Considering the Public Option

By Robert Cohen

President Obama likes to say, regarding health care, “We cannot afford to do nothing.”  Given the mounting costs and the unacceptable number of uninsured Americans, that is obvious.  What the President must do is convince us that his reforms will make the situation better.

His most controversial proposal, the so-called “Public Option,” a government-sponsored insurance plan meant to “keep health insurance companies honest,” is borne out of the reality that the private insurance market has failed us, and, I believe, also out of the best of intentions.  However, good intentions can pave the road to hell, and creating a government entity to compete with the private sector is certainly a radical shift from American commerce as we know it. It is his responsibility—as the proponent of this idea—to prove to us that it will work, instead of coyly belittling his critics by saying, “Some people say we should do nothing.  I don’t agree.”

Firstly, he is right that the health insurance industry as it currently operates represents a cardinal obstacle to an effective health care system.  In this sector, doctors and pharmaceutical companies are sellers, patients are buyers, and insurers are the middlemen of this $2.4 trillion industry.  This is acceptable in principle, given how high the price can be for any unlucky individual. But with doctors busy—and usually not too business-savvy—and patients occupied fighting their illnesses, the opportunity is there for those who move vast sums of money in this system to divert large profits into their pockets.

And that is what has happened the last few years.  On January 3, 2000, Aetna’s stock was selling for $7.24.  On January 3, 2008, it was $57.21, nearly an eight-fold increase in eight years (During this time, the S&P 500 went down 100 points).  Even after the stock market crashed during the past year, on June 12, 2009, Aetna closed at $22.97, still a greater than 3-fold increase in the last 9 years, making it one of the most profitable companies over an otherwise difficult investment period.  Other health insurers follow the same pattern, while during this time doctors’ salaries track to inflation.

How did this happen?  From 2000-2004, as health care costs and health insurance profits were skyrocketing, the number of uninsured Americans also climbed from 39.8 million to 45.8 million.  The correlation was explained retrospectively by Aetna spokesman Fred Laberge: “We focused on profitable growth rather than growth at any cost…We lost a lot of membership, but we’re OK with that.”  Think about that statement. The business model of the insurance industry was to unload those with bad illnesses—to “lose a lot of [unprofitable] membership”—forcing them onto the compassionate taxpayer or uncompassionate nature.  They instead focused on insuring those who were unlikely to need expensive treatments. Thus, by cherry-picking healthy individuals and not insuring expensive patients, insurers make the most money.

Given this outcome, is it correct for free-marketers (how I certainly view myself) to throw up our hands and say, “Too bad!  That’s the way the market works!”? If so, then the American health care system will not meet its goal: to provide our citizens with health, which is necessary to pursue our dreams and lead full, productive, and happy lives.

How, then, to meet this goal?  President Obama and Speaker Pelosi propose that the government, with the interests of the 47 million uninsured at heart, enter into the insurance market and offer a government-created plan for people to buy.  They believe this will “compete with private insurers to help keep their prices down.”

There is precedent for a proposal like this.  In 1938, in response to a political and arguably moral imperative to help lower-income Americans afford to buy their own home, the government entered into the housing market with the creation of a “Government-Sponsored Enterprise,” whose role it would be to purchase mortgages from banks and securitize them, thus transferring risk to the government and providing greater flexibility, and accessibility, to the lending market.  The name of this GSE is, of course, Fannie Mae. For many years it worked well, but in the 1990s political pressure arose for Fannie and Freddie to facilitate more loans to riskier borrowers, and to pool the risk in mortgage-backed securities. We all know how that turned out.

Herein lies the grave concern with Obama’s public option, which he has yet to adequately address.  He wants the government to enter the insurance business. But his government would not only enter the market, it also would have the power to set the rules of the market, and it would be subject to political pressure.  There are many reasons this is scary, but let us examine four. First, the potential for corruption completely abrogates the concept of a competitive free market. Second, if its way of cutting costs is to force doctors to accept low reimbursements, then it is not a free market, it is a coercive one, which history has shown to be counterproductive.  Third, as a less draconian method to restrain costs a government administrator might tell the doctor that the patient cannot have an MRI because a CT-Scan will do (sometimes it will, sometimes not). If doctors will have to argue with less informed government bureaucrats about decisions like this, that will hardly constitute improvement. Fourth, because of the government’s unmatched ability (desire?) to run up deficits, it might, in an effort to make its plan affordable to 47 million lower-income people, simply spend more than it charges.  Its privileged relationship with the government will allow it to subsidize its losses by either running up the national debt or raising tax revenue. If it does a good job providing care for below-market prices, more people might purchase its plan, thus expanding its membership to eventually the whole nation and putting private insurers out of business. Thus, instead of immediately replacing the health care system with a single-payer system, we will reach Medicare-for-all after a little while. That outcome, which Obama has promised to avoid, is very dangerous.  Many doctors today do not accept Medicare, because the bureaucratic hassles are too great and the reimbursements too low. And furthermore, Medicare is poised to go broke. Imagine what Medicare-for-all would be like.

President Obama has said “No matter how we reform health care, I intend to keep this promise: If you like your doctor, you will be able to keep your doctor; if you like your health care plan, you will be able to keep your health care plan.”  However, there are reasons not to trust him—public financing of the 2008 campaign, earmark reform, and taxing of health care benefits come to mind. Most worrying, on this subject he has said that “if I were starting a system from scratch, then I think the idea of moving toward a single payer system could very well make sense.”  And about this he could not be more wrong. America has proved beyond a shadow of a doubt, and China provides a vivid modern example, that the free market is the best engine for prosperity and efficiency in commerce. The free market today gives America its vast edge in the creation of new medical technologies, new drugs, and, for most of insured America, better care than they might find anywhere else in the world, including Europe and Canada.  Remember, Canadians who need something big come here.  Many Americans with insurance, whether they need $40,000 thyroid surgery or $100,000 chemotherapy, are cured today and pay no more than their premium and deductible, and do not have to wait.  Obama should harness this functioning market, not destroy it.

Within today’s health care market, innovation is already occurring in the face of the cost imperative.  Some doctors, as recently reported by the New York Times, are charging a flat monthly fee for routine care and checkups and cutting costs in half.  Kaiser Permanente runs an innovative managed care system that is cheaper than most and whose doctors find it satisfying and efficient. Safeway Co. offers discounts to employees who do not smoke and who are not obese, pays for smoking cessation and gym memberships, and reaps the dual rewards of saved money and healthier workers.

So instead of taking the radical step of government participation in the private markets, with all its risk, why not simply regulate the insurance industry to keep it honest?  For example, eliminate price gouging by oversight; prevent collusion with antitrust legislation—which will help in states where there are one or two dominant insurers, such as Kansas; reform patent law to keep pharmaceutical drugs’ costs down.  

Importantly, President Obama is right to pursue changes that encourage personal responsibility and healthy lifestyles.  In medical school we learn about several thousand different illnesses, but the three we see most commonly by far are type 2 diabetes, heart disease, and asthma.  Type 2 diabetes results from obesity, asthma from smoking, and heart disease from both obesity and smoking. Imagine the cost savings—and health benefits—if just these two behaviors were curtailed.

This debate will boil down to whether government or the private sector can produce the best long-term outcome.  If Obama is going to sign a bill with government entry into the competitive marketplace, the burden is on him to prove it ensures a competitive market, not a coercive one.  He will need to secure, beyond the shadow of the doubt, that this government-sponsored insurer is spared from both the political pressure and corruption that doomed Fannie Mae and Freddie Mac (which I believe is impossible for a GSE).  He will need to insist that the plan not keep its prices artificially low by running up a debt or subsidizing with taxpayer dollars.

Indeed, while the Public Option seems borne out of best of intentions, it looks problematic.  I am not saying it will necessarily pave the road to hell—that would be hyperbolic—but President Obama, as Reformer-in-Chief, has the responsibility to prove it will work.  Because as written, unlike many of his ideas which have earned widespread support, it could make things much worse.