What does the public plan equilibrium look like?, part III

I'm still thinking about this topic and I will refer you to a response by Frank Pasquale.  He knows a lot about the topic but I'm still not sure how to translate his points into econspeak. 

Here is another way of looking at my original question: some of the key (possible) problems in private insurance markets are adverse selection and lack of transparency in prices and terms of service.  Previously I asked whether the public plan does compete with the private plans for the same pools of customers.  Today I am asking whether greater competition necessarily improves these outcomes.  (It's trickiest when it comes to transparency; you might think that a more transparent plan will outcompete a less transparent plan, but the whole point of the lesser transparency is to make the plan look more attractive than it really is.  A truly transparent plan could look not so attractive at all.  The model here has many relevant iterations, with unclear results.  You get the best results when the presence of a transparent plan educates consumers about the nature of the market more generally, rather than just educating consumers about the nature of the transparent plan.  But that is hard to do)

As Pasquale points out, a lot of state insurance markets are currently not so competitive.  As it stands today, do the more competitive markets offer superior performance?  I genuinely do not know but I would like to see the evidence on this question.


The biggest problem that I have with the public plan is that the government would be competing AND it would be regulating, "cutting costs" (read: setting prices for itself and its competitors), and making up new rules as we go along. Any investment that is required by the private sector to compete (either maintenance or new capital investment) will need to made in this context. Essentially, the private insurers will be operating in a world that they will perceive is stacked against them and will invest accordingly. In that world, the public plan will be able to invest in profitable technologies and use its investments (and the lack of private investment) as an excuse for an eventual takeover of the market.

This is not paranoid. This is just a version of Gresham's Law in action.

Thinking about the private market only, there's a tricky balance that isn't receiving much attention (yet). All other things equal, greater competition in the insurance market weakens plan power with respect to providers, leading to higher provider prices. On the other hand, insurers with large market power may negotiate lower prices from providers but not pass them on to policyholders. This market requires a two-sided analysis, about which I'll blog very soon at thefinancebuff.com.

I don't feel like I can adequately answer the question (do I fully understand it?), but let me offer this thought. The process of competition serves to improve (economic) outcomes via brutal Darwinian selection. Consumers will choose the plans that have the best available balance between coverage and price, meaning that the market will (in the long run) tend toward providing plans that group about the population mean preference.

Three questions, then. First: what will be the effect on consumers of the selection process? Will consumers gravitate away from poor plans because they've been 'burned', so to speak, by being forced into pauperhouse by poor coverage, or will there be other reasons?

Second: will the long-run equilibrium be optimal? What will be the negative externalities of those unlucky ones who are at the balance and just happen to be screwed over by a horrid, long-term disease? What about humane considerations?

Third: what will be the distribution about the preferred balance between coverage and cost? Unless a public plan (as it should) provides insurance at little or no cost to low income, low cost will provide low coverage, underinsuring those with low incomes.

My view of the public option is that it addresses the coodination problem on the supply-side. The coordination problem requires service delivery and cost allocation/settlements of complementary products. Healthcare is multi-provider in that its delivery requires the coordination of multiple providers. Coordination can occur in a competitive context through standards (best practises); or it can occur through monopoly. Cost allocation usually involves prime and sub contractors. It provides a best practises model of how coordinated healthcare should work.

If the public option produces a better product at lower cost than private health care in spite of the public option's built-in cost disadvantage (high cost elderly and low income paid for by a tax on private plans) then the private market should quickly adopt similar models. I assume it includes Medicare and Medicaid and whoever else wants to opt in. How could/should it work? Like VA healthcare: best practises, electronic records, oriented toward outcomes at minimum cost.

Many of the other "solutions" seem to me to be misdirected. Demand-side solutions: There already is lots of pressure on the demand side to reduce consumption from high premiums and business (through insurance companies)unwillingness to absorb higher costs. Moreover, internationally the U.S. seems already to be a pretty low consumer of healthcare services (http://wikileaks.org/leak/crs/RL34175.pdf).

Supply side competitive solutions: Competition on the supply side does not seem to be the issue, in fact the opposit seems to be the case: the more the provders the higher the cost.

There are a lot of confusing issues. What should be provided: heathcare (both preventive and curative)? Health insurance? How should it be priced? If I am risk adverse why shouldn't I buy a comprehensive policy? If I prefer fixed to a la carte price why should that not be provided?

A transparent plan may out compete a non-transparent plan, especially if the transparent plan points out the "hidden costs" of the non-transparent plan. A lot of airlines and banks already compete in this way.

In the courtroom, you can argue that the side that lies the most (to make themselves look good) should win too. That's only true if the other side doesn't point out that they're lying. Shouldn't this be true in insurance markets too?

One thing that gets overlooked is the tremendous deadweight costs that employer-supported healthcare puts on American businesses.

I mean, a company will outsource its development, its back office, and its cleaning ... but it has maintain a competency in health care? Why should we expect businesses to be social welfare organizations? That's ridiculous, and anti-capitalistic.

I think this is true the best results when the presence of a transparent plan educates consumers about the nature of the market more generally, rather than just educating consumers about the nature of the transparent plan.

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