Public option in private insurance

Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, March 6, 2012

During the debate on the health care bill in Congress in 2010, Republicans and some Democrats vehemently opposed the inclusion of public option in the provision of health care insurance for non-seniors.

The opposition from the health insurance industry was expected, but the opposition to the public option from the Republicans in Congress expanded to include the entire health care bill. Finally, the Affordable Care Act (ACA) of 2010 passed, but without the public option and support of all the Republicans in Congress.

The main argument against the public option was that it would be unfair to the private insurers, because they would be at a disadvantage to compete with the government-subsidized health insurance. Furthermore, opposition in Congress, especially Republicans, argued that government intervention in the private market amounts to creeping socialism, creating inefficiencies and resulting in increasing cost of health care. The opposition groups, so fearful of socialism, did not realize that Medicare for seniors, Medicaid for low-income Americans and health care for veterans are actually part of the public health insurance system. There was at least an option of public health insurance in the original health care bill for other Americans who do not meet the requirements of existing public insurance programs.

In the August 2011 issue of The American Economic Review, authors Randall Cebul, James Rebitzer, Lowell Taylor and Mark Votruba (CRTV) present very convincing arguments, supported by their meticulous empirical analysis, in support of the public option in health insurance plans in the insurance market. This study undermines some of the myths propagated by Republicans, Tea Party loyalists and current Republican presidential candidates.

CRTV investigate the private insurance market in the presence of "search frictions." For a significant majority of people under the age of 65, health insurance is provided through group plans purchased by employers. Health insurance is a complex service involving a multiplicity of factors. Employers, especially small size employers, face a complicated task of shopping for insurance. They have to make comparative decisions among insurance policies and companies regarding drug coverage (brand name, generics and formularies), network of pharmacies, doctors and hospitals, copays, deductibles and other fees.

In fact, a service industry, with health insurance brokers, has developed to facilitate choice among policies. Search frictions, according to CRTV, increase the administrative-health insurance cost to employers. Let me summarize their findings:

            First, search frictions result in disparity in insurance premiums for identical policies, and employer groups' premiums are higher (due to monopolistic power) than what a purely competitive market will produce. Due to lack of competition in premiums, insurers engage in a "marketing arms race," resulting in excessive spending on marketing strategies to attract clients. The excess of premiums above the competitive market premiums entails transfer of monetary benefits of consumers (termed as consumer surplus by economists) to insurers, amounting to $34.4 billion in 1997. A study by Leemore Dafny in The American Economic Review, September 2010, also shows that insurance companies engage in price discrimination.

Second, there is a significant turnover in policies (an average of 20 percent per year), since employers, in their quest for seeking less expensive policies, drop insurance for the entire group of employees. High turnover increases administrative cost of insurers and lessens incentive to invest in preventive health care, thus undermining quality of care and disease management (including chronic diseases). In The Journal Economic Perspectives, Fall 2008, CRTV cite a 2007 Commonwealth Fund Report that finds that if the U.S. spends the same amount on administrative cost as Germany and Switzerland, it would save $32 billion to $46 billion a year. Both Germany and Switzerland have a mixed private and public health insurance systems.

Finally, CRTV finds that a socially optimum government policy would be to subsidize a public health insurance option. It would displace the highest-priced policies and would reduce incentive to private insurers to engage in excessive marketing campaigns, thus improving market efficiency. It would also make private insurance more attractive to consumers by narrowing the dispersion of premiums and bringing premiums much closer to the competitive market price.

Our current private health insurance system also hinders mobility of labor and causes dispersion in unemployment rates across cities and states. A public option, besides improving efficiency in health insurance market, would also improve efficiency in labor markets by promoting labor mobility. We should also not forget that healthy people are productive people.

It is ironic that Rep. Paul Ryan has now proposed with Sen. Ron Wyden a new Medicare plan for seniors in which private health insurers will compete with the current Medicare plan. Rep. Ryan, however, joined other Republicans in denying a public option for non-elderly Americans in the ACA. This double standard is not only inequitable but also inefficient. All politicians and policy makers must base their decisions on unbiased facts, not on ideologies and fear-mongering about socialism. Congress should reconsider including the public option in 2012.

Mathur is former chair and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/.

Health insurance markets and health care

Vijay K. Mathur

Published in Standard-Examiner, Ogden, Utah, April, 3, 2011

This year, on March 23, was the first anniversary of the Affordable Care Act. Experts of different stripes from conservative think tanks, conservative politicians, media pundits and editorial writers of conservative media outlets are on the bandwagon of criticizing the law. The column on ACA by Wisconsin Republican Sen. Ron Johnson in the Wall Street Journal on March 23 caught my attention. He heaped praise on the medical care his daughter got. He had insurance through his employer. His praise was sprinkled by highly critical remarks on ACA.

According to Senator Johnson, ACA will destroy the quality of care and innovations in medical care, and implement bureaucrats' take over: I wonder where he got that information about ACA. He had nothing to say about the imperfections (concentration of economic power) in the insurance markets, lack of health insurance to almost 47 million people now and increasing rapidly over time, denial of insurance based on pre-existing conditions and other hardships people face in getting and continuing their health insurance coverage.  

Similarly, Sen. Orrin Hatch in columns, including one in the Standard-Examiner, on March 27, tried to make the case for repeal of the law. The ACA, according to him, will increase insurance premiums, increase unemployment, taxes and deficit. It was not clear where he got his data to make such unsubstantiated claims contrary to other analytical evidence. He praised Utah's health care system. However, if Utah has such a good system, why such a high growth in enrollment during 2009-2010 and in the expenditure, and why is Utah Health Exchange plagued with low enrollment and high premiums? Moreover, the claim that ACA is a government takeover overlooks the fact that UHE, as in some other states, is a government-organized market place, just like ACA requires.

The column by Doug Olson, a small business owner, in the March 24 Standard-Examiner, points out the problems he faced in getting insurance from varied insurance companies in covering his wife's surgery-related medical bills. His experience is indicative of the problems ordinary people face in getting insurance, especially those with preexisting conditions. Sometimes insurance companies refuse coverage on the pretense that the doctor-approved treatment is experimental. A former health insurance executive, Wendell Porter, describes such an incident in his book, "Deadly Spin," which resulted in the death of a child.

Utah politicians do not have to worry about their lifetime taxpayer-paid coverage after only 10 years of service in the Legislature. I am sure federal government employees and politicians will not willingly reduce or do away with their generous taxpayer-provided coverage. Why do the politicians think that other people have to fend for themselves and be deprived of the opportunity to obtain lower priced group coverage if their employers do not provide insurance?

I understand that medical care in the U.S. is among the best in the world for those who have access to it at an affordable price. But those who are priced out of the market for any reason do not even have the opportunity to access the second-best medical care. As Professor David Cutler at Kennedy School of Government at Harvard states in "The Economists Voice," "Substantial empirical evidence shows that the major issues influencing insurance take-up are price and accessibility." The subsidies to low- and middle-income persons under the ACA will go a long way for many Americans to afford insurance and hence adequate medical care.

The access to medical care and its cost not only depends upon insurance markets but also on the pharmaceutical drugs markets and medical care markets in various regions of the country. For example, if medical care industry increases prices, it tends to increase insurance premiums. The cost of drugs, profit motive, monopolistic practices and diversified insurance pools also affect premiums.

The study by Leemore S. Dafny in American Economic Review's September 2010 issue finds that controlling for other effects, health insurers charge higher premiums to more profitable firms, and within an insurance company premiums escalate in the most concentrated (indicative of market power) markets. This study challenges the notion prevalent among many faithful but misinformed supporters of free competitive markets that health insurance markets are highly competitive. The Wall Street Journal, March 26-27, reports that the Justice Department has opened its antitrust probe into the Blue Cross-Blue Shield insurance plans' anti-competitive behavior in several states.

It is hoped that cool heads will prevail in the health care debate. The debate should be guided by factual information and solid objective analysis of the consequences of ACA, rather than ideology. If the ACA has certain deficiencies, then the responsible action will be to remove those deficiencies and substitute them with policies, which assure adequate health care for all Americans.

Mathur is former chair and now professor emeritus of economics, Department of Economics, Cleveland State University, Cleveland, Ohio. He writes original blogs for the Standard-Examiner http://blogs.standard.net/economics-etc/