I can't say that President Obama knows little about health care and misunderstands the free market, but, based on his performance at last week's press conference, both seem likely. The notion that there is no competition unless there is a government option is absurd. Although it is not really a free market, there is competition in the current system (whether we like the market equilibrium is another matter). What a monopsonistic public option is likely to do is destroy competition since it will tend to set prices in a way that will drive out private insurers and, as a result, stifle supply side innovation and quality improvements. That's elementary economics.
It is probably true that care decisions are driven by reimbursement schedules but that is a function, not of profit, but of third party payment. Any system of third party payment is likely to develop a set of rules about what can or cannot be paid for. In fact, Obama's central selling point is that he thinks the government can set up a centralized reimbursement schedule better than the ones that have emerged from competition between insurers and plan administrators.
This seems unlikely and, if it is possible, it's not because the government doesn't have to make a profit. Public choice theory tells us that the government is just as self interested as private actors.
Once again, Obama treats profit as economic rent or as a "cost" that must be wrung from the system. The notion that it might serve as an incentive for the development of new drugs, technologies, modes of treatment, etc., does not seem to have occurred to him.
That point is central to his failure to appreciate what is good about our current system. Poll after poll shows that an overwhelming majority likes their health care. They may want to pay less for it. They may want to feel more secure about it. But they like it and they should. The best health care in the world is available in the US. The oft cited WHO "ranking" and the reliance on aggregate statistics like life expectancy don't prove otherwise. The WHO ranking is weighted heavily toward state provided or guaranteed health care and aggregate stats on general well being reflect all sorts of things other than health care. Statistics that focus on what happens to people that actually get sick tend to support the notion that the US offers the best care. Many of the drugs and technologies that are available elsewhere were developed here where firms had incentives to develop them. Blowing up that system to address an access problem for a relatively small percentage of the population and to reduce costs seems counterintuitive.
Reform is certainly warranted but, once again, Obama shows a commitment to centralized solutions. A recent article in the Weekly Standard shows the difficulty in developing a nationalized system of health care records in which a computer would decide whether you need a stent or a bypass. Perhaps the federal government has the capacity to decide treatment regimes (as Obama puts it, whether to use the red pill or the blue pill) in a way that won't harm care and innovation. But I find it hard to believe.
In the end, its hard to see anything on offer from the President but an embarassingly caricatured view of the private sector (doctors will take out tonsils of someone who just has an allergy to make more money).
And he's not the only one. Paul Krugman won a Nobel Prize for Economics by doing something, but the studiously avoids any economic erudition in his New York Times column. On Saturday, he told the nation that insurance doesn't work. That's quite a surprise given the billions of dollars that people willingly pay not only for health insurance but for life, auto, liability, business interruption, property, etc. insurance.
The reason seems to be that insurance companies would prefer not to pay claims. The government, he implies, wouldn't mind at all. But we know that's not true (and we'd go bankrupt if it were). The difference is that insurance companies have to pay what they promised to pay. This is why they engage in what Krugman believes is the "socially harmful" business of claims administration. Insurers who stiff their policyholders tend to lose customers.
But, in a single payer system, the government can deny whatever and whenever it wants. The only solution is political and we see how well that has worked with the IRS, DMV and other bastions of customer service in the public sector.