuclear engineer can always find work at Harvard or other universities if the California institution doesnt pay up.
Under the Democrats Medicare-like public-plan option, that competitive dynamic wouldnt exist.
Whats more, since Medicares regulations make it very difficult for hospitals to refuse Medicare patients, its not as though providers can rebel. The incredible power of the federal government to impose pricing on providers as opposed to state governments renders meaningless the comparisons between a national public-plan option and experiments in, say, Kansas. If Washington is paying below-market rates to providers, it could charge artificially low premiums. Talk about a competitive advantage: The much cheaper public-plan option would become a magnet for enrollment, swelling public rolls.
In April, the Lewin Group, one of the nations most respected health care consultants, reviewed the potential enrollment of the public-plan option. Its study notes: “Medicare premiums would be lower than private premiums because of the exceptional leverage Medicare has with providers.” The result, according to the groups vice president, John Shiels: “The private industry might just fizzle out altogether.”
Conservatives and moderates should support reforms that expand access to affordable, portable, high-quality private health insurance. So far, one promising idea has attracted bipartisan backing: reforming the tax treatment of health insurance by changing the bias in the tax code toward employer-based insurance.
Jason Furman, deputy director of the National Economic Council, has backed it as has Douglas Holtz-Eakin, former policy director for Sen. McCains presidential bid.
But such proposals are only a beginning. More broadly, supporters of market solutions to the nations health care crisis must make clear that any plan that strangles private health insurance will not advance the cause of reform.
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