The Catch-22 of government health care

| Staff Columnist

There has certainly been a lot of controversy regarding the government’s latest efforts to “reform” health care. Much of it is certainly deserved, as the American public feels that there’s been a lack of transparency regarding what exactly is in the currently proposed bill. I certainly have no qualms about saying that I really have no clue about what’s being proposed now, save for two specific details. The media likes to harp on two points: whether there’s a “public option” for health care included in the proposed legislation, and how long the bill is on paper. The latter point is rather meaningless; it’s the public option that will determine whether or not this bill accomplishes anything. Friday’s Wall Street Journal reported that the Senate Finance Committee has voted in favor of a health care reform bill that does not include a public option.

I like to view politics through an economic lens. I think the government ought to take action when the benefits outweigh the costs and, when applicable, the action will better foster competition in the relevant marketplace. If there is no public option, I honestly cannot figure out what the purpose of a health care reform bill would be. Perhaps it would make a few tweaks to obscure policies and change some pointless regulations around, but it wouldn’t do what this nation’s health system desperately needs; it would not lower the cost of health insurance.

The market for health care is not particularly competitive. For example, Missouri, according to the Kaiser Family Foundation’s StateHealthFacts.org, has only 12 HMOs in the state. That’s not a lot to choose from, especially considering that health insurance companies are very localized in their operations. The providers we may be able to select from within St. Louis likely do not overlap with providers in, say, Kansas City or Springfield. This creates a monopoly-like power imbalance in the market for health care. Because the number of providers is low, the supply side of the market is uncompetitive. Companies thus have less incentive to lower the costs of their care than they would if they faced stiff competition.

We need a government health plan simply to render itself unnecessary. That’s certainly a Catch-22, but it’s true. From an economic standpoint, a government plan would drastically increase the supply of health care available to the general public. This, in turn, would drive prices down. It’s a matter of classic microeconomics. Now here’s the catch: An inexpensive or free health option would force the costs of private health insurance to drop, lest they lose customers to the government’s public option.

Whether or not one has faith in the government to provide health care that’s on par with the best private insurance options is rather irrelevant. In a cost-benefit analysis of a public health care option, the most important benefit is not what will become of the poorest of Americans. Though giving health care to the destitute is an important argument in support of a public option, the largest and most noticeable benefits will come to the middle class. With the cost of health care increasing so rapidly—usually at a rate many times that of inflation—a public option will provide the biggest benefit to those who are struggling to afford medical care by lowering the costs of insurance. This will allow the majority of Americans to get the same or better health coverage at a cost lower than what they’re currently paying. There needs to be a public option, but not for the purpose of the government insuring the public. Instead, government health insurance should exist for the seemingly paradoxical reason of negating the necessity of a public option altogether.

Richard is a junior in Business. He can be reached via e-mail at rmarkel@wustl.edu.

  • Neo

    Why not work on tort reform for medical malpractice, allow interstate shopping of insurance plans and expand medicaid for those citizens who can not afford a private plan.

    Why create an entity that our grandchildren and great grandchildren will have to pay for. Allowing business to join a public option will be death to the private insurance companies and then we are stuck with a canadian health care system. Scary stuff.

  • US Healthcare

    Richard,

    How much do you know about the US healthcare system? I cannot claim that I even know 10% about its policies and history but I know enough to shed some light on your comments.

    “I honestly cannot figure out what the purpose of a health care reform bill would be. Perhaps it would make a few tweaks to obscure policies and change some pointless regulations around, but it wouldn’t do what this nation’s health system desperately needs; it would not lower the cost of health insurance.”

    The current state of our healthcare system was both caused and transformed by “pointless regulations,” and rewriting our flawed decision making throughout the evolution of US healthcare is exactly what needs to happen. For example, in 1954 (post-World War II) a small line of IRS tax code, that rode along with wage freeze legislation, created tax-free status on employee provided health benefits. Along with other factors, this one “pointless regulation” is exactly what drove the inflationary tendency of health care costs and thus the coverage of them by inherently providing a subsidy to those purchasing private insurance for healthcare through employers.

    If you don’t want to listen to me, listen to someone much smarter than I:
    http://www.hsph.harvard.edu/news/hphr/fall-2008/fall08baicker.html from a professor in Health Policy & Management at the Harvard School of Public Health.

    One more thing, the healthcare industry may be tempting to model with classical economics as you mentioned, but the classical assumptions we make to model a market do not hold in healthcare. For example, we assume “perfect information” — think about the asymmetries of knowledge in a patient-physician relationship, or even a payor-provider relationship.

    Furthermore, the Congressional Budget Office and other authorities in healthcare costing have actually shown that instituting a public option would drive up healthcare costs for the middle class. You like economics: think about scarce resource allocation. Currently in the US system we allocate healthcare resources on the individuals ability to pay, whether it be out of pocket, through insurance, or through a government-sponsored program. If legislation passes which extends the allocation base (including those who couldn’t pay) by subsidizing their entry, who has to provide that subsidy?

    Lastly, you mentioned that the media is only concerned with two areas, one being the “public option.” I would like to point out that currently half of our healthcare spending (which is the third largest sector of our economy and heavily regulated in every aspect) goes through the government. Here’s your real paradox: how can the entity who has had its hands in ‘half’ of the problem claim to hold the solution?

  • http://www.facebook.com/imosley Ian August Mosley

    UPS and FedEx compete with the USPS for certain niche services, but in several real senses they cannot compete, both because in some cases they are legally prohibited from competing, and in others they cannot compete with a government entity which takes substantial losses every year. This article is, I think, instructive: .

  • Mason Allen

    They will be able to compete the same way that FedEx and UPS kick the hell out of the USPS but the USPS still provides the basic necessary services to all areas for a low cost (making it available to everyone). If you object with the ability to deficit spend, then call your senator or congressional representative and ask them to support a version that has a built in budget neutrality requirement for the public option. It works in Austria and Germany where all individuals have public insurance but augment it with a private package to extend coverage. I think it’s the way we need to be going if we want to provide competition to the market as well as make insurance available to all Americans at a reasonable cost.

  • Ian Mosley

    Perhaps you would like to explain how it is that private insurers (who must by law make a profit) will be able to compete with a government program (which is free to shift its losses onto the national budget).