Friday, June 26, 2009

Lowry and Krugman agree

Earlier this week, I blogged about Barack Obama's testy response to a question about a "public option" in his coming health care plan. This is what the President said:

Why would it drive private insurers out of business? If private insurers say
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.

Barack 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.

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.


Sandra said...

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.

1. Are people "overwhelmingly happy" with their current plans? What is the evidence for this? Which people?

2. How should we address the "serious, but limited, access problem"?

Anonymous said...

I would like to know if Obama's program would change or eliminate workers compensation insurance.

It would seem that many employers and employees would like to know what is going to happen with it.

Billiam said...

Well, Sandra. I am one of "Those People" who are happy with my current plan through my employer. I liked the plan I had last year, but, due to costs, it was phased out. So, instead of paying 10%, I now pay 20%. No degredation in care, however. That is one of the things the Democrats seem to be trying to do. Lump care in with insurance. They tried the same thing with Stem Cells. I have never, in my entire life, been refused care, whether I had Insurance or not. There is not a 'care' crisis. Also, as far as the real number of uninsured, those who can't afford insurance are lumped in with those who refuse to buy insurance to make the number seem larger, and the problem seem a 'crisis'. This is typical strategy, used by both parties.

Rick Esenberg said...

If you look at these polls, when people are asked whether they are satisfied with the quality of health care they receive, the number is around 80%. Yes, they would like to pay less and worry about losing it. Certainly they express support for certain kinds of reform. But if folks become convinced that the quality of their care is going to suffer, that support will go away. And it should.

I think we need to evolve toward an individual market for insurance with subsidies for those who can't afford it. It may have to involve an individual mandate. I think McCain's proposal was a step in that direction.

I can't imagine Obama's proposal - or any other - would change worker's comp.

jp said...

If we went to a "Medicare for all" program, would not private insurance companies selling supplements (Medigap) plans prosper?

Dad29 said...

And if those companies prosper, so what?

jp said...

Dear Dad;
The point is private insurance companies would offer coverage for services not covered under “Medicare for all” and not be driven out of business.

Dad29 said...

OK, point taken. But do you really think that O will allow 'medigap'? From all we've seen so far, a 'private option' is not part of the mix, period.

He talks about 'competition,' but that's foofoodust, to be polite; the Feds will not "compete" in any sense of the word.

jp said...

Looks like the private option may be headed to Mexico.

Jack Lohman said...

Spoken like a typical worker who has a job and an employer still willing to provide employee insurance. But just in case you haven't heard, your employer is paying the 31% of insurance bureaucratic waste, at least for the moment.

Jack Lohman

Unknown said...

The monopsonistic buyer is not the patient and will not seek to maximize the patient's welfare but that of those who control it

And private insurers in today's free market system are all about maximizing the patient's welfare? Come on, Rick. You're a graduate of Harvard Law School and served on the law review. You're too smart not to understand the problem.

The issue is big insurance companies (these aren't helpless mom & pop shops) are making decisions about patients based upon profits. The process is described by a former CIGNA executive in his recent testimony before Congress:

The top priority of for-profit companies is to drive up the value of their stock. Stocks fluctuate based on companies' quarterly reports, which are discussed every three months in conference calls with investors and analysts. On these calls, Wall Street looks investors and analysts look for two key figures: earnings per share and the medical-loss ratio, or medical-benefit ratio, as the industry now terms it. That is the ratio between what the company actually pays out in claims and what it has left over to cover sales, marketing, underwriting and other administrative expenses and, of course, profits.

To win the favor of powerful analysts, for-profit insurers must prove that they made more money during the previous quarter than a year earlier and that the portion of the premium going to medical costs is falling. Even very profitable companies can see sharp declines in stock prices moments after admitting they've failed to trim medical costs. I have seen an insurer's stock price fall 20 percent or more in a single day after executives disclosed that the company had to spend a slightly higher percentage of premiums on medical claims during the quarter than it did during a previous period. The smoking gun was the company's first-quarter medical loss ratio, which had increased from 77.9% to 79.4% a year later.

To help meet Wall Street's relentless profit expectations, insurers routinely dump policyholders who are less profitable or who get sick.

More on that here.

So, again, the structure of the reformed system is important. I'm not convinced a system can't be devised with a public option and still retain a level playing field along adequate funds for R&D; but, if someone comes up with a better way to do it, then fine, let's go with that.

In the meantime, though, let's at least fully quote everything the president said on the issue, or at least acknowledge he said more and link to it so others can check it out.

A couple other quibbles: 1) you shouldn't conflate happiness with quality of care or coverage and happiness with the actual insurer (my guess is most people could care less about the logo on their insurance card), and 2) you should link to Lowry and Krugman to allow readers to make their own judgments on their similarities.