Fannie Med? Why a "Public Option" Is Hazardous to Your Health
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No. 642 August 6, 2009
Fannie Med?
Why a “Public Option” Is Hazardous to Your Health
by Michael F. Cannon
Executive Summary
President Obama and other leading Demo- A health insurance “exchange,” where con-
crats have proposed creating a new government sumers choose between private health plans with
health insurance program as an option for artificially high premiums and a government pro-
Americans under the age of 65, within the context gram with artificially low premiums, would not
of a new, federally regulated market—typically increase competition. Instead, it would reduce
described as a “National Health Insurance competition by driving lower-cost private health
Exchange.” Supporters claim that a new govern- plans out of business. President Obama’s vision of
ment program could deliver higher-quality a health insurance exchange is not a market, but a
health care at a lower cost than private insurance, prelude to a government takeover of the health
and that competition from a government pro- care sector. In the process, millions of Americans
gram would force private insurers to improve. would be ousted from their existing health plans.
A full accounting shows that government If Congress wants to make health care more
programs cost more and deliver lower-quality efficient and increase competition in health
care than private insurance. The central problem insurance markets, there are far better options.
with proposals to create a new government pro- Congress should reject proposals to create a
gram, however, is not that government is less new government health insurance program—not
efficient than private insurers, but that govern- for the sake of private insurers, who would be
ment can hide its inefficiencies and draw con- subject to unfair competition, but for the sake of
sumers away from private insurance, despite American patients, who would be subject to
offering an inferior product. unnecessary morbidity and mortality.
_____________________________________________________________________________________________________
Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of Healthy
Competition: What’s Holding Back Health Care and How to Free It.The central percent) are well below the overhead
problem with Introduction costs of large companies that are self-
insured (5 to 10 percent of premiums),
proposals to President Obama,1 Senate Finance Commit- companies in the small group market
create a new tee chairman Max Baucus (D-MT),2 and other (25 to 27 percent of premiums), and
leading Democrats have proposed creating a new individual insurance (40 percent of
government government health insurance program as an premiums).12
program is that “option” for Americans under the age of 65. This
government can program would operate within the context of a Supporters claim they are willing to put gov-
new, federally regulated market—typically ernment to the test by having it compete
hide its described as a “National Health Insurance against private plans in the context of a new
inefficiencies and Exchange.” House Speaker Nancy Pelosi (D-CA)3 government-run “exchange.” President Obama
draw consumers and four House caucuses representing more than claims that a new government program “gives
100 Democrats4 have stated that a new govern- consumers more choices, and it helps keep the
away from private ment health insurance program modeled on private sector honest, because there’s some
insurance, despite Medicare is the sine qua non of health care competition out there.”13 The House Demo-
reform. Sixteen Democratic senators have signed crats’ legislation would create a “public health
offering an a letter signaling their support.5 Senate Health, insurance option” that would be “self-sustain-
inferior product. Education, Labor, and Pensions Committee ing and compet[e] on [a] ‘level field’ with pri-
chairman Edward M. Kennedy (D-MA) has pro- vate insurers.”14 Columnist E. J. Dionne writes,
posed legislation that would create such a pro- “The public-option idea . . . would allow the
gram,6 as have three key House committees.7 United States to move gradually toward a gov-
Others have suggested that Congress ernment-run system if—and only if—a substan-
should adopt a different model. Senate Budget tial number of consumers freely chose to join
Committee chairman Kent Conrad (D-ND) such a plan. The market would test the idea’s
and Sen. Charles Schumer (D-NY) have pro- strength.”15
posed that Congress create one or more health- A full accounting, however, shows that
insurance “cooperatives,” although each government programs are less efficient than
endorses different structures and different lev- private insurance. Administrative costs are
els of government support. Cooperatives are higher in government programs such as
member-run health plans that already exist in Medicare, because they avoid administrative
many areas of the country; for instance, Group activities that increase efficiency and incur
Health Cooperative already covers 580,000 other administrative costs that are purely
Americans in the states of Washington and wasteful. Government programs also sup-
Idaho.8 Schumer proposes that Congress press innovation, and thereby reduce the
spend $10 billion to create a single nationwide quality of care for all patients, whether pub-
cooperative, which would be governed by a fed- licly or privately insured.
eral board and endowed with the power to use The central problem with proposals to cre-
Medicare-like price controls.9 Conrad proposes ate a new government program is not that
multiple cooperatives10 with start-up subsidies government is less efficient than private insur-
in the neighborhood of $4 billion.11 ers, however, but that government can hide its
Advocates of a new government health inefficiencies and draw consumers away from
insurance program claim that government private insurance, despite offering an inferior
provides coverage more efficiently than the pri- product. If the government plan’s premiums
vate sector. University of California–Berkeley reflected its full costs—and private insurance
political scientist Jacob Hacker writes: premiums reflected only their actual costs—
there would be no reason not to let the gov-
The public Medicare plan’s adminis- ernment enter the market. As Dionne sug-
trative overhead costs (in the range of 3 gests, the market would test the idea’s
2strength. Yet government possesses both the new program to everyone, it could pull 120 mil-
power to hide its true costs (which keeps its lion Americans out of private insurance—more
premiums artificially low) and to impose costs than half of the private market.20 The share of
on its competitors (which unnecessarily push- Americans who depend on government for
es private insurance premiums higher). It their health care would rise from just over one-
makes no difference whether a new program quarter to two-thirds.21 Many of those millions
adopts a “co-operative” model or any other. would be involuntarily ousted from their cur-
The government possesses so many tools for rent health plans—much like President Obama
subsidizing its own program and increasing suggested ousting 10 million seniors22 from
costs for private insurers—and has such a long their private Medicare Advantage plans and
history of subsidizing and protecting favored forcing them into the traditional Medicare pro-
enterprises—that unfair advantages are gram.23 Yet even those who voluntarily chose a
inevitable. This is in no small part because new government program over their existing
supporters of a new government program coverage would do so not because the govern-
want it to have unfair advantages. ment program provides better value for the
money, but because the government program
Literally Ousting Patients from Their would hide some of its cost.
Health Plans A health insurance “exchange,” where con-
President
In a speech to the American Medical sumers choose between private health plans Obama’s vision
Association, President Obama reiterated a with artificially high premiums and a govern- of a health
promise that he has made repeatedly since the ment program with artificially low premiums,
2008 presidential campaign: would not increase competition. Instead, it insurance
would reduce competition by driving lower- exchange is not a
No matter how we reform health care, cost private health plans out of business.
we will keep this promise to the President Obama’s vision of a health insurance
market, but a
American people. If you like your doc- exchange is not a market, but a prelude to a prelude to a
tor, you will be able to keep your doc- government takeover of the health care sector. government
tor, period. If you like your health care In the process, millions of Americans would be
plan, you’ll be able to keep your health ousted from their existing health plans, and all takeover of the
care plan, period. No one will take it would suffer the consequences of government- health care
away, no matter what.16 run health care. sector.
After the Congressional Budget Office estimated
that as many as 15 million Americans could lose Is Government
their existing coverage under Senator Kennedy’s More Efficient?
legislation,17 the Associated Press reported,
“White House officials suggest the president’s Supporters of a new government program
rhetoric shouldn’t be taken literally.”18 note that private insurers spend resources on a
Indeed, a new government program would wide range of administrative costs that govern-
literally oust millions of Americans from their ment programs do not. These include market-
current health plans and threaten their rela- ing, underwriting, reviewing claims for legiti-
tionships with their doctors, as employers macy, and profits. The fact that government
choose to drop their current employee health avoids these expenditures, however, does not
plans and as private health plans close down. A necessarily make it more efficient. Many of the
Lewin Group analysis estimated that Obama’s administrative activities that private insurers
campaign proposal would move 32 million undertake serve to increase the insurers’ effi-
Americans into a new government-run plan.19 ciency. Avoiding those activities would there-
Lewin subsequently estimated that if Congress fore make a health plan less efficient. Existing
used Medicare’s price controls and opened the government health programs also incur
3administrative costs that are purely wasteful. costs may come at a price. 28
In the final analysis, private insurance is more
efficient than government insurance. CMS further estimates that it made $10.4 bil-
lion in improper payments in the fee-for-ser-
Administrative Costs vice Medicare program in 2008.29
Time magazine’s Joe Klein argues that “the Medicare keeps its measured administra-
profits made by insurance companies are a tive-cost ratio relatively low by avoiding
good part of what makes health care so expen- important administrative activities (which
sive in the U.S. and that a public option is need- shrinks the numerator) and tolerating vast
ed to keep the insurers honest.”24 All else being amounts of wasteful and fraudulent claims
equal, the fact that a government program (which inflates the denominator).30 That is a
would not need to turn a profit suggests that it vice, yet advocates of a new government pro-
might enjoy a price advantage over for-profit gram praise it as a virtue.31
insurers. If so, that price advantage would be Medicare also keeps its administrative
slight. According to the Congressional Budget expenditures down by conducting almost no
Office, profits account for less than 3 percent quality-improvement activities. Journalist
of private health insurance premiums.25 Shannon Brownlee and Obama adviser Ezekiel
Furthermore, government’s lack of a profit Emanuel write:
motive may not be an advantage at all. Profits
are an important market signal that increase [S]ome administrative costs are not only
efficiency by encouraging producers to find necessary but beneficial. Following
lower-cost ways of meeting consumers’ heart-attack or cancer patients to see
needs.26 The lack of a profit motive could lead which interventions work best is an
a government program to be less efficient than administrative cost, but it’s also invalu-
private insurance, not more. able if you want to improve care.
Moreover, all else is not equal. Government Tracking the rate of heart attacks from
programs typically keep administrative expen- drugs such as Avandia is key to ensuring
ditures low by avoiding activities like utilization safe pharmaceuticals.32
or claims review. Yet avoiding those activities
increases overall costs. The CBO writes, “The According to the CBO, private insurers spend
traditional fee-for-service Medicare program nearly 1 percent of premiums on “medical
does relatively little to manage benefits, which management.”33 The fact that Medicare
tends to reduce its administrative costs but may keeps administrative expenditures low by
raise its overall spending relative to a more tightly avoiding such quality-improvement activities
managed approach.”27 Similarly, the Medicare may likewise result in higher overall costs—in
Payment Advisory Commission writes: this case by suppressing the quality of care.
Supporters who praise Medicare’s appar-
[The Centers for Medicare & Medicaid ently low administrative costs often fail to note
Services] estimates that about $9.8 billion that some of those costs are hidden costs that
in erroneous payments were made in the are borne by other federal agencies, and thus
fee-for-service program in 2007, a figure fail to appear in the standard 3-percent esti-
In the final more than double what CMS spent for mate.34 These include “parts of salaries for leg-
claims processing and review activities. In islators, staff and others working on Medicare,
analysis, private Medicare Advantage, CMS estimates that building costs, marketing costs, collection of
insurance is more erroneous payments equaled $6.8 billion premiums and taxes, accounting including
efficient than in 2006, or approximately 10.6 percent of auditing and fraud issues, etc.”35
payments. . . . The significant size of Also, Medicare’s administrative costs
government Medicare’s erroneous payments suggests should be understood to include the dead-
insurance. that the program’s low administrative weight loss from the taxes that fund the pro-
4gram. Economists estimate that it can easily istrative burden of government health insurance Medicare hides
cost society $1.30 to raise just $1 in tax revenue, programs conclude that administrative costs are its higher
and it may sometimes cost as much as $2.36 far higher in government programs than in pri-
That “excess burden” of taxation is a very real vate insurance. In 1992, University of administrative
cost of administering (i.e., collecting the taxes Pennsylvania economist Patricia Danzon esti- costs from
for) compulsory health insurance programs mated that total administrative costs were more
like Medicare, even though it appears in no than 45 percent of claims in Canada’s Medicare
enrollees and
government budgets. system, compared to less than 8 percent of taxpayers, and
Comparing administrative expenditures in claims for private insurance in the United public-plan
the traditional “fee-for-service” Medicare pro- States.40 Pacific Research Institute economist
gram to private Medicare Advantage plans can Ben Zycher writes that a “realistic assumption” supporters rely
somewhat control for these factors. Hacker about the size of the deadweight burden puts on the hidden
cites a CBO estimate that administrative costs “the true cost of delivering Medicare benefits [at] nature of those
are 2 percent of expenditures in traditional about 52 percent of Medicare outlays, or
Medicare versus 11 percent for Medicare between four and five times the net cost of pri- costs when they
Advantage plans. He writes further: “A recent vate health insurance.”41 argue in favor
General Accounting Office report found that Administrative costs can appear quite low if
in 2006, Medicare Advantage plans spent 83.3 you only count some of them. Medicare hides
of a new
percent of their revenue on medical expenses, its higher administrative costs from enrollees government
with 10.1 percent going to nonmedical expens- and taxpayers, and public-plan supporters rely program.
es and 6.6 percent to profits—a 16.7 percent on the hidden nature of those costs when they
administrative share.”37 argue in favor of a new government program.
Yet such comparisons still do not establish
that government programs are more efficient Cost Containment vs. Spending
than private insurers. The CBO writes of its Containment
own estimate: “The higher administrative costs Advocates of a new government health care
of private plans do not imply that those plans program also claim that government contains
are less efficient than the traditional FFS pro- overall costs better than private insurance.
gram. Some of the plans’ administrative Jacob Hacker writes, “public insurance has a
expenses are for functions such as utilization better track record than private insurance
management and quality improvement that when it comes to reining in costs while pre-
are designed to increase the efficiency of care serving access. By way of illustration, between
delivery.”38 Moreover, a portion of the 1997 and 2006, health spending per enrollee (for
Medicare Advantage plans’ administrative comparable benefits) grew at 4.6 percent a year
costs could reflect factors inherent to govern- under Medicare, compared with 7.3 percent a year
ment programs rather than private insurance. under private health insurance.”42 In fact, looking
For example, Congress uses price controls to at a broader period, from 1970 to 2006, shows
determine how much to pay Medicare that per-enrollee spending by private insur-
Advantage plans. If Congress sets those prices ance grew just 1 percentage point faster per
at supracompetitive levels, as many experts year than Medicare spending, rather than 2.7
believe is the case,39 then that may boost percentage points.43 That still omits the
Medicare Advantage plans’ profitability 1966–1969 period, which saw rapid growth in
beyond what they would earn in a competitive Medicare spending.
market. Those supracompetitive profits would More importantly, Hacker’s comparison
be a product of the forces that would guide a commits the fallacy of conflating spending and
new government program—that is, Congress, costs. Even if government contains health care
the political system, and price controls—rather spending better than private insurance (which
than any inherent feature of private insurance. is not at all clear), it could still impose greater
Economists who have tallied the full admin- overall costs on enrollees and society than pri-
5vate insurance. For example, if a government compared with [private insurance].”47 Patients
program refused to pay for lifesaving medical with Medicaid coverage experience more
procedures, it would incur considerable non- unmet medical needs than similar patients
monetary costs (i.e., needless suffering and with private insurance.48 Studies have found
death). Yet it would look better in Hacker’s that Medicaid patients suffer worse outcomes
comparison than a private health plan that than similar privately insured patients when it
saved lives by spending money on those ser- comes to cancer,49 unstable angina,50 and
vices. Medicare’s inflexibility also imposes coronary artery bypass graft surgery.51 The
costs on enrollees. Medicare took 30 years Veterans’ Health Administration appears to
longer than private insurance to incorporate outperform private insurance on some dimen-
prescription drug coverage into its basic bene- sions of quality,52 but exhibits serious defi-
fits package. The taxes that finance Medicare ciencies in others.53 President Obama’s secre-
impose costs on society in the range of 30 per- tary of Health and Human Services, Kathleen
cent of Medicare spending.44 In contrast, there Sebelius, has called the government-run
is no deadweight loss associated with the vol- Indian Health Service a “historic failure.”54
untary purchase of private health insurance. Nevertheless, supporters make the demon-
Hacker nods in the direction of nonspend- strably false claim that government programs
Medicare and ing costs when he writes, “Medicare has main- are more innovative than private insurance.
other government tained high levels of . . . patient access to Hacker writes, “Medicare has been slow to
programs care.”45 Yet there are many dimensions of qual- adopt quality innovations—though generally
ity other than access to care. It is in those areas quicker than private health plans.”55 Peter
uniformly lag that government programs impose their Harbage and Karen Davenport of the Center
private insurers greatest hidden costs, on both publicly and for American Progress cite Medicare’s policy
privately insured patients. on “never events”—severe medical errors that
when it comes should “never” happen—as proof of govern-
to quality Government Programs Suppress Quality, ment’s superior ability to promote quality:
innovations. Cost Lives “Witness steps such as Medicare’s refusal to
Supporters also claim that government pay medical care providers for ‘never events,’
programs outperform private health insur- where a patient suffers a knowable and cata-
ance on quality. On the surface, the quality of strophic mistake, such as having the wrong
medical care in government programs tends limb removed. This is something other major
to be similar to, or worse than, the quality of insurers are now adopting.”56
care under private insurance. This may be In reality, Medicare and other government
largely due to the fact that government pro- programs uniformly lag private insurers when
grams uniformly lag private insurance in it comes to quality innovations. For example,
adopting quality innovations. Beneath the private insurers began experimenting with
surface, however, government programs sup- “pay-for-performance” financial incentives
press the quality of care for all patients, almost an entire decade before Medicare.57
whether publicly or privately insured. “Never events” provide an even clearer illus-
Researchers estimate that patients receive tration. In 2003, an estimated 181,000 severe
high-quality, evidence-based care only about medical errors occurred in hospitals alone.58
half of the time, regardless of whether they are Throughout its 43-year history, Medicare has
enrolled in Medicare, Medicaid, or private actually encouraged such errors by financially
insurance.46 A recent Minnesota study found, rewarding health care providers when an error
however, “On eight of the nine statewide mea- leads to more services, and financially penaliz-
sures, performance in achieving high-quality ing providers who reduce error rates.59 In
care was significantly lower at both the October 2008, Medicare eliminated those per-
statewide and medical group levels for verse incentives for a short list of medical
[Medicaid and other government programs] errors called “never events.” That policy will
6likely discourage some medical errors by forc- such patients to only 1 in 25, down from
ing providers to pay for some of the associated nearly 1 in 6. But the reduction has been
costs. Yet the first private health plan to force a losing proposition. Although the
providers to bear the full financial cost of all effort saved Medicare roughly $5 million
medical errors was offered by the Ross-Loos a year, Park Nicollet is not paid to pro-
Clinic in 1929.60 Kaiser Permanente has done vide the follow-up care. Meanwhile, few-
so since the 1940s. Medicare didn’t even play a er returning hospital patients mean low-
leading role on “never events” among fee-for- er revenue for Park Nicollet. “We’ve kept
service plans, as Harbage and Davenport it up out of a sense of moral obligation
claim. HealthPartners of Minnesota stopped to these patients, but we’re getting
paying for “never events” in January 2005.61 killed,” said David K. Wessner, chief
Medicare merely followed suit. executive of Park Nicollet. “We will total-
ly run out of gas.”62
Stagnation Costs Lives
Government programs are not merely slow Medicare suppresses countless quality
to innovate, they are outright hostile to quali- innovations by making them “a losing
ty innovations. Government programs inject proposition.”
rigidity into health care markets that sup- A free market would use competition from
presses the quality of care for publicly and pri- different methods of paying providers to keep
vately insured patients alike. The result is those perverse incentives in check. Under “pre-
greater morbidity and mortality. payment” or “capitation,” for example,
This can be seen most clearly in the way gov- providers receive a flat fee to provide medical
ernment suppresses competition between dif- care for a given patient or group of patients.
ferent methods of paying doctors, hospitals, Group Health Cooperative is an example of an
and other health care providers. As noted above, integrated, prepaid health plan. Prepayment
Medicare financially rewards medical errors rewards providers for avoiding unnecessary
and penalizes error-reduction efforts because it and harmful services: whatever money
pays providers on a fee-for-service basis. Fee-for- providers save by avoiding medical errors, for
service payment, as the name suggests, means example, the providers get to keep. It is no
that providers collect an additional fee for each coincidence that prepaid health plans, like
additional service they provide. Conversely, if Kaiser Permanente, lead the market in innova-
providers deliver fewer services, they collect less tions such as coordinated care and electronic Government
revenue. Fee-for-service payment thus creates a medical records, which help avoid unneces-
perverse incentive: if low-quality care (e.g., a sary services. Prepayment also creates its own
programs inject
medical error, poor coordination between perverse incentive: providers get to keep what- rigidity into
providers, insufficient attention to medical evi- ever money they save by denying access to health care
dence) results in a patient requiring more ser- needed care as well. In a free market, however,
vices, then low-quality providers will receive competition from fee-for-service providers markets that
more revenue than providers who adopt quali- would force them not to stint on necessary suppresses the
ty innovations. According to the New York care. By the same token, competition from
Times, for example: prepaid plans would force fee-for-service
quality of care for
providers to coordinate care, offer electronic publicly and
Park Nicollet Health Services, a hospital medical records, and avoid medical errors. privately insured
and clinic system based in St. Louis Park, Government health insurance programs—
Minn[esota] . . . started . . . spending as principally Medicare—block competition patients alike.
much as $750,000 annually on more between different payment systems, and there- The result is
nurses and on sophisticated software to fore dramatically reduce the quality of care. As greater morbidity
track heart failure patients after they left the largest purchaser of medical services in the
the hospital. It reduced readmissions for United States, Medicare accounts for two- and mortality.
7Harbage and thirds to four-fifths of revenues for many hos- Medicare program promotes quality care
Davenport write pitals and specialties.63 Medicare’s influence is alongside cost containment.”65 That is precise-
so vast that hospitals and other providers ly the problem. A new government program
that a new organize the delivery of medical care around would suppress quality, just as Medicare has,
government the financial incentives it creates. Providers by further stifling competition between pay-
like Park Nicollet Health Services cannot stay ment systems. Sebelius says that making
program “will in business by providing high-quality coordi- Medicare “a strong and sustainable program
create incentives nated care, because that means less revenue depends on our ability to fix what’s broken in
for effective from Medicare. Because privately insured the rest of the system.”66 Sebelius has it exact-
patients use the same doctors and hospitals, ly backward: Medicare is what’s broken in the
performance just that means Medicare suppresses the quality of rest of the system.
as today’s care even for privately insured patients.64 We need not look to Canada to find horror
The main reason that the U.S. health care stories about government-run health care.
Medicare program sector lacks coordinated care, electronic med- Estimates of 100,000 deaths each year in the
promotes quality ical records, and comparative-effectiveness United States from medical errors should be
care alongside research is that government rewards providers frightening enough.67 A new government pro-
who avoid these quality innovations and gram, whether modeled on Medicare or not,
cost containment.” penalizes providers who adopt them. The would further suppress health care quality
That is precisely main reason that as many as 100,000 and cause additional morbidity and mortality.
the problem. Americans die from medical errors each year is
that the nation’s largest health care purchaser
rewards providers who tolerate medical errors The Fair-Competition
and punishes providers who reduce them. Fantasy
Congress cannot solve this problem by
reforming Medicare’s payment system, creat- President Obama admits, “I think there can
ing a new program that uses a different pay- be some legitimate concerns on the part of pri-
ment system, or attempting to incorporate vate insurers that if any public plan is simply
such competition into a government program. being subsidized by taxpayers endlessly, that over
All methods of paying health care providers time they can’t compete with the government
create perverse incentives. If Medicare or a new just printing money.”68 Nevertheless, supporters
program adopts the payment system used at claim that Congress can create a new govern-
Group Health Cooperative, Congress will ment program that competes with private insur-
merely trade the perverse incentives of fee-for- ers on a level playing field. The “Blue Dog
service payment (uncoordinated care, medical Coalition” of moderate House Democrats has
errors) for those of prepayment (less provider offered several criteria that a new program would
choice, greater rationing). Only competition have to satisfy in order to do so.69 The Blue Dogs
between different payment systems can hold insist, for example, that the program would have
those perverse incentives in check. Yet govern- to be completely self-sustaining (i.e., premium
ment programs like Medicare and Medicaid revenue would cover all costs), that the govern-
stifle such competition. Medicare Advantage ment not leverage its market power to favor the
attempts to allow such competition, yet differ- new program, and that government not enact
ent health plans with different payment sys- any regulations that favor a new government
tems constantly lobby Congress for special program over private insurers. Supporters such
advantages. Meanwhile, politicians, such as as Len Nichols and John Bertko of the New
President Obama, propose eliminating such America Foundation claim that a new program
competition entirely. can satisfy those conditions.70
Harbage and Davenport write that a new Yet the government need neither subsidize
government program “will create incentives its own program with taxpayer money, nor
for effective performance just as today’s newly printed money, nor must it do so “end-
8lessly,” to supplant private insurance with an Direct Subsidies
inferior option. Indeed, government has count- Among the many ways that Congress
less other ways to prevent the true cost of a new could favor a new government program is
program from appearing in its premiums, and through direct subsidies—that is, real
to increase the premiums of its competitors. resources provided to the government pro-
Moreover, government’s long history of subsi- gram, yet withheld from private insurers:
dizing, protecting, and bailing out favored
enterprises shows that such special advantages • The federal and state governments
would be inevitable. For example, Amtrak finance Medicaid and the State
requires repeated taxpayer subsidies to stay Children’s Health Insurance Program
afloat.71 And Congress famously bailed out almost entirely through tax revenue. As
Fannie Mae and Freddie Mac. a result, those programs crowd out pri-
Congress has made Medicare increasingly less vate insurance among individuals who
self-sustaining over time. When Congress creat- could otherwise obtain coverage on their
ed Medicare in 1965, enrollee premiums covered own.75 Likewise, taxpayer subsidies fund
50 percent of the cost of physician services. nearly 90 percent of Medicare spending,
Under pressure from Medicare enrollees, subse- which helps that program almost com-
quent Congresses gradually reduced that share pletely crowd out private health insur- Government has
to 25 percent. The U.S. Postal Service is similarly ance for the elderly.76 countless ways to
unable to sustain itself. According to one critic: • Creating a new program around
Medicare’s existing infrastructure, as prevent the true
Make no mistake . . . the Postal Service is some supporters propose, would bestow cost of a new
not self-sufficient. It is kept afloat by a start-up subsidies not available to new program from
number of hidden taxpayer subsidies. private health plans.77 Senator Schumer
For starters, it has a monopoly on First has insisted that a government-spon- appearing in its
Class and Standard mail. No private sored “co-operative” receive $10 billion premiums, and to
company can deliver a letter for less than in start-up subsidies.
$3 or twice what USPS charges, whichev- • The leading Democratic proposals
increase the
er is greater. . . . Meanwhile, USPS is would create a “risk-adjustment” mech- premiums of its
immune from antitrust lawsuits and anism that would essentially tax all competitors.
exempt from taxes on its massive real- health plans to compensate those that
estate holdings. . . . It enjoys power of attract a disproportionate share of high-
eminent domain. And it doesn’t even cost patients and/or that do little to
pay parking tickets.72 reduce wasteful expenditures.78 Whether
It calculates the amount of corporate a new government program proves to be
income tax it would owe if it were a pri- more attractive to high-cost patients or
vate company—and then pays that does a poorer job of controlling unnec-
amount to itself.73 essary expenditures, the risk-adjustment
program could easily become a tool for
Likewise, state governments have repeatedly taxing private insurers to subsidize the
crowded out private insurance in markets for government plan.
workers’ compensation insurance, crop and • When estimating Medicare’s adminis-
flood insurance, and reinsurance for medical trative costs, the federal government
malpractice and natural disasters, according does not count the cost of activities
to University of Pennsylvania economist undertaken by other federal agencies to
Scott Harrington, because “the public sector support Medicare.79 If the government
is supported by various types of subsidies or fails to include such costs when calculat-
special rules that allow it to compete with the ing the premiums for a new program,
private sector.”74 that would constitute an implicit sub-
9sidy and enable the new program to set drives prices higher for private insurers.82
its premiums below its true costs. Whatever the case, such price controls
would increase the cost of private insur-
To the extent that a new government pro- ance relative to a new government pro-
gram receives direct subsidies that are not gram.
available to private insurers, its relative cost • Tightening the price controls that
would also be higher due to the deadweight Medicaid uses to purchase prescription
loss of taxation, yet that added cost likewise drugs, or expanding those price controls
would not appear in the government pro- into either Medicare or a new govern-
gram’s premiums. ment program, would likewise increase
costs for the new program’s private com-
Indirect Subsidies petitors. The price controls that
To subsidize a new government program, Congress imposes on drug purchases
Congress need not hand it bags of cash or use through the Medicaid program have the
creative accounting when setting premiums. effect of increasing prices for private
Congress can instead subsidize its program insurers by an estimated 15 percent.83
indirectly, whether by granting it special status The Senate Finance Committee has sug-
or increasing its competitors’ costs: gested tightening this price control,84
while House Energy and Commerce
• The taxpayer subsidies and other advan- Committee chairman Henry Waxman
tages granted to Medicare give the feder- (D-CA) has proposed importing those
al government a degree of market power price controls into Medicare.85 Either
that private insurers cannot match. That move would further increase costs for
market power in turn creates opportuni- private insurers.
ties for Congress to grant other special • Any new program would come with an
advantages to a new government pro- implicit guarantee that Congress would
gram. Many supporters propose that a bail it out if premiums proved insuffi-
new program should adopt price con- cient to cover its costs. Hacker argues for
trols identical or similar to Medicare’s, an explicit bailout guarantee when he
or that the federal government should writes that reserve requirements “would
require providers to participate in the not make sense for the public health
new program as a condition of Medicare insurance plan, which has the full faith
participation.80 Sen. Jay Rockefeller (D- and credit of the federal government
WV) proposes to let a new program use behind it.”86 Even if the bailout guaran-
Medicare’s price controls for two years, tee were only implicit, that would enable
and to require doctors who participate the new program to set its premiums
in Medicare to participate in the new below costs. According to a 1996
program for three years;81 yet those time Treasury Department report signed by
frames could easily be extended to four Larry Summers, who is now President
years, six years, or beyond. Leveraging Obama’s National Economic Council
Adopting the special advantages granted to chairman, a similar implicit guarantee
Medicare-like Medicare would enable a new govern- saved Fannie Mae and Freddie Mac an
price controls ment program to achieve a level of estimated $6 billion per year.87
provider participation at a lower cost Meanwhile, private insurers would effec-
would increase than private insurers. tively face higher reserve requirements
the prices that • Adopting Medicare-like price controls than the government program.
providers charge would also increase the prices that • Unlike many private insurers, govern-
providers charge private insurers. Experts ment programs pay no taxes. The pres-
private insurers. disagree about the exact mechanism that ence of corporate income taxes, invest-
10ment taxes, etc., increases the price of playing field between a government program The only
private insurance relative to a govern- and private insurers could never be level. The rationale for
ment program. The CBO estimates that Medicare Advantage program allows private
taxes account for 1.2 percent of private insurers to compete with the traditional, gov- having Congress
health insurance premiums, on aver- ernment-run Medicare program. The playing construct a new
age.88 Government could further advan- field shifts depending on whether the party in
tage its program by raising taxes on pri- power prefers government or private insur-
health plan is to
vate insurers, such as through the special ance. In 2003, President George W. Bush and a create socially
tax on insurance-company profits pro- Republican Congress adopted fairly high price harmful
posed by Senator Schumer.89 controls for the Medicare Advantage plans.
• Government can increase the effective More recently, a Democratic Congress has competition
cost of private insurance by imposing sought stricter price controls. President whose objective is
penalties on consumers who choose it Obama even proposed to throw private plans a government
instead of the government plan. Federal out of Medicare entirely, which is not so much
regulations penalize seniors who opt out a level playing field as it is a cliff. takeover of the
of Medicare to obtain private health Nichols and Bertko admit that the playing U.S. health care
insurance by taking away their Social field isn’t level in Medicare Advantage due to
Security benefits, past and future.90 congressional interference, and they claim that
sector.
That penalty exists in spite of a provision such interference is “not inherent in public-pri-
in the Medicare statute called, “Option vate competition.”93 Yet when Congress creates
to Individuals to Obtain Other Health a federal health insurance program and a fed-
Insurance Protection,” which reads: eral bureaucracy to craft and enforce the rules
“Nothing contained in this title shall be of competition between that program and pri-
construed to preclude . . . any individual vate plans, nothing is more inherent to such a
from purchasing or otherwise securing, scheme than Congress and its whims.
protection against the cost of any health If wise philosopher-kings could somehow
services.”91 create a new government health insurance pro-
gram and (permanently) deny it of any special
Even if Congress could create a new govern- advantages, it would cease to be a government pro-
ment program with no special advantages, a gram. It would be just another private insurer. If
truly level playing field would require a credible that is what supporters of a new government
guarantee that no future Congress and no program want, there is no need for Congress to
future regulator would ever confer any special act. Supporters can gather investors and
advantages on that program. Given the bailout launch their own private health plan right now.
craze of 2008–2009, it is not credible to suggest The only rationale for having Congress con-
the government would not bail itself out if pre- struct a new health plan is to create socially
miums were insufficient to support the new harmful competition whose objective is a gov-
program’s outlays. That public perception ernment takeover of the U.S. health care sector.
would itself create an implicit bailout guaran-
tee, and redound to the exclusive benefit of a
new government program. Moreover, today’s Conclusion
Congress cannot bind future Congresses.
Supporters of a new program know this, and A new government program would sup-
they are already contemplating future efforts plant private insurance, despite offering inferi-
to secure special advantages for any new pro- or care at a higher cost. The program would
gram that Congress creates.92 attract consumers not by virtue of its superior
performance, but by government’s ability to
Medicare Advantage prevent the full cost of its program from
Medicare Advantage demonstrates that the appearing in enrollee premiums and its ability
11to increase the cost of private options. As the sake of American patients, who would be sub-
new program’s artificially low premiums ject to unnecessary morbidity and mortality.
crowd out private insurance, the government
would exert even greater downward pressure
on quality. Any new government health insur- Notes
ance program would shortly lead to a govern- 1. See Obama ’08, “Barack Obama and Joe Biden’s
ment takeover of health insurance markets— Plan to Lower Health Care Costs and Ensure
and the entire health care sector. Affordable, Accessible Health Coverage for All,”
No one should be surprised. President http://www.barackobama.com/pdf/issues/
HealthCareFullPlan.pdf.
Obama has repeatedly affirmed his preference
for a single-payer, government-run health care 2. Max Baucus, “Call to Action: Health Reform
system, such as exists in Canada.94 Many peo- 2009” (white paper, Senate Finance Committee,
ple, including New York Times columnist Paul November 12, 2008), http://finance.senate.gov/
healthreform2009/finalwhitepaper.pdf.
Krugman, support a new government pro-
gram precisely because they believe it will lead 3. Ryan Grim, “Pelosi: Health Care Reform Can’t
to a single-payer system.95 Hacker has Pass Without Public Option,” Huffington Post,
quipped, “Someone once said to me, ‘This is a June 11, 2009, http://www.huffingtonpost.com/
If Congress wants Trojan Horse for single-payer,’ and I said,
2009/06/11/pelosi-health-care-reform_n_
214303.html.
to make health ‘Well, it’s not a Trojan Horse—it’s right there!
I’m telling you: we’re going to get there, over 4. “Caucuses Unite behind Public Health Insurance
care more Plan Option” (press release, The Congressional
time, slowly.’”96
efficient and If Congress wants to make health care more
Black Caucus, April 28, 2009), http://www.
house.gov/apps/list/speech/mi13_kilpatrick/more
increase efficient and increase competition in health news/04_28_09_Public_Plan_ Option.html.
insurance markets, there are far better options.
competition in Congress should let consumers—rather than 5. Sherrod Brown, “Letter to Senator Kennedy
health insurance and Senator Baucus,” April 29, 2009, http://
employers or the government—control their brown.senate.gov/imo/media/doc/Letter.pdf.
markets, there are health care dollars and choose their health plan.
It should convert Medicare into a program that 6. Ceci Connolly, “Kennedy Readies Health-Care
far better options. gives seniors a voucher and frees them to pur- Bill,” Washington Post, June 6, 2009, http://www.
washingtonpost.com/wp-dyn/content/article/
chase any health plan on the market.97 2009/06/05/AR2009060504036.html; and Senate
Reforming the tax treatment of employer-spon- Committee on Health, Education, Labor, and
sored insurance with “large” health savings Pensions, “Affordable Health Choices Act,” http://
accounts would give workers the thousands of help.senate.gov/BAI09A84_xml.pdf.
dollars of their earnings that employers cur- 7. House of Representatives Committee on Ways
rently control, and likewise free workers to pur- and Means, “Key Features of the Tri-Committee
chase any health plan on the market.98 Finally, Health Reform Draft Proposal in the U.S. House
Congress should expand competition by pro- of Representatives,” June 9, 2009, http://waysand
means.house.gov/media/pdf/111/tri.pdf.
hibiting states from denying market entry to
health plans and providers licensed by other 8.Group Health, “Group Health Overview,” http://
states—that is, by making clinician and health- www.ghc.org/about_gh/co-op_over view/
insurance licenses portable across state lines.99 index.jhtml.
Those reforms would reduce costs, increase 9. Dana Bash and Ted Barrett, “Negotiations over
innovation, and reduce the number of unin- Health Insurance Co-Ops at Impasse,” CNN.com,
sured—without higher taxes or additional gov- June 23, 2009, http://www.cnn.com/2009/POLI
ernment spending. TICS/ 06/23/health.care/.
Congress should reject proposals to create a 10. Kent Conrad, “Bridging the Divide with a
new government health insurance program— Cooperative Health Care Proposal” (press release, June
not for the sake of private insurers, who would 30, 2009), http://conrad.senate.gov/pressroom/
be subject to unfair competition, but for the record.cfm?id=315210&.
1211. Kevin Sack, “Health Co-op Offers Model for com/content/publications/LewinCostand
Overhaul,” New York Times, July 6, 2009, CoverageImpactsofPublicPlan-Alternative%20
http://www.nytimes.com/2009/07/07/health DesignOptions.pdf.
policy/07coop. html.
21. Author’s calculations based on Carmen
12. Jacob S. Hacker, “The Case for Public Plan DeNavas-Walt, Bernadette Proctor, and Jessica
Choice in National Health Reform: Key to Cost Smith, “Income, Poverty, and Health Insurance
Control and Quality Coverage,” Center for Health, Coverage in the United States: 2007,” U.S. Bureau
Economic and Family Security, University of of the Census, August 2008, p. 61, http://
California–Berkeley School of Law, and the Institute www.census.gov/prod/2008pubs/p60-235.pdf.
for America’s Future, December 16, 2008, p. 5,
http://institute.ourfuture.org/files/Jacob_Hacker_ 22. Kaiser Family Foundation, “Medicare Fact
Public_Plan_Choice.pdf. Sheet: Medicare Advantage,” April 2009, http://
www.kff.org/medicare/upload/2052-12.pdf.
13. Reed Abelson, “A Health Plan for All and the
Concerns It Raises,” New York Times, March 24, 23. President-elect Obama opined, “We’ve got to
2009, http://www.nytimes.com/2009/03/25/health/ eliminate programs that don’t work, and I’ll give
policy/25medicare.html. you an example in the health care area. We are
spending a lot of money subsidizing the insurance
14. House of Representatives Committee on Ways companies around something called Medicare
and Means, “Key Features of the Tri-Committee Advantage, a program that gives them subsidies to
Health Reform Draft Proposal in the U.S. House of accept Medicare recipients but doesn’t necessarily
Representatives,” June 9, 2009, p. 3, http:// make people on Medicare healthier. And if we elim-
waysandmeans.house.gov/media/pdf/111/tri.pdf. inate that and other programs, we can potentially
save $200 billion out of the health care system that
15. E. J. Dionne Jr., “Not Yesterday’s Health we’re currently spending, and take that money and
Fight,” Washington Post, April 23, 2009, http://www. use it in ways that are actually going to make peo-
washingtonpost.com/wp-dyn/content/article/ ple healthier and improve quality. So what our
2009/04/22/AR2009042203091.html. Emphasis challenge is going to be is identifying what works
in original. and putting more money into that, eliminating
things that don’t work, and making things that we
16. “Remarks by the President at the Annual have more efficient.” ABC News, This Week with
Conference of the American Medical Association” George Stephanopolous, January 12, 2009, http://
(White House press release, June 15, 2009), media.bulletinnews.com/playclip.aspx?clipid=
http://www.whitehouse.gov/the_press_office/ 8cb4275f6a44ad3.
Remarks-by-the-President-to-the-Annual-
Conference-of-the-American-Medical-Association/. 24. Joe Klein, “The Fire This Time: Is This Health
Care’s Moment?” Time Magazine, May 7, 2009, http://
17. Congressional Budget Office (letter to the www.time.com/time/politics/article/0,8599,
Honorable Edward M. Kennedy, June 15, 2009, p. 1896574,00.html.
1), http://www.cbo.gov/ftpdocs/103xx/doc10310/
06-15-HealthChoicesAct.pdf. 25. Congressional Budget Office, “Key Issues in
Analyzing Major Health Insurance Proposals,”
18. Ricardo Alonso-Zaldivar, “Promises, Promises: December 2008, p. 69, http://www.cbo.gov/ftp
Obama’s Health Plan Guarantee,” Associated docs/99xx/doc9924/12-18-KeyIssues.pdf.
Press, June 19, 2009, http://www.google.com/
hostednews/ap/article/ALeqM5gK8UACQa5gEv1 26. If profits fail to serve that purpose in private
cZ-SRxXDc3XDwRw D98TPSP80. health insurance markets, the reason may be that
government gives employers control over 70 per-
19. The Lewin Group, “McCain and Obama cent of all spending on private health insurance,
Health Care Policies: Cost and Coverage Com- which forces insurers to respond to the needs of
pared,” October 15, 2008, p. ES-3, http://www. employers more than consumers. U.S. Centers for
lewin.com/content/Files/The_Lewin_Group_ Medicare & Medicaid Services, “Sponsors of
McCain- Obama_Health_Reform_Report_and_ Health Care Costs: Businesses, Households, and
Appendix.pdf. Governments, 1987–2007,” http://www.cms.hhs.
gov/NationalHealthExpendData/downloads/bh
20. John Sheils and Randy Haught, “The Cost and g07.pdf; and author’s calculations.
Coverage Impacts of a Public Plan: Alternative and
Design Options,” The Lewin Group Staff Working 27. Congressional Budget Office, “Key Issues,” p. 93,
Paper no. 4, April 8, 2009, http://www.lewin. http://www.cbo.gov/ftpdocs/99xx/doc9924/
1312-18-KeyIssues.pdf. Emphasis added. 36. Martin Feldstein, “How Big Should Govern-
ment Be?” National Tax Journal 50, no. 2 (June
28. Medicare Payment Advisory Commission, 1997): 197, http://ntj.tax.org/wwtax%5Cntjrec.
Report to the Congress: Medicare Payment Policy, nsf/36CFE3E5BCCB188C85256863004A5939/
March 2009, p. 12, http://medpac.gov/documents/ $FILE/v50n2197.pdf.
Mar09_EntireReport.pdf.
37. Hacker, “The Case for Public Plan Choice,” p. 6,
29. Lewis Morris (testimony before Senate Finance http://institute.ourfuture.org/files/Jacob_Hacker_
Committee, U.S. Department of Health and Public_Plan_Choice.pdf.
Human Services, Office of the Inspector General,
April 21, 2009, p. 2), http://finance.senate.gov/ 38. Congressional Budget Office, “Designing a
hearings/testimony/2009test/042109lmtest.pdf. Premium Support System for Medicare,” Decem-
ber 2006, p. 12, http://www.cbo.gov/ftpdocs/
30. The Department of Health and Human 76xx/doc7697/12-08-Medicare.pdf.
Services’ Office of the Inspector General estimates
that every $1 it spends on Medicare audits saves tax- 39. Medicare Payment Advisory Commission,
payers $17. Morris, p. 1, http://finance.senate. Report to the Congress: Medicare Payment Policy,
gov/hearings/testimony/2009test/042109lmtest. March 2009, p. 252, http://medpac.gov/docu-
pdf. A rational health care purchaser would keep ments/Mar09_EntireReport.pdf.
increasing such audits until $1 of oversight yielded
exactly $1 of savings—in economic jargon, the mar- 40. Patricia M. Danzon, “Hidden Overhead Costs: Is
ginal return would be $1. Unfortunately, the OIG Canada’s System Really Less Expensive?” Health
does not calculate the marginal return on invest- Affairs 11, no. 1 (Spring 1992): 40, http://
ment for Medicare audits. Donald B. White, content.healthaffairs.org/cgi/reprint/11/1/21.pdf.
Department of Health and Human Services’ Office
of the Inspector General, Public Affairs, e-mail mes- 41. Benjamin Zycher, “Comparing Public and
sage to author, July 9, 2009. However, the average Private Health Insurance: Would A Single-Payer
return on investment is not only high, but has been System Save Enough to Cover the Uninsured?”
steadily rising in recent years. U.S. Department of Manhattan Institute Medical Progress Report no. 5,
Health and Human Services, Office of the Inspector October 2007, http://www.manhattan-institute.
General, “FY 2010 Online Performance Appendix,” org/html/mpr_05.htm. Private health insurance
http://www.oig.hhs.gov/publications/docs/budget/ in the United States is no doubt less efficient than
FY2010_online_performance_appendix.pdf. At a it could be. Danzon writes, “Although there may
minimum, that raises the question of whether well be waste in U.S. private insurance markets, it
Medicare underinvests in claims auditing. is attributable primarily to tax and regulatory fac-
tors and is not intrinsic to private health insur-
31. On the vices of government health insurance ance.” Danzon, p. 40. Yet Medicare’s administra-
programs, see generally, David A. Hyman, tive costs are still higher.
Medicare Meets Mephistopheles (Washington: Cato
Institute, 2006). 42. Hacker, “The Case for Public Plan Choice,” p. i,
http://institute.ourfuture.org/files/Jacob_Hacker_
32. Shannon Brownlee and Ezekiel Emanuel, “5 Public_Plan_Choice.pdf. Emphasis in original.
Myths about Our Ailing Health Care System,”
Washington Post, November 23, 2008, http://www. 43. Medicare Payment Advisory Commission, Report to
washingtonpost.com/wp-dyn/content/article/ the Congress: Medicare Payment Policy, March 2009, p. 10,
2008/11/20/AR2008112002420.html. h t t p : / / m e d p a c . g ov / d o c u m e n t s / M a r 0 9 _
EntireReport.pdf.
33. Congressional Budget Office, “Key Issues,”
pp. 69–70, http://www.cbo.gov/ftpdocs/99xx/doc 44. See, for example, Amy Finkelstein and Robin
9924/12-18-KeyIssues.pdf. McKnight, “What Did Medicare Do? The Initial
Impact of Medicare on Mortality and Out-of-Pocket
34. Hacker is a notable exception. See Hacker, “The Medical Spending,” Journal of Public Economics 92, no.
Case for Public Plan Choice,” p. 6, http://institute. 7 (2008): 1660, http://econpapers. repec.org/article/
ourfuture.org/files/Jacob_Hacker_Public_Plan_ eeepubeco/v_3a92_3ay_3a2008_3ai_3a7_3ap_3a1
Choice.pdf. 644-1668.htm.
35. Mark E. Litow, “Medicare versus Private 45. Hacker, “The Case for Public Plan Choice,” p. i,
Health Insurance: The Cost of Administration,” http://institute.ourfuture.org/files/Jacob_Hacker_
Milliman, January 6, 2006, p. 4, http://www.cahi. Public_Plan_Choice.pdf.
org/cahi_contents/resources/pdf/CAHIMedicare
TechnicalPaper.pdf. 46. Asch et al., “Who is at Greatest Risk for
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