Will the Public Insurance Plan Be a Predator?

Thom Lambert —  8 October 2009

Wall Street Journal columnist Thomas Frank inhabits a simple little world in which private enterprise, in its relentless pursuit of profit (i.e., charging more for something than it’s worth), is consistently a force for evil, and government, populated by wise and benevolent folk who have eschewed riches in favor of public service (see, e.g., Ted Kennedy), is always a force for good. Responding to Mr. Frank’s simple-minded musings is generally like shooting fish in a barrel, so I normally just leave him alone. This week, though, I feel compelled to respond.

In Health Care and the ‘Predator State,’ Mr. Frank expresses dismay that critics of Obamacare would refer to the so-called “public option” as a “predator.” He writes:

What makes government predatory, [these critics] seem[] to believe, is its public-mindedness. Were government to offer health insurance to everybody without the industry’s many devices for excluding risky individuals, some seem to fear, it might be able to offer consumers a price too fair for the profit-minded sector to match.

This is a curious reversal for a movement that ordinarily celebrates Darwinian struggle and the destruction of the weak by the strong. Just think of the conservative caricatures that must be inverted for this argument to work: All those soft liberal bureaucrats? Ferocious man-eaters. The welfare state? Law of the jungle.

And the actuarial-minded hardliners of the insurance biz, the ones who deny your claim or cancel your policy? A gentle but endangered species that needs our nurturing, sort of like panda bears.

Putting aside the second sentence’s nonsensical suggestion that including more high-risk individuals in a risk pool will lower, rather than raise, insurance premiums, the main problem with Mr. Frank’s rant is that he misunderstands what critics of the public option mean when they say the plan would be a “predator.”

In competition law, predation occurs — at least in theory — when a business drives out equally or more efficient rivals by charging a price they are unable to match. The classic example is predatory pricing: the predator lowers its price to a level below its own costs (and thus below the costs of all equally efficient rivals), holds its price at that level until the rivals are driven out of business, and then, freed from competition, charges monopoly prices to recoup its losses during the period of below-cost pricing.

Real-life predation is extremely rare for an obvious reason: most potential predators don’t have deep enough pockets to charge below-cost prices (and thereby incur immediate losses) for long enough to drive their rivals out of business.

Government, of course, doesn’t face this limitation. A government-sponsored enterprise can perpetually lose money without going out of business. A government-sponsored insurance plan would therefore be in a terrific position to engage in predation.

Defenders of the public insurance plan insist that it will be required to stand on its own, so if it charges prices that don’t cover its costs, it will eventually go out of business. But to accept that assurance, one must ignore gobs of history. When has a government-sponsored business ever been allowed to fail? Just look at the Postal Service. Whenever it begins running deficits (as it’s doing now), Congress ponies up money to keep it afloat. It’s not even required to cut back on high-cost services like Saturday delivery and rural outposts. When cost-cutting measures are proposed, entrenched interests lobby Congress for a subsidy. Given that legislative proposals with concentrated benefits and diffused costs almost always pass, such subsidies are routinely approved. The same thing will happen with a public insurance option.

Because there will be constant political pressure to keep the public plan’s prices low and benefits high, and because the plan will not need to break even, the plan will be perfectly poised to predate its private sector rivals. Critics’ claim that a government option will be a predator therefore has nothing to do with whether government or the private sector is a bigger meanie, as Mr. Frank supposes. It has everything to do with the political realities that a government-sponsored insurance plan will have implicit and explicit subsidies that allow it to charge below-cost prices and thereby drive out its equally efficient rivals.

To be fair, Mr. Frank does make one important point: “[G]overnment becomes a ‘predator’ when it adopts the agenda of the private sector, when it comes under the control of business interests.” Yes, all sorts of mischief results when government makes its powers available to private businesses.

Mr. Frank’s plan for avoiding that danger is, in his own words, “incredibly simple.” He offers the following advice as to how Congress should manage its government-sponsored business: “Don’t let insurance industry lobbyists give you advice. Don’t take their money. Just say no.”

Even if one were convinced that the current members of the legislative and executive branches could and would follow this advice, what’s going to happen when new, less noble and enlightened leaders are elected? If we create the government institution today, it will persist even after bad guys (i.e., Bush/Gingrich types) are elected to run it!

I have a simpler solution: Don’t create government-sponsored businesses in the first place. Have we learned nothing from Fannie and Freddie?

Thom Lambert

Posts

I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

10 responses to Will the Public Insurance Plan Be a Predator?

  1. 

    Okay, this is going to be my last post because I think we have gotten to the point where we are just speaking past one another.

    The problem in the debate is based on the foundations of the arguments. As you have stated, “healthcare isn’t like other products” and “panels of politicians… can’t do worse than the private system we have now.” That is where we have to agree to disagree. Most on the right do not believe the government can do anything efficiently or effectively because they are induced by certain groups of constituents, not the people most affected by the legislation. And most on the left believe that corporations only have profits in mind and that economic incentives are not conducive to providing healthcare en masse. Starting from those premises, we will never come to the same conclusion.

    And as far as my health coverage goes, I was uninsured for years as a graduate student, but ended up okay. Under the health bill as it currently stands, I would have been forced to pay over a thousand dollars I did not have to pay for healthcare I really did not need. And if I did not buy coverage, I would be taxed a penalty I could not pay. I took a risk that I thought was worth a few thousand dollars, and it paid off. Currently, I have a wonderful employer who provides excellent coverage for a cheap rate. In fact, I chose a health savings account, where I have a high deductible, but my employer contributes to the fund that I can use for anything from doctor visits and surgery to aspirin and band-aids. Because I pay out of pocket, and because the employer contributions can eventually be rolled over into a retirement account, this type of plan makes me responsible for my healthcare costs (I only go to the doctor when necessary, I don’t seek prescriptions I don’t need, and I’m more conscious about keeping myself healthy to avoid unnecessary costs). And under the new health bill, I am very afraid that this will be deemed a “Cadillac” plan, which will be taxed at a very unfavorable rate, thereby reducing my employer contributions, increasing my costs, and making my HSA unaffordable. As a self-interested party, I am probably less concerned with the people without healthcare (many of whom still qualify for medicare and medicaid), and more concerned with losing the coverage my employer is so graciously willing to provide.

  2. 

    And just to clarify– I myself haven’t been denied coverage, or am getting chemo, or any of the other scenarios I’ve painted; I’m actually blessed with good health and good insurance (for the moment).

  3. 

    Firstly, to say that interstate contract law can resolve the problem flies in the face of practical reality. You’re an over-worked, underpaid investigator for California’s insurance regulator, you get a call from a confused 62-year-old in New York who needs medical treatment right away but is getting jerked around by her plan based in Oxnard– and conservatives seriously expect that overworked bureaucrat is going to care equally about someone 3,000 miles away? Good lord, they don’t even care about you now if you live two blocks over. I wholly agree that your solution works in theory, but in practice it will break down more often than an ’82 Yugo.

    Second, I do believe the government is better at making a judgment call about my health than an insurance company that stands to reap more profit by denying my claim, yes. And that’s precisely the situation many Americans face now. We hear stories all the time about private insurers denying coverage or payment. On Medicare, however, we always heart that the nation is going to go bankrupt because we cover everything under the sun. Is that a problem? You bet. But because *healthcare isn’t like other products,* people would much rather cover too much and worry about the cost later, rather than go without treatment because it’s financially prudent– I mean, wouldn’t you?

    When government rations healthcare, it does so based on policy set by a panel somewhere, yes, that might not always have your best interest in mind– but the private healthcare market *never* acts with your best interests in mind; it acts in the *other party’s* interests, which is to maximize economic gain. When that means Ford sells somebody else Cadillac I can’t afford, that’s fine; but when it means the insurer denies me chemotherapy drugs and offers them to someone more well-off, it doesn’t pass the smell test of what America is about. Panels of politicians have been deciding policy for everyone in America since the settlers of Jamestown 400 years ago, and contrary to what Sarah Palin seems to think, they’ve done pretty well so far. I think they can do the job here, too. At the very least, they can’t do worse than the private system we have now.

  4. 

    First off, interstate contracts happen all the time. In Missouri, for example, the state law that applies is the state where the contract was entered into (that’s an oversimplification, but you get the idea). However, simple legislation stating that the contract language governs or that the state where the insurer resides is the law that governs would be a quick fix and not all that unusual. I do believe there is a federalism issue that underlies this because you would have to have all the states agree to something that is currently state choice, and the states would essentially be giving up the right to be sole regulators of their insurance. While these are large technical problems, they are not insurmountable, and given the current atmosphere for change and reform, I’m sure they could be overcome.

    The whole idea of interstate insurance purchases would be to avoid the costly regulations and mandates of your own state’s insurance laws and to obtain the benefits of another state’s laws that make your premiums cheaper, usually at the expense of fewer benefits. Ultimately, I think what would happen is that most states would contract and expand their benefits until each state had reached a sort of equilibrium price point that reflected the best available coverage and options according to what consumers want. In other words, as close to a traditional market economy as you can get with such a regulated industry.

    Secondly, do you believe the government is better at making a judgment call about your health than you are?

    Lastly, you say we have rationed care doled out by the private market. Well the truth is… everything in the private market is rationed. The difference between private rationing and government rationing is that when the government rations, it does so based on an arbitrary policy or by a panel or committee of politicians who do not necessarily have your best interest in mind. When the private market rations something, it is done so by price. (See any Hayek references here). So resources are allocated where the person who needs it most and is willing to pay for it is going to get it.

  5. 

    I’d love to see the ability to purchase insurance across state lines– but explain to me how one would then oversee that activity. When I’m in New York and buy coverage from a California insurer, and then feel I’ve been unfairly denied coverage, to whom do I appeal? New York authorities, or California? The idea of cross-border availability sounds great right until you hit that question, which raises the possibility of some federal oversight panel. Personally, I’m fine with that, but the conservatives then balk at their own proposal.

    Second, I’d also like more transparency into my medical costs so I can make better medical decisions– right until I remember that I’m not a doctor. Healthcare is not like other products consumers purchase. Often you have no time at all to weigh costs and decisions (urgent or emergency care), and when you do, often you lack the judgment to make proper choices.

    I’m well aware of the implications of my beliefs– that we’ll end up with a single-payer system that provides healthcare to all at considerable cost, and we’ll either need to raise taxes or ration care. But we already have high costs and rationed care doled out by the private market, just more expensively and to fewer people. I don’t presume to argue that my vision is a *good* plan; it’s simply the worst plan their is, except for all the others. Including the system we have now, which is awful.

  6. 

    Joey, I have a few brief comments on your response.

    First of all, philosophically, you should be opposed to a public option pushing out private insurers. While you say it is cost-effective, that is likely because you do not see the hidden costs that come from higher taxes and a rising national debt that eventually needs to be addressed. Also, don’t forget the decreases in innovation and efficiency that accompanies government run programs.

    Second, we don’t know whether FedEx or UPS can match the USPS delivery of letters because there is a law making it a crime to deliver first class mail if you are not the USPS. Even William Henderson, a former postmaster general, suggested the privatization of the USPS as a feasible alternative to the current system.

    Lastly, I do agree that more should be done in reforming the health insurance industry, but I do not think that includes taking the ability to insure people out of the hands of the private sector. In fact, we have to make sure that reforms to the health insurance industry are really de facto reforms to health care in general. Personally, I would like to see the ability to purchase insurance across state lines, more in the way of health savings accounts that can roll over into IRA’s or 401k’s upon retirement, and the ability for the public to choose their own doctor and see the costs before they commit to a medical decision since I think the indirect payor status blurs the lines of responsibility for rising medical costs.

  7. 

    Philosophically, I don’t have a problem with the public option naturally being the most cost-effective choice, inexorably driving more people to use it and pushing the private insurance plans out of business.

    Earlier on this blog, someone compared this debate to the public option for mail delivery, the US Postal Service. I’d say that’s an excellent analogy. The US Postal Service exists to provide mail service to all citizens, and offers an excellent product: delivery of any letter from one address to another usually within three days, for $0.42. The private sector can’t match that performance, so private delivery services like FedEx or UPS offer higher-end services, charging $7.95 to delivery any package anywhere overnight, with tracking ability.

    Likewise, a public option will ultimately provide the fundamental safety net our social compact (the U.S. Constitution) supposedly provides (‘to promote the general welfare’). Will other private insurers be able to keep pace with it? Personally, I suspect they will– but even if they don’t, they can focus on offering more sophisticated services for the higher price. And we still achieve the overall goal, of giving more citizens better access to care, so we don’t end up devoting all our economic activity simply to paying for insurance– which is what we’re sliding towards now.

    Sure, we need more doctors and hospitals– but take that up with the medical schools, who are too exclusive in admissions, or with investment funds, pouring their piles of money into other investments. Those are separate issues. The primary problem we have now is that by leaving access to insurance in the hands of the private sector, we are slowly warping our natural economic activity towards keeping ourselves insured, rather than creating *more* economic activity– which is the whole point of capitalism, or so I thought.

  8. 

    Joey, if that is the purpose of the public option, I think the result does not deliver. First of all, the purpose you purport reads more like an extended medicare and/or social security disability benefit. Secondly, if a public option were able to avoid major carrying costs that private companies are required to pay (e.g., property taxes and corporate taxes), it could potentially lead to essentially below-cost pricing on behalf of the government. That would cause the private insurers to either go out of business or lower premiums dangerously below established underwriting levels. With more private insurers out of business, people who are employed, middle-class or even well-to-do, and healthy to moderately ill will turn to the public option, thereby defeating or at least altering the purpose.
    And lastly, I am not sure when the debate went from lowering healthcare costs to lowering the cost of health insurance. There is definitely a distinction. By reducing the cost of insurance, we are providing more health care to more people. This means increasing the demand for doctors, nurses, hospitals, clinics, and emergency/urgent care services. But where are we working on the supply side of the argument? We are supposedly going to give 47 million people easy access to the aforementioned services, but we are not talking about increasing the number of services provided. It’s like we’re making healthcare the hot new Christmas toy, but we aren’t ramping up production. The logical thing to happen with amped up demand and a shortage of supply is… increase the price of healthcare. If a decreased cost of health insurance leads to an increased cost in healthcare, it seems like a zero-sum game at best. And with all the barriers to entry in the medical field, even if we increased production now, it would be years before we saw a surge in doctors and hospitals.

    I don’t know what the right answer is, but I know it’s not a public option.

  9. 

    Even if one believes, as Joey does, that the safety net is not big enough, one need not agree that the best way to handle that problem is to create a public insurance company that is highly likely to drive its private sector competitors out of business.

  10. 

    As I’ve mentioned on this blog before, your argument makes the assumption that a public-option insurance plan’s purpose is to compete with private plans. That is incorrect.

    The purpose of a public-option plan is to provide health insurance to citizens the private market would otherwise ignore: the unemployed, the poor, the seriously ill. This isn’t just a question of whether these groups can afford insurance– it’s a question of *how to give them insurance when the market does not wish to provide it to them.*

    The conservative argument ignores this point completely, or just doesn’t understand the true plight of the uninsured in this country; I’m not sure which. But until you find some way to address it, your solutions are talking past the real problem.