July 24, 2009 | Executive Summary on Health Care
One of the most hotly debated proposals in health care reform is the establishment of a new "public plan"--a health insurance program operated by the federal government and modeled on Medicare. In most variants of this idea, the public plan would "compete" with existing health plans currently offered by employers, in the individual insurance market, and/or in a new national health insurance exchange. President Barack Obama says that "a public health insurance option operating alongside private plans" would give Americans "a better range of choices, make the health care market more competitive, and keep insurance companies honest."
The Claims. Proponents of the public health plan idea claim that the high cost of American health care is caused by private insurance companies' expenditures on marketing, efforts to deny claims, high executive salaries,unrestrained pursuit of profit, and unwillingness to drive "hard bargains for reduced prices" from hospitals and physicians. They claim that the federal government's "bargaining power" allows Medicare--the nation's largest existing public health plan--to achieve lower costs and slower cost growth, and that the government could achieve similar results with a public plan for the non-elderly.
Proponents also claim that competition from such a public plan would reduce private-sector health care costs by forcing private insurers to either reduce costs to the supposedly lower public plan level or go out of business. Many even claim that, if the entire privately insured population were switched to a public plan, enough could be saved in administrative costs alone to pay for covering all Americans who are currently uninsured.
This rationale for creating a new program modeled on Medicare is based on four erroneous beliefs: (1) that, compared to private-sector health plans, Medicare provides comparable access to health care with slower cost growth; (2) that Medicare's administrative costs are lower; (3) that Medicare uses superior bargaining power to reduce health care costs without harm to patients; and (4) that public health plans are more innovative, whereas private health plans only follow the government's lead.
The Reality. All of these beliefs are demonstrably false. Contrary to the claims of public plan advocates:
Other Dangers. The current Medicare program, which covers one-fifth of the American population, has unfunded future liabilities of over $36 trillion. A public plan with Medicare's essential characteristics that covered the entire population--or a significantly larger fraction of it--would not reduce costs and would be even more financially unsustainable.
Furthermore, any public plan would be driven by congressional interventions, bureaucratic processes, and lobbying rather than by incentives to deliver quality, efficient health care. This was evident with Fannie Mae and Freddie Mac: "public plan" mortgage companies that were established to "keep private lenders honest" and increase levels of home ownership. Driven by congressional interventions and policies at odds with economic reality, these public mortgage companies collapsed and threw the entire financial system into chaos. A "Freddie Doc" would produce similarly disastrous results.
No Cost Advantage to the Public Plan Concept. Despite the claims of proponents, the available evidence from the nation's largest and oldest public health care plan does not indicate that a new or expanded public plan modeled on Medicare could provide Americans with health care comparable to that offered by existing private plans, let alone at a lower cost. A public plan would be no better than the status quo and might well prove to be much worse than the "disease" it is intended to cure.
Americans clearly need health care reform, but a public plan is the wrong kind of reform. Contrary to the claims of the President and some Members of Congress, a public plan could not achieve cost savings or reduce the number of uninsured without substantially reducing the quality and access to health care that Americans currently enjoy.
Robert A. Book, Ph.D., is Senior Research Fellow in Health Economics in the Center for Data Analysis at The Heritage Foundation. The author thanks Joseph R. Antos and Walton J. Francis for helpful discussions and comments on earlier drafts, Benjamin Zycher for answering copious questions about administrative cost data, Paul L. Winfree and Tim Carr for help with private insurance enrollment data, and John W. Fleming for designing creative graphic representations of complicated quantitative concepts.