Why a Public Option Won't Help

There are two problems we're trying to address, it seems, in this healthcare debate.

1. Rising cost of health care
2. Large number of people uninsured

I'll deal with costs in this post. Costs can only be lowered by four things (five if you count convincing people that health care is for losers):

1. Providing less (or lower quality) service
2. Increasing efficiency
3. Transfering profits around
4. Increasing supply (in ways other than efficiency)

Providing less (or lower quality) service
This whole area has been pretty well maligned with Palin's argument about death panels and rationing, but it might not be as bad as it sounds if you use free market techniques (i.e., no death panels or rationing).

Providing less service may be good or bad depending on how cost effective the service is. One problem is moral hazard. If you pay the same co-pay for a $10 drug as a $100 drug that is only slightly more effective, you'll take the pricey drug every time. Effective reform would change the incentives so you pay some percent of all the costs. Then we'd look for the best bang per buck, rather than just the best bang.

A great example of this is Clartin and Benadryl. When Clartin was on prescription it cost four to five times what Benadryl did, with the added benefit that it wouldn't make you drowsy. Maybe for airline pilots or train engineers this is a good deal, but for most of us being a little drowsy when we're watching our soaps isn't such a big deal. If we are high productivity people who need that extra alertness, we're likely paid sufficiently to pay a percent of the total cost. My point is that state-of-the-art isn't always that much better than a remedy that's five years older.

Increase efficiency

I have a hard time believing the government will run more efficiently than the private sector. See, e.g., DMV, post office, etc. Government workers are harder to fire under the Constitution (because it's government action) and they usually unionize, which raises costs. One economist found that post office workers are paid about 30% above market rates.

Some claim the government will still be more efficient for two reasons:

1. Greater access to information would allow more accurate actuarial data and premium setting.
2. The private sector is inefficient because it spends so much on administrative costs.

The first answer is well-thought out, but incorrect. The private sector figured this out long ago and standardized their forms through a service called the ISO. The ISO prints standard forms used by every company (which is why when you switch companies, you can end up with identical terms). In exchange for this, the companies pool data on risk. This lets the private sector have all the efficiencies the government would.

If the government would get more information than the private sector, I would love to know how, but it's disturbing to the little libertarian inside me to think about.

The next claim, that the private sector is inefficient also has some merit, but it's a bit deceptive. The Congressional Budget Office found in 2008 that $700 billion is spent every year on health care costs “that cannot be shown to improve health outcomes.” This has been twisted to say, the private sector is inefficient.

It takes more than doctors and pills to cure people. You need administration. Some of this $700 billion hires secretaries, customer service, and fraud investigators and pays for things like rent and utilities. The government could probably only eliminate three costs with a full-takeover: Sales departments (no competition), CEO salaries, dividends to stock holders.

Sales departments is pretty straight forward. You don't need to advertise if its illegal not to buy your product.

CEO salaries are likely a cost saver, as government employees are paid less. There is an argument that the CEOs will be lower quality with lower wages, but that's hard to quantify, so I'll come back to it.

Cigna, pays about $24 million total for their top five executives. Humana pays $12 million to their top five. WellPoint (Blue Cross/Shield) paid $43 million. Being generous, if you figure the top ten firms are paying that $43 million, you end up with $430 million in savings that you could gain by having the government run it. That's a lot, but still only 0.006% of the $700 billion.

Likewise, dividends could save some money. Last year Cigna paid $14 million in dividends. Humana hasn't paid dividends in a while, neither did WellPoint (though the data stops in 2004) and both say they don't intend to pay dividends in the foreseeable future. So there are a lot of costs to be saved in dividends.

The question of efficiency comes down to balancing the costs and benefits. With a public option we have increased administration costs, the costs of unionizing (increased salary/job-security-despite-ineptitude), and the costs of possibly having your health insurer influenced by politicized popularist movements. On the other side, we have the costs of high CEO salaries, sales/marketing departments, and dividends. I just don't see where the alleged cost savings will come from.

(Of course, if you're a politician, the calculus is for votes. This is affected by the number of people who like you, which includes those who agree with your ideology (difficult to change), and those who depend on you for work (big programs hire lots of people.))

Transfering profits around

The most common argument for the public option is that it will force the insurance industry to compete on price. This plays to our free market sympathies, but is either uniformed or disingenuous. Insurance is already heavily regulated by the states. Before an insurance company can change it's rates, it must get approval from the state insurance commissioner. If our goal is to force them to lower their rates, we already have the system in place to do it: have the Insurance Commissioner require them to lower their rates.

You make not like the command and control system, but it's already in place and it doesn't create an entitlement program with unknown costs. Besides, insurance companies already have extensive disclosures that make the option less arbitrary.

But say we ignore that and go with the public option. The public option's premium price will either be above or below the market rate. If it is above, it won't spur competition, so it fails its purpose. If it is below, (because political ponies live on subsidy feed) it will put some or all companies out of business. So unless the proponent's goal is really just a single-payer system (which I suspect it is) the public option price should be set to where the market can match. This is just as much command and control as letting the insurance commissioner set the price directly. And we can do that now without creating entitlements that might expand or agencies with budgets to ratchet up.

Increasing the Supply

The best way to lower health care costs is to break the monopoly on doctors. I don't advocate returning to the days of snake oil salesmen in traveling wagons, but we can reduce the amount of training that a doctor needs to practice. The easiest option here would be to cut the requirement of a bachelor's degree before medical school. This cuts 11 years down to seven, and honestly I don't care what my doctor knows about geology or art history. You might think that these are important to breed well-rounded and creative doctors. Well-rounded doesn't cure a cold; and creativity isn't necessary for your average practioner. Researchers can go get a bachelor's degree if they want. Let them study theatre history. But practitioners don't need it.

The next monopoly to bust is prescription drug patents. The present value of a dollar in twenty years for an investor seeking a 10% return is about 13 cents. Long monopolies don't create strong incentives for innovation.

Moreover, 42% of drug research is paid for by the U.S. government already. So why do we give large monopoly profits for drugs created with this money? Haven't taxpayers already paid once? (And maybe three times if you've ever done a "race for the cure.")