The Heritage Foundation

Executive Summary #2224 on Health Care

December 22, 2008

December 22, 2008 | Executive Summary on Health Care

Executive Summary: How a Public Health Plan Will Erode Private Care

When it comes to the deadly details, millions of Americans could be in for an unpleasant surprise. During the election campaign, President-elect Barack Obama promised--repeatedly--that Americans who already had health insurance would not face any changes in their coverage. He also promised that under his plan, the typical American family would save $2,500 annually in medical costs.

It turns out, however, that these promises cannot possibly be fulfilled. Under the health reform plan that the President-elect has outlined, including variations of his basic approach that have been refined by Senator Max Baucus (D-MT) and former Senator Tom Daschle (D-SD), President-elect Obama's pick for Secretary of Health and Human Services, millions of Americans will indeed lose their existing coverage, and the promised premium savings are unlikely to materialize.

The reason is that President-elect Obama has proposed (1) the creation of a new national health plan, run by the federal government and financed by the taxpayers; (2) an employer mandate enforced by a payroll tax; and (3) a congressionally created national health insurance exchange in which the government health plan, subsidized by taxpayers and having special advantages, would compete unfairly with private health insurance. The result would be a massive crowd-out of private health insurance coverage, especially employer-based coverage.

Ugly Scenarios. Senators Baucus and Daschle, unlike Obama, favor the imposition of an individual mandate on adult Americans to buy health insurance, but such a mandate is not nearly as consequential as a whole new government health plan. "The irony is that the public option--not the mandate--is far and away the most radical part of the plan," notes The Wall Street Journal. "Green eyeshade objections are obviously out of favor in modern Washington, but the reality is that the Baucus-Obama plan would be extraordinarily expensive as it slowly but relentlessly grew the government's share of health spending."

Most Americans under the age of 65 get private health insurance through employment, and the overwhelming majority are satisfied with it. The vast majority of American voters oppose any kind of government-controlled health plan if it means that they have to change their own health insurance coverage. In a recent survey, only 15 percent of Americans with private insurance would be willing to switch to a government health plan. But the combination of a government health plan and a new tax or mandated coverage by the employer would prove disastrous for millions of individuals and families enrolled in employer-based coverage. In an employer-based health insurance system, of course, employers, not employees, decide whether to continue or terminate coverage.

Big Impact. The Lewin Group, a nationally prominent econometrics firm, estimates that the Obama plan would significantly reduce the number of uninsured, with 26.6 million additional Americans getting coverage by 2010. Lewin also estimates that the Obama plan would dramatically alter the way in which many Americans would be covered: 21.6 million would lose their private coverage, and an estimated 48.3 million would end up in public coverage through the new government health plan, as well as through the State Children's Health Insurance Program and Medicaid. Meanwhile, an estimated 18.6 million employees would find themselves in the new public plan as employers switched from private health insurance.

Since October 2008, when Lewin completed its initial analysis of the Obama proposal, even more detailed studies have brought to light other potential consequences of a public plan:

  • Greater cost-shifting. American families already pay an estimated $1,788 annually in additional insurance costs because they routinely absorb the extra costs of government health programs, Medicare, and Medicaid. A new public plan, assuming it pays below-market rates to doctors and hospitals, would aggravate this cost-shifting.
  • Less private coverage. The Lewin Group estimates that anywhere from 10.4 million to 118.5 million people would lose private coverage, depending on the new public plan's payment levels and the pool of eligible enrollees.
  • Lower hospital and physician revenues. Under different payment and public-plan enrollment scenarios, Lewin estimates that hospitals could lose substantial revenues and that doctors would certainly lose from $2.8 billion to $36.4 billion annually.

Details Matter. President-elect Obama's rationale for a new public plan is that it would give Americans who are not enrolled in employment-based health insurance coverage, or those with insecure coverage, the opportunity to obtain stable, affordable health insurance with a guaranteed set of government-standardized benefits. But while it might look like a prescription for consumer choice and competition, the reality is very different.

Conclusion. A new public insurance plan to compete with private health plans through a "national health insurance exchange" is a Trojan horse for government control and the progressive destruction of Americans' private health insurance coverage.

The creation of a "Medicare-like" plan, in particular, would entail creation of a Medicare-like financing system--a shell game in which prices are held artificially below market rates while costs are shifted to private carriers and growing liabilities are shifted to the next generation of taxpayers. Congress would thus add to entitlement burdens that are already enormous. Meanwhile, it is hard to imagine how Congress and the Administration could be neutral in the national competition with private health plans: a competition in which they would staff, manage, and fund their own creation.

President-elect Obama claims that providing a public plan through a National Health Exchange would enhance personal choice and health plan competition. That is highly unlikely. Rather, such a system would erode private health insurance. While private health coverage would start to disappear more or less rapidly, hardly any aspect of remaining private health plans' business operations would be free from government control. That is not a prescription for the kind of choice or competition that would drive innovation, improve quality, or enhance the productivity of the health care sector. It would severely weaken private health insurance pools--and guarantee a severe loss of economic prosperity and personal liberty.

Robert E. Moffit, Ph.D., is Director of the Center for Health Policy Studies at The Heritage Foundation.

About the Author

Robert E. Moffit, Ph.D. Senior Fellow
Center for Health Policy Studies