The public health insurance plan

Here is comment from Ezra Klein, who distinguishes different versions of the public plan idea and also links to further reading.  Matt Yglesias comments in favor of the idea.  Here is a Paul Krugman column.  Arnold Kling is skeptical.  Those are good introductions to the debate.  On the economics, Ezra writes:

Rather, the theory here is simple: If you can't replace them, convert
them. If the public plan works, then private insurance will work better
as well. In this telling, the simple existence of the public plan
forces a more honest insurance market: Private insurers need to offer
premiums closer to their marginal cost, and they have to cut
administrative costs, and they have to work on their reputation for
cruelty and capriciousness. The existence of another option changes the
market. Individuals will have access to private insurers, but they'll
no longer be stuck with them.

I believe Ezra is assuming no direct cash subsidy to the public plan, lower marginal and average costs for the public plan, and some mix of market power and X-inefficiency in the private insurance companies.  The existence of the public plan then "contests the market," which eventually lowers MC in the private plan and leads to lower prices and better service.

My question is what the equilibrium looks like.  Say the public plan has a cost advantage (both MC and AC), as plan proponents suggest.  If public and private plans are to coexist, the public plan must be attracting the higher-cost customers, namely the higher medical risks.  (I am also assuming that the political equilibrium does not allow the public plan to reject these customers outright.)  There is then market segmentation and it is not obvious that there are significant positive competitive pressures on private insurance companies.

Oddly, I believe in some models the public insurer constrains the private companies more tightly when the public insurer does not have an apparent cost advantage.  Even here, the properties of the monopolistically competitive equilibrium would be very tricky.

You might wonder why the public plan does not attract all the low-risk customers and take over the whole market.  I would say that either a) it does, or b) it is tailored toward the high-risk customers.  Since public plan advocates sincerely and correctly claim the policy is not just a back door to single-payer, we are left with b).

Another question: is the "cruelty and capriciousness" of the private plans — cited by Ezra — driven by profit maximization?  Presumably it is and again assume the government plan will not do the same.  Why then would public sector competition force a private firm to throw out a profit-maximizing strategy?  In fact "cruelty and capriciousness" would be a comparative advantage of the private companies and maybe it would be milked more strongly in a more competitive environment. 

Another possibility is that the public company has a bigger cost advantage on AC than MC.  For instance maybe it has a "head start" on the fixed costs, because everyone has heard of it, but its cost advantage for additional service dwindles at some point.  The successive accretion of high-risk customers then threatens to put the public plan under (especially if there are lots of previously uninsured and they are high risks) and the public plan requires a subsidy simply to break even.  I consider this equilibrium to be not totally unlikely.

Obviously I am missing some equilibria, but in many cases the public plan is mainly providing insurance to high-risk customers.  There's nothing wrong with that (and indeed it is a major policy goal), but the resulting equilibrium needn't much improve the performance of private health insurance.  I file this argument under "not yet established."


Ezra believes despite all the evidence to the contrary, that a public will be better. I don't where to begin with that assumption.

It is people like that, that make health care inevitable. Where is their critical thinking? How many times do we have to read about state health cuts in this recession or rats in bedrooms of the VA, to realize that most likely the Obamacare will be worse.

The last thing I want is to transfer the responsibility of my health care to a people who have been unable to balance a budget in well over 30 years.

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Another question: is the "cruelty and capriciousness" of the private plans -- cited by Ezra -- driven by profit maximization?

He does say reputation for cruelty and capriciousness, although I doubt that the greatest problem facing private plans is public relations.

I notice that in the image of health insurers painted by the left, the health insurers don't maximize for their shareholders but for their managers ("greedy CEOs" - hence high administrative costs, see Ezra's comment), and the health industry is noncompetitive to begin with (hence private inefficiency, again in Ezra). Given this model, it is plausibly true that a public option can substantially improve the performance of private plans. But whether this model is true to begin with seems to correlate exceptionally well with one's political alignment ;)

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Your 'Felix Salmon' and 'Ezra Klein' links both point to the Ezra Klein article.

Ezra says:

"Moreover, public insurance is simply more efficient. Medicare holds costs down better than private health insurance. The substantially public systems employed by every other industrialized nation cost less and cover more than the American model."

Public systems in other nations are cheaper because they can dictate drug costs, reimbursement rates to providers, and coverage limits to patients -- a 'public plan' in the U.S. that had only a fraction of the market would not be able to do any of these things.

Another question: is the "cruelty and capriciousness" of the private plans -- cited by Ezra -- driven by profit maximization?

Eh, no--those outcomes are driven by financial incentives, which are largely the same regardless of whether or not the insurer is a for-profit enterprise. Which is why government health systems are quite well known for cruelty and capriciousness. My wife deals with a state Medicaid program all the time -- standard operating procedure is to lose paperwork and ask for it to be resent, to ask for 'additional information' to justify the care (without specifying what additional information). If she is persistent enough, usually, but not always, the coverage is provided. But such persistence requires a lot (unbillable) time spent making phone calls and writing letters and reports. Most providers are not so persistent, and coverage is not denied by a clear 'no' (which could be disputed--perhaps even by the patient in court) but by exhausting the provider's time and patience. (And it goes without saying that she is strictly forbidden from providing the relevant names and phone numbers to patients to allow them to take up the case themselves).

These kids of 'cruel and capricious' treatment delays are well-known in the UK and were, for example, what lead to the Canadian Supreme Court to strike down Quebec's ban on private insurance:

I don't know how Klein can possibly claim, with a straight face, that costs will go down and denial of coverage will become a thing of the past with a public option. It's laughable.

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I can think of no better words than 'cruel' or 'capricious' to describe government run health care (medicade and medicare) that we have already.

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Wintercow20 brings up an interesting point. Aren't the vast majority of those uninsured in their 20's?

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"The inclusion of a strong public insurance option has become, for most observers I know, the single most recognizable marker for victory. If the public plan exists, liberals have won. If it's eliminated, or neutered, then conservatives have triumphed."

Apparently, Ezra Klein thinks the answer to my question is no. Well, in the words of John Conner, if we stay the course, we are all dead, even if we don't.

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Hrm... most of the uninsured (or in my case, under insured) people I know are healthy young college students and workers are small startup companies. I bet a public plan would be in a good place to reach out to all those college kids... and I'd rather have cheap, crappy insurance from the govt that would still be there next year than from some company I've never heard of that might go under.

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As for "cruelty and capriciousness" doesn't each individual health insurance policy holder want their insurance to deign more care to other policy holders in order to keep the premiums down? It seems to me that the insurance companies pay for too much care which is the argument that some proponents of Gov. health insurance make when they make arguments that Gov. can control costs better by better tracking what does not work.

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Klein: But that political insight didn't cancel out the policy insight: The private insurance market is a mess. It's supposed to cover the sick and instead competes to insure the well.

No, no, no. The insurance industry is a method for consumers to manage their risk. The sick have no risk of getting sick, they ARE sick! My apoligies, but if the leftists would stop torturing reality, I wouldn't have to multi-post.

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And what happens if people in better health (more wealth) stay with the private plan but their taxes go towards paying for the public plan? How long before wealthier, healthier people start voting officials out of office if they increase funding to the public insurance plan? I cast no aspersions on the healthy & wealthy. I will do the same thing if the time comes.

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Tyler, wouldn't the equilibrium tend to a division in types of coverage? The public plan would cover all common and low-cost procedures, while private coverage would be for new techniques and elective procedures, etc.?

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Lee, isn't that the way it works in countries with single-payer systems? The way I understand it works in Canada (or at least Ontario) the government covers procedures deemed medically necessary, and you can buy additional coverage if you want to get stuff like cosmetic surgery or if you want to jump the queue.

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All of the left's ideas are really strong in regards to health care. However, I am alive right now. I have a beating heart and I would like to be alive a lot longer. What country is then tasked with medical innovation if America employs the same rationing techniques as observed in Western Europe? Is Switzerland or more importantly Zurch supposed to provide all of the world's health care innovation? It seems like quite the burden to bear!

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At least this is better than the argument that we have to spend more money on health care for rich old people instead of poor young people because it really sucks to be old.

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Ed, they aren't competing arguments. Tyler's viewpoints are valid. He is one of the few actually shedding light rather than pushing an agenda.

The left simply wants the poor to get money, in this case for medical services. Then, they want to take credit for the gift. They don't need to screw all of us structurally, and they don't have to convince us that we need to bend over for their new programs. Just cut checks and call it what it is, welfare.

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Isn't this "public plan" just eliminating the age requirement for Medicare.

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"I ask for evidence..."

Typical leftist, wanting something that costs for free.

"If the nationalized Canadian system is so inefficient, why does it cost less?"

Because the product is less valuable. It takes a lot of resources to get poor people to pay their bills.

Your evidence doesn't mean that governments aren't always inefficient. It means Canadians aren't as inefficient as the U.S.

So does this:

"Total government spending per capita in the U.S. on health care was 23% higher than Canadian government spending,"

The assumption that Canadian medical deals with the same inputs as US is just that, an assumption.

So, the plan is that when the government takes over, we'll save 15% of the medical costs by matching Canada's administrative costs?

There is "no question" Canada's cost reduction is from increasing wait times. But, a longer residence time wouldn't cut costs unless people opted to not wait. So, bottom line, it comes from reduction of procedures.

To compare the prices of two different products that are not the same is disingenuous. Yes, if you buy a Canadian car that has no engine, it will be cheaper than the US model.

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Your evidence doesn't mean that governments aren't always inefficient. It means Canadians aren't as inefficient as the U.S.
I suppose you may have tangentially touched upon a technical point; the question isn't whether governments are inefficient by some arbitrary standard, but whether governments are less efficient than private industry. And that is why I cited the evidence I did: people are treating "private industry is more efficient than government" as an axiom, and it's a particularly stupid one at that. It's clearly possible for a largely government-run system to be more efficient than a largely private system, seen by comparing Canada and the US.

(More general complaint:) And what's the deal with treating long wait times as though they're some dreaded socialist horror? Health care is a scarce resource; it has to be rationed somehow or another, whether it be by ability to pay (as in a private system), or by how urgent the care is (as in a public system). Which one is more human is left as an exercise to the reader.

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There is ample room for competition on a quality and service basis that provides room for private plans even if more expensive. They will try to force their more expensive patients in to the public plan so this will limit the cost advantage of a public plan but is unlikely to eliminate it. The public plan would provide basic coverage and cost controls which would make it less desirable for those capable of affording private plans. Those that do without would end up in public plans but they do without because they are low cost, not high cost. It would be difficult for private plans to attract them but they will try. Most in Singapore have private plans even though they are more expensive.

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Actually, being younger and relatively healthy I would immediately sign on to a public plan even if was neutral compared to my own insurance for ideological reasons.

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Tyler - Why are you certain that the public plan is not a back door to single payer? Or asked differently, even if the goal is not a single payer system why won't that be the end result anyway? If the public plan has lower AC and MC it will attract both healthy and high-risk members away from private insurers. Nowhere have I seen advocates for the public plan justifying it as a coverage option for only high risk people. It may provide a better option for high risk people but it may also be a better option for low risk people too (especially if everyone is requred to purchase coverage).

the equilibira i foresee is a public plan that at a minimumn is subsidized through its access to debt at the federal government's cost of capital and at a maxmimum dictates prices to doctors and hospitals much like Medicare. The end result is the same -- it takes over most of the market, either slowly or quickly. Private insurers will be left with a niche of the wealthy who are able to pay for concierge type service to plug gaps in government care and to jump the queue for treatment.

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You seem to be assuming that the only market segmentation is along the lines of risk. I can imagine a variety of other dimensions along which plans might compete: convenience, either in acquiring medical care, tailoring a plan, or in dealing with the back-end of claims and billing, geographic scope, kinds of care that are covered, etc.

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If an efficient, equitable, and humane system of national health care had been established in 1890, today we would all be enjoying a fair and efficient system of 1890 state-of-the-art health care. Well, maybe 1910.

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Has anyone used the student loan program as model? In the early 90s the federal student loan program was horrendous. Lenders and state guarantee agencies were impossible to work with, calling them resulted in lengthy hold times, processing times were absurdly long, additional documentation could only be received by mail, etc.

Along comes the Direct Loan program, which enables students and schools to cut out the guarantors and lenders. Direct Lending isn't perfect, but it forced the lenders to streamline their processes, cut costs and improve customer service.

Wouldn't it be interesting if a government run health insurance plan could do the same?

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I have a hard time standing the discussion of our national health-care solution on its normal terms. Such a hard time that I can't bear reading this thread, frankly.

Here's what I think: people should insure against the things they normally insure against. A catastrophic hit in other words. The rest should be up to them to pay, with help for the truly indigent.

Why is this never what we talk about? Whence the magical thinking about microeconomic medical expenditures? Really: I don't mean it rhetorically. Why? We don't feel that way about other expenses after all...

Awaiting enlightenment, I remain

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Here's what I think: people should insure against the things they normally insure against. A catastrophic hit in other words. The rest should be up to them to pay, with help for the truly indigent.

Maybe so, but that isn't the system we actually have. Maybe private insurance has been running up the cost of routine medical services to make them all but unaffordable to those without insurance but the whole point of this discussion is that nobody wants to ban or restrict private insurance. A very big chunk of health spending is on chronic conditions rather than catastrophic emergencies: think spending $800 per month for the rest of your life, for instance. Even someone who isn't truly indigent to start with could become that way with these kinds of expenses, especially if he loses his job and finds himself unemployable.

Mr. Econotarian,

How do these wait times compare with U.S. emergency rooms? I wasn't aware American hospitals were known for speedy service. Plus, they are already socialist entities: they have to treat everybody. Whether you see a doctor immediately or not depends on the hospital's current work load and the triage nurse's judgment.

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Well, if you want outright nationalize health care, making it a one plan for all kind of thing, you should beware that this will not cut costs! People will abuse the system and costs will rise. Then politicians agree to install auditors that review cases and consider if they are valid cases or just free-riders. And we start to get a bloated behemoth that doesn't do what it was supposed to do (best example, Germans biggest state health insurer: AOK).

If the price-tag private market doesn't work, why not give away health care totally free? That is the ultimate solution for all those that think paying thousands of dollar that Doctors and nurses care for their daughter is just not bearable.

Also, look at other countries, they have adopted, what the US hasn't yet done. Are they overall better off?

If there is one thing than it would be a state insurance or loan on high cost medical procedures that are unforeseeable (accidents, inherited diseases, handicaps etc.). But aren't they already covered?

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John Lilly:
Here's what I think: people should insure against the things they normally insure against. A catastrophic hit in other words. The rest should be up to them to pay, with help for the truly indigent.

That in and of itself won't fix the problems. I currently have what I call "hit by a bus" insurance - high deductible, co-pay, etc, which keeps my premiums around $225/month. In five years, that monthly payment will more than double because I'll be 50 and premiums go up every year regardless, thanks to the re-assignment of costs that takes place under the current system. I should add that, as a self-employed person, I'm extremely fortunate to have had good general health; otherwise I would not be offered insurance at any price and my choices would be to risk just going without insurance knowing that even a relatively minor health issue such as gall bladder surgery would take my home and everything I've worked for, or to go to work for someone who offers group health. Or marry someone who has group health. I should add that, if I had one or more children, I'd already have been forced into becoming someone's employee or wife, because I wouldn't be able to pay the premiums themselves - forget about picking up the tab on the routine care.

In other words, I'm already doing what you think everyone should be doing - picking up the tab for the routine stuff and carrying the insurance for the catastrophic stuff. But I'm one moderate health incident away from being uninsurable. Those of us who must carry our own individual policies can pretty much be cancelled at any time for just about any reason the insurer decides justifies it.

Add to that the fact that most of the 750,000 people filing bankruptcy due to medical costs had medical insurance. Against what, no one knows. The whole point of insurance is to protect your property.

As for paying the routine stuff out-of-pocket, I'm fortunate - no chronic health conditions. So I can cover the routine stuff. But some people just tend by virtue of genetics to be less-healthy and there are a number of fairly common medical conditions that can be well-managed but cost hundreds or thousands of dollars per month to do so. What defines "catastrophic"? If you have a condition that, left untreated, won't kill you but will severely impair your quality of life and which costs $1000 per month for treatment, is that "catastrophic" enough to insure or should that come out of pocket?

When you really start rooting around in how effed the current system is, it becomes clear that there isn't going to be a perfect answer, in a one-off or ever.

Just to get to the point that you can force insurers to offer affordable coverage to everyone you are already in a very tightly-regulated scenario. Because you either have to be able to force them, or you have to have a public option or public subsidies for the unhealthier people - otherwise, you can't cover everybody. I can't see how trying to do that exclusively through a privatized system doesn't just make it more expensive, since you're adding a layer of regulatory bureaucracy while leaving the underlying grossly inefficient privatized system in place.

In short, there isn't an easy answer. I have, however, bothered to ass myself for the link to the Frontline show about different universal healthcare systems in other countries, and recommend it highly.

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"You might wonder why the public plan does not attract all the low-risk customers and take over the whole market. I would say that either a) it does, or b) it is tailored toward the high-risk customers."

I would also add: c) it is NOT tailored toward the low-risk customers (relative to the private plans).

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Thanks for this information about health insurance plan!

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