What's Wrong With Competition In America's Health Care System?

Source: http://www.ibdeditorials.com/IBDArticles.aspx?id=326934219527160

By JEFFREY H. ANDERSON | Posted Monday, May 11, 2009 4:20 PM PT

The post office competes against UPS and FedEx.  Public schools compete against private ones — and should have to compete more. So what's wrong with having a "public option" for health care to compete against private insurance?

The core problem with a "public option" is simple, but it hasn't been widely recognized. In other realms, government has to provide a service to compete with private businesses.

But health insurers don't provide a service, per se. They are middlemen or financiers. They contract with others — doctors, nurses, hospitals — who provide the actual service. In such a context, genuine private-public competition is impossible.  For no one can match government's ability to dictate the prices and availability of services rendered by others.

What Option?

The "public option" is intended to be a form of Medicare for all.  President Obama and the Democratic Congress are pitching it as a way to give individuals and families a new choice. 

More often the choice will be made by employers, who will decide whether they want to keep offering private insurance to their employees. To save money, many will choose to offer only the government-run plan, which should be called the "employer option" or perhaps the "government option for employers." By any name, it's an option for employers to force employees into government-run care.

To understand why the government-run plan will be tempting for employers, one must understand the nature of the "competition" involved. Imagine the scenario in which government competes directly against private automakers. 

If Government Autoworks is vying for sales against Acme Autoworks, it actually has to make a decent product and sell it at a competitive price. If Government Autoworks makes a $20,000 car, but it's less reliable (think FedEx vs. USPS overnight), responsive or stylish than Acme's $20,000 car, it won't sell. 

Government Autoworks cannot merely declare that its $20,000 car, which costs at least as much as Acme's to make, will now be priced at $16,200. If it does, it will lose money. It could still be propped up by taxpayers, but it couldn't compete on its own.

Now take the alternative scenario of providing health insurance. There, government doesn't have to make anything. It doesn't have to deliver packages. It doesn't have to run a school. Above all, it can dictate prices at its whim. 

According to the Lewin Group, Medicare pays health care providers 81 cents on the dollar. So for a $20,000 procedure, Medicare, on average, pays $16,200. Doctors, nurses and hospitals go without the difference or pass along the costs to private insurers or individuals. So government can fix prices, at little or no cost to itself. 

That makes the "public option" a fundamentally different animal from government entities that compete (more or less) legitimately against private competition. There is no way private insurance can compete against an entity that can just wave a wand and change a price to its advantage and someone else's detriment.

But if government can lower health care costs in this way, why is that bad? Three central reasons: 

First, Medicare pays less per procedure, but it doesn't pay less. What Medicare gains per procedure, it loses in poorly coordinated care, wasteful procedures, fraudulent claims and bureaucratic waste. 

Despite paying only 81 cents on the dollar, Medicare's costs since 1970 have risen more than twice as fast as the costs of all other health care in America combined. Per patient, Medicare costs have risen 27% more than all other nationwide health care costs — 41% if you include the prescription drug benefit. 

Medicare is far more expensive than privately run care, and it's leading us toward financial disaster.

Second, a government-run system would kill any chance at real reform. The core problem with American health care is that the patients aren't the payers.

So providers and insurers don't cater to patients, and patients don't shop for value. Each element caters to whoever pays it: Providers cater to insurers (and the government); insurers cater to employers. Nobody caters to consumers. 

A vibrant free market would aggressively cater to consumers, who in turn would shop for value — thereby making health care more consumer friendly, affordable and better. We'll never get there if the government takes over the insurance business.  That will cement in place the core problem with today's system. We need a change, not another coat of cement.

Shaky Combination

Third, once government has run private insurance out of business, providers will no longer be able to shift costs to them. This will result in higher costs to taxpayers and lower wages for medical professionals, which will attract fewer people to the profession. If anyone doubts this, do they also doubt that higher pay attracts teachers? 

Lines will form, care will be rationed and a two-tiered system will emerge: The very rich will pay for the care they want — whether here or abroad — out of their own pockets. The rest of us will have plenty of time, while we stand in line, to reflect on how nice it would be to have private insurance and the personal freedom it affords.

Anderson is the former senior speechwriter for the Health and Human Services Department and a former professor of political science at the Air Force Academy.