The White House claims that the choice of a public plan operating alongside private plans would spur private plans to improve. It also promises that all plans would be playing by the same rules.
According to a July 2 letter from the Congressional Budget Office (CBO), the addition of a government-run plan provision to the Dodd/Kennedy bill, the Affordable Health Choices Act, “did not have any substantial effect on the cost or enrollment projections, largely because the public plan would pay providers of health care at rates comparable to privately negotiated rates—and thus was not projected to have premiums lower than those charged by private insurance in the exchanges.”
In other words, the government either keeps its word about competing on a level playing field, in which case the plan is pointless, or the government plan gets unfair advantages, notes Andy Chasin in a memo to Republican Health Policy Staff.
Advocates for the public option, such as former Secretary of Labor Robert Reich, say it is the “lynchpin of health-care cost containment”—because without it, “the other parties that comprise America’s non-system of health care—private insurers, doctors, hospitals, drug companies, and medical suppliers—have little or no incentive to supply high-quality care at a lower cost….” (Wall St J 6/24/09).
In other words, the public plan is expected to use its monopsony power to squeeze providers.
Economist Paul Krugman agrees: A public plan would have the “bargaining power needed to bring down costs” (NY Times 6/22/09).
Gregory Mankiw points out that it wouldn’t really bring down costs, just shift them from consumer to provider. The same thing could be accomplished by taxing providers and using the proceeds to subsidize consumer purchases (NY Times 6/28/09).
Cost-shifting from the big public plans called Medicare and Medicaid already adds an estimated $89 billion to private insurance costs. Crowd-out is amply demonstrated: up to one-half of children newly enrolled in the State Children’s Health Insurance Program (SCHIP) previously had private coverage. A Robert Wood Johnson survey of 22 studies concluded that substitution of government for private coverage “seems inevitable” (Michael Tanner, “Obamacare to Come: Seven Bad Ideas for Health Care Reform, Cato Policy Analysis No. 638, May 21, 2009).
Bargaining power is not the only potential source of lower prices charged by government, notes John Calfee: just look at Fannie Mae and Freddie Mac. They were viewed as less risky because the government was expected to bail them out if they failed (Wall St J 6/26/09).
The other advantage of the government is that it can always change the rules, observes Michael Tanner.
“Let’s get this straight: 1300 insurance companies aren’t enough to have competition? We need 1301 to suddenly make it all OK?” asks Rossputin.
And if the government wanted more competition among insurers, why not repeal the McCarran-Ferguson exemption that shields the business of insurance from antitrust law?
One enormous advantage the federal plan will almost certainly have is exemption from 50 sets of state mandates that make health insurance unaffordable for so many.