Argument: Public insurance would not kill the private insurance industry

Issue Report: Public health insurance option


John Holahan and Linda Blumberg. “Is the Public Plan Option a Necessary Part of Health Reform?” Urban Institute: “Will Private Insurance Plans Survive? We believe it is highly unlikely that private insurance would be eradicated by competition from a public insurance plan. Some plans would not survive, but the strongest and mostefficient would. First, the public plan would not use all of its potential market power for the reasons outlined above. Rates would be determined based on MedPAC analyses and recommendations. Moreover, providers would lobby over the adequacy of rates. Individuals would move from public plans to private plans if public plan rates were inadequate and led to poor access to providers of choice. Thus, there are significant constraints on the ability of a public plan to use all of its market power, driving down rates below reasonable levels. Second, there is some evidence that private plans are more effective at managing utilization relative to Medicare fee for service. The private sector has developed wellness and disease management programs that have been widely adopted. The Association of Health Insurance Plans has presented data that suggest that private Medicare Advantage plans have had considerable success in reducing utilization.13 In one study, they found a 34 percent reduction in hospital days and a 17 percent reduction in hospital readmissions. Another study found an 18 percent reduction in hospital days, a 41 percent reduction in readmissions, and a 32 percent reduction in emergency room visits (Association of Health Insurance Plans 2009).14 MedPAC reports that HMOs’ bids in Medicare Advantage for the average beneficiary were 98 percent of average fee-forservice expenditures, which suggests the ability to compete (MedPAC 2009).15 Again, it is not that all private plans would survive; those that have profited through positive risk selection but cannot create incentives for the efficient management of health care will be unlikely to do well in a more competitive environment. However, those that manage care effectively and control utilization will survive, as will those that bargain effectively with providers for lower rates. Plans that provide better consumer service and better access to desired providers than the public plan would do well even with somewhat higher premiums. Private plans would also likely become more aggressive in provider negotiations because of the price competition catalyzed by the public plan.”

“On the public option”. Economist. June 29, 2009: “Mankiw also writes:

‘A dominant government insurer, however, could potentially keep costs down by squeezing the suppliers of health care. This cost control works not by fostering honest competition but by thwarting it.
Recall a basic lesson of economics: A market participant with a dominant position can influence prices in a way that a small, competitive player cannot. A monopoly — a seller without competitors — can profitably raise the price of its product above the competitive level by reducing the quantity it supplies to the market. Similarly, a monopsony — a buyer without competitors — can reduce the price it pays below the competitive level by reducing the quantity it demands.
This lesson applies directly to the market for health care. If the government has a dominant role in buying the services of doctors and other health care providers, it can force prices down. Once the government is virtually the only game in town, health care providers will have little choice but to take whatever they can get. It is no wonder that the American Medical Association opposes the public option.
To be sure, squeezing suppliers would have unpleasant side effects. Over time, society would end up with fewer doctors and other health care workers. The reduced quantity of services would somehow need to be rationed among competing demands. Such rationing is unlikely to work well.

Mr Mankiw is assuming that the public option would use its market power to force down the price of services in a manner that would discourage potential doctors and nurses. But that doesn’t have to be the case. A dominant public option might restrict the services available to subscribing patients to those justified by a standard cost-benefit analysis. In other words, it might create a fragmented market in which the government offers affordable but restrictive coverage, while private firms compete based on the market niche left to them—a willingness to cover all treatments at a higher premium level.”

There are two broader issues to consider when mulling how a public option might actually work. One is that competition is very good at delivering desired outcomes in an efficient manner in some circumstances—when consumer information is right, when the proper institutional structures are in place, and when incentives are right. And it could be the case that the market for health insurance operates best when split into two markets, one of which provides health insurance as a basic public service, and one of which offers insurance as a consumption good (satisfying consumer desires more than addressing public health).”