Why would it drive private insurers out of business? If private insurers sayBarack Obama is a magna cum laude graduate of the Harvard Law School and served on the law review. He is too smart not to understand the problem.
that the marketplace provides the best quality health care, if they tell us that
they're offering a good deal, then why is it that the government -- which they
say can't run anything -- suddenly is going to drive them out of business?
That's not logical.
It is not simply that a public plan is likely to be subsidized (although it is), but that it will be able to engage in monopsonistic purchasing - driving down prices which providers will have to pass on to the privately insured who will in turn join the public program. Don't take my word for it. In separate columns published today, Rich Lowry and Paul Krugman agree on this.
Lowry writes "[p]Private insurers are at a disadvantage vis-à-vis the federal government because they don’t have the power of the government to dictate prices to doctors and hospitals. That’s what Medicare does, and why it pays less for health services than private insurers.' He concludes that a public plan would tend to crowd out private plans.
Krugman says that "it would help keep costs down through a combination of low overhead and bargaining power." Overhead is, of course, always going to be low if you pay what you will for whatever you will. And, as pointed out in a piece in today's Wall Street Journal by John Calfee, comparing the administrative costs of medicare with private plans is a bit of apples and oranges. (For more on the sounds too good to be true claim that medicare's administrative costs are ten percent of the private sectors, see here.)
"Bargaining power," of course, refers to monopsony power. If there is a public advantage, that is where it is likely to be found.
And Krugman even agrees that this will crowd out private insurers. "Behind the boilerplate about big government, rationing and all that," he writes, "lies the real concern: fear that the public plan would succeed."
The difference between Lowry and Krugman is what "success" for the public plan means for the rest of us. Monopsony is generally thought to impair the maximization of welfare and that's likely here as well.
First, as explored Calfee's column, the minimization of payments to health care providers is not an unalloyed good. Profits pay for research and development and the likelihood that one buyer (the single payer) will know what to pay for R&D and be able to recognize valuable emerging technologies is very low. Remember that the value of a free market is not that all the private sector players are smart, but that they all don't have to be smart.
Second, we still have the third party problem. The monopsonistic buyer is not the patient and will not seek to maximize the patient's welfare but that of those who control it, i.e, the political branches. That's why single payer plans tend to result in less care. The pain of someone who is told he must wait for a hip replacement or is "too old" for a bypass operation is isolated. Everyone frets about the system's cost.
The bottom line is that a public option is likely to absorb the private plans that people are overwhelmingly happy with in order to address a serious, but limited, access problem.