Unbiased Analysis of Today's Healthcare Issues

Should a Government Health Plan compete with Private Health Plans?

Written By: Jason Shafrin - Feb• 24•09

“If you do not have insurance you can choose to enroll in the new public plan, which will offer benefits similar to what every federal employee and member of Congress gets. Or you can choose private plan options…” Barack Obama.com

Should the government develop a health plan that would compete with private health plans?  Thomas Rice thinks this is a good idea.  In his Health Economics editorial, Rice believes that the government’s market power and lower administrative expenses will lead to lower health insurance costs.  He claims that “Government should have a strong role in providing coverage to those who are currently uninsured or who have meager coverage, and a government-sponsored option that competes against the current array of private insurers is an excellent way to start.”

I am not opposed to having a public health insurance plan competing with the private health insurance plans.  However, there are some issues that need to be dealt with:

  • Budget Constraints.  Although the government may be able to charge lower health care premiums than private health insurers could, why is this the case?  If this is because  public health insurance is more efficient due to economies of scale, than this is great.  If they charge lower premiums however because they do not have a firm budget constraint, then this is a problem.  If public health insurers can unfairly compete by running a deficit every year, then this will not only drive private health insurers out of business, it will also saddle future generations with a large tax burden.
  • Public School Problem.  Individuals who want to send their children to private school face a stark disincentive to do so. If they sent their children to public school, the only cost is the taxes they must pay.  If they want to send their children to private school, they must not only pay the taxes for the public school, but most also pay private school tuition.  Similarly, if a public health insurance plan is made available, individuals should not get this for free.  If there is a subsidy for public health insurance (e.g., based on income or health risk) then private health insurers should also be able to receive this subsidy.  This will create a more level playing field.  
  • Risk Adjustment.  How will the public health insurance plan price premiums?  If the public plan is community rated, but the private plans are rated on an individual basis, all the sickest individuals will gravitate to the public plan. This will drive up medical costs for the government insurer.
  • History.  Rice notes that “the Federal Employee Health Benefits Program…provides access to private health insurance plans to over eight million federal employees and dependents. Although the program has provided good coverage at a reasonable cost, historically it has been plagued by the same issues as other consortia of private insurance: difficulties in controlling costs, and selection bias.”

As I mentioned, I am not opposed to having a government-run health insurance plan.  However, we must realize that this in and of itself is not a cure-all for the health care problems facing the U.S.

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6 Comments

  1. […] Gov. Jindal theme was this: the government will help pay for your health insurance premiums, but does not support a single payer plan.  Although Gov. Jindal was vague, the Republican worldview might support a voucher system.  In a voucher system, individuals receive subsidies to buy private health insurance based on their income and illness level.  I believe that Republicans would oppose the creation of a public health insurance plan that could compete with private insurers (see 24 Feb 2009 post). […]

  2. […] month, I blogged about allowing a government-sponsored health plan to compete with private insurers.  Joe Paduda gives one argument in favor of a public health insurer that any economist would love: […]

  3. […] be counterproductive to fiscal restraint and the viability of a public/private configuration.  Jason Shafrin from Healthcare Economist duly notes, “If public health insurers can unfairly compete by running a deficit every year, then this […]

  4. Until now, I had never even thought about a new health care system where the government and private insurance companies would compete for consumer dollars. However, this might be a good idea once you get past the first bad taste in mouth. Right now, there is really no competition in the health insurance or health care field. Sure there are many different participants, but almost every insurance company charges the same rate for coverage and doctors and hospitals have the same cost structure as well. Like most other people, I am afraid of what a total government run health care system will look like. This idea might be worth further study.

  5. […] health reformers are urging President Obama to pass legislation which would create a public, Medicare-style health plan which would be available for all individuals.  The plan would be open to all…or would it.  […]

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