Healthcare Reform: The Public Option

The Objectivist
Public Option: Higher Cost, Lower Quality
Dunkirk-Fredonia Observer
August 24, 2009

The Democrats in Congress and the Whitehouse are pushing a public option. It is a centerpiece of the Affordable Health Choices Act. The public option is a Medicare-like, government-run health insurance program.

The White House has signaled that they might be willing to pass a healthcare-reform bill without a public option. This caused many Democrats to get their panties in a twist. As reported in Medical News Today, Sen. Jay Rockefeller (D-WV) asserted that the public option is “a must.” Sen. Russ Feingold (D-WI) stated that “without a public option, I don’t see how we will bring real change to a system that has made good health care a privilege for those who can afford it.” House Speaker Nancy Pelosi (D-CA) said, “There is strong support in the House for a public option.” Rep. Anthony Weiner (D-NY) threatened that without a public option, the legislation could lose up to 100 Democratic votes in the House.

Concerns about cost and quality of care supposedly motivate the attempt to reform healthcare. The U.S. spends more on health care than any other nation. According to the New York Times, this amounts to more than $7,500 per person and roughly $15,000 per household. Using 2004 figures, this is 92.7% more than any other G7 country (France, Germany, Italy, Britain, Japan, and Canada). The U.S. also spends a higher percentage of the economy than all but one other member of the United Nations (in 2007 this was $2.26 trillion or 16% of Gross Domestic Product). These costs wreck havoc on personal finances. One study by David Himmelstein of Harvard University found that medical expenditures caused 60% of all personal bankruptcies in the U.S.

U.S. healthcare gets bad grades. A 2008 report by the Commonwealth Fund found that despite all this spending, the quality of health care in the U.S. was worse than 19 other developed industrial countries with which it was compared. The World Health Organization also ranked the U.S. 37th in overall performance and 72nd in overall health level in comparison to the 191 member organizations it included in its study.

The public option will not fix either problem. Consider cost. A public option is designed to cover many of the uninsured. The U.S. Census Bureau asserts that there are 47 million people who are uninsured at some point in the year. Economist Katherine Baicker and others point out that people who are insured generate more healthcare spending than uninsured individuals. Hence, insuring the 47 million would increase total healthcare costs. If our concern is to lower overall spending, the public option is a loser.

It might be argued that public option would reduce costs (or more specifically, reduce the increase in medical costs) by providing more competition. Some proponents argue that the government can provide services more cheaply. They often cite Medicaid, Medicare, and Veteran’s Health Administration as evidence for their claim. This is wishful thinking.

Medicaid charges less because it pays a fraction of what Medicare, private-insurance companies, and out-of-pocket consumers pay. The latter groups end up subsidizing Medicaid. Merely encouraging more subsidization will not reduce total costs, merely shift them around.

Medicare (or a Medicare-like program) will not reduce costs. First, Medicare is a mess. The program involves 140 million Americans paying 2.9% of their income to pay for healthcare for 42 million mostly elderly Americans. It costs roughly $400 billion a year and is running a massive deficit ($179 billion in 2007). It will go broke roughly 8 years from now. In its shaky status, Medicare resembles Social Security. The latter is another Ponzi scheme that will start running deficits as early as this year. It works via a 12.4.% tax on working Americans (in part via their employers) that is also transferred to the elderly, disabled, and others.

Second, as Steven Pearlstein of the Washington Post points out, if Medicare (or a similar program) offered insurance that competed against private plans, it would have to start doing a number of costly things. It would have to collect premiums, market its programs, maintain a reserve, and manage payouts in way that lowers costs and increases quality. There is no reason to believe that it would do so more efficiently than the private sector. Public sector employees get roughly 44% more in compensation (wages and benefits) than do private sector employees and are usually much harder to fire. Government waste and mismanagement is legendary. Government-protected businesses like Amtrak and the Post Office are forever running deficits and needing protection against competition. History simply provides no reason to think that a government-run insurance company would be more efficient.

Even if the government could run an insurance system more efficiently, massive taxes would be necessary to support the public option. Under the current House plan the public option would be available for individuals making up to 400% of the poverty level (or up to $43,320). The Congressional Budget Office estimates that the latest version of Affordable Health Choices Act at will cost $597 billion over ten years and reduce the number of uninsured by 20 million. This surely underestimates the cost.

Consider the estimate of 47 million uninsured people. Somewhere around 9 million of the uninsured (19%) make more than $75,000 a year and hence choose not to purchase health insurance. Let us subtract them from the number of uninsured, thereby reducing the number to 38 million. If we insured all 38 million, the total cost would be would be $285 billion per year ($7,500/person x 38 million people). If we also screen out immigrants and those currently eligible for employer-sponsored insurance or current government programs, this still leaves 12 million uninsured. Covering them would cost $90 billion per year ($7,500/person x 12 million people). In addition, the public option would suck millions of people out of the private sector because for many employers it would be cheaper for the employer to pay the tax (8%) for not insuring its workers than to pay for private insurance.

The current House plan leaves 27 million uninsured. The program would quickly expand to cover many of these people. To see this, merely consider how Social Security and Medicaid (and the State Children’s Health Insurance Program or S-Chip) were expanded. If President Obama and Congress provide amnesty for the 12-20 million illegal aliens, and they’ll try, even more people will need to be covered. None of this is affordable, especially when we consider that Obama has already run up huge deficits and that Medicare and Social Security will soon be in the red.

There is even less reason to think that the government will increase the quality of healthcare. Is there an area where government-provided services are better and cheaper than the private sector? Like the medical system, the public-school system provides a poor product. The U.S. spends more on education (in per pupil terms) and gets middling to bad results. In the inner cities, the schools are horrible despite being awash in money. The burden here is on the proponents of the public option to establish that the government would provide higher-quality medical services. They can’t carry this burden because there is no area where the government has done so, at least when its costs are competitive with the private sector.

Several states, specifically Maine, Massachusetts, and Tennessee, introduced programs to cover the uninsured. An article in the Wall Street Journal on Maine’s program pointed out that in 2003 Maine attempted to cover all of its uninsured citizens. Its proponents claimed that it would be paid for by savings in the healthcare system. Instead, the program is operating a deficit and had to be supported by a tax on private health insurance. Despite substantial tax subsidies, the Maine’s program produced only a small reduction in the uninsured. Massachusetts’s program did reduce the uninsured. However in doing so, it likely caused healthcare costs to rise faster there than in the rest of the nation. Also, predictably, the cost to Massachusetts taxpayers skyrocketed. Tennessee’s program is another failure. Proponents of the public option might claim that the federal government will do so much better than state governments. Yeah right.

The case for the public option is that it will decrease costs or will increase quality. Neither is plausible. The public option would increase medical costs, jack up taxes, and produce inferior healthcare. Anyone who votes for it should be thrown out of office.