Health Care Reform Part 3: The Government "Option" is Not an Option at All

We have heard it over and over again...... "If you want to keep your current health insurance you will be able to do that," and the public "option" will "make the health care market more competitive, and keep the insurance companies honest." You hear these statements in the media, you hear them from Congress and you hear them from our President. No matter how many times they get repeated, however, none of them are or will ever become true.

It really does not take much to demonstrate that these statements are very misleading. Let's start with the first statement about keeping your current plan. In the first installment in this series I outlined a few of the major problems with our current health care structure and solutions to fix them. One of the problems is health insurance being tied to employment for the vast majority of Americans. One consequence of this relationship is that you don't actually choose your health insurance provider. Your employer chooses for you. The insurer may be great or it may be terrible. Regardless of quality, you are stuck. So let's revise things a bit: "If you want to keep your current health insurance you will be able to do that if and only if your employer chooses to keep your current provider." The choice is not yours.

Employers, faced with the decision to stay competitive and keep their businesses alive vs. provide private health insurance for their employees, will eventually start dropping their private health insurance coverage in favor of the cheaper public plan. Once this happens you don't really have the "option" of keeping your current plan, because your employer made the choice, not you. You only option becomes the public plan. If you don't believe companies will drop health insurance then check out this study that illustrates the effects of a public "option" on private health insurance markets. In the scenario where the government models their plan after Medicare the study shows that 119 million people would drop or lose their private plans and be enrolled in the public plan.

It's simple economics. Company A sees that Company B is dropping their private health insurance plan in order to save costs. If they cut costs then they can also cut prices. Cutting prices causes more people to buy Company B's products. Company A sees their sales drop as a result. To fix this Company A drops their private health insurance plan and cuts prices to stay competitive. It's not that Company A necessarily wanted to drop their private health insurance, because they know it's better than the public plan. However, the choice eventually becomes "do I want to stay in business by cutting costs or close as a result of sales dropping too far?" To put it another way "I can either keep all of these people employed and receiving paychecks and offer them a public plan, or I can give them private health insurance until I have to close the business and everyone loses their jobs." This is the beginning of the "crowding out" process.

Once people start moving off of private insurance it will cause private insurance premiums to rise. As they start rising, more and more people will be unable to afford private health insurance (even though they could previously afford it). These individuals and families will start moving to the public plan as well, because it will be the only "option" that they can afford. It happened in Florida with property insurance when the state started offering a public insurance "option." The Wall Street Journal notes (article linked above) that private insurers "have either curtailed operations or withdrawn from the Sunshine State." Now the state of Florida is one hurricane away from financial disaster, because they do not have the funds behind their public property insurance "option" to cover a disaster. Looks pretty similar to the current failing state of Medicare and Medicaid doesn't it? Oh, and speaking of Medicare, if the "crowding out" factor does not exist as our government is currently trying to tell us then why are the elderly all covered by Medicare? Answer: because private plans have been crowded out by the government plan.

Regarding the "competition" aspect of the debate, there are already hundreds and hundreds of insurance companies in the marketplace today. How much more competition do they need? Furthermore, if the insurance market needs government competition to keep it "honest" then why not other industries as well? We all use computers so how about a government computer "option"? Or a government grocery store chain? Government airline? I would also include "government automobile option," but we already have that. The truth is that there is no solid economic basis for the government "option" providing competition for the private sector. Many people in Washington would like you to think so, but it's simply not true.

We have every reason to be skeptical of Congress and the President. Our government, to my knowledge, has never given a correct estimate of the costs of any government program. The costs are always higher than projected. So with a government that runs two failing medical insurance programs that have crowded out private insurance, what reason do any of us have to believe that the same thing won't happen this time? It's important to decide now, because if we wait then we won't have an option.