I’ve been writing this post for a long time…not because I wasn’t sure what I wanted to say, but because there’s a lot to say, I’m lazy so I haven’t worked on it as fast as I could have and most importantly because I really thought the issue would be settled by now…it’s so straight forward that I can’t believe how it’s getting bogged down. Anyway, so here it is.
So a few weeks ago a guy by the name of John E. Calfee from the conservative think tank The American Enterprise Institute wrote an opinion piece in the WSJ titled: The Dangers of Fannie Mae Health Care. The article was supposed to be an indictment of President Obama's desire to have a "public plan" option as part of his health care reform efforts and like all good conservatives Mr. Calfee it would seem dogmatically believes in smaller government...whether it serves the purposes of society or not, and therefore looks at all proposed government programs with a leery eye. To be honest, that's probably a good thing. Our system is about debate and finding answers to the issues that keep us from enjoying life, liberty and the pursuit or happiness (Or the Good Society) and a strong and reasoned opposition party is critical to achieving this goal. The problem I have with the ideologues in Washington (I don't know that Mr. Calfee is one but I'll assume based on what he wrote that he is) is that they are often blinded by their ideology from seeing any good solution that doesn't fit within their world view. As you'll see from this post I think this happens on both side of the debate.
According to Mr. Calfee the administration has said we need a public plan in order to give people a competitive option to private insurance plans. He states that the administration claims this public option will offer needed competition, save money through low administrative costs and zero profits, realize greater economies of scale and allow for superior negotiations in the prices of medical services and technology.
Let's for the moment take Mr. Calfee at his word and accept that these are the basic arguments the administration is putting forth in favor of the public plan. He dismissed the first three arguments as bogus and the 4th as half bogus and the most dangerous. Actually I believe he sort of has it right for the first three arguments (look here: http://online.wsj.com/article/SB124597297859757163.html to see his reasons).
In fact I have a big problem with the fact that the administration even puts this idea in those terms. Yes, if you are a supporter of bigger government in some instances to help solve civil problems you might look at those arguments and find them reasonable and sort of middle of the road right? If they are all true who could argue with them? And I think that sometimes our politicians try to put things in the terms that they think people will find easiest to swallow instead of dealing with the real, hard and messy truths that need to be addressed. In my mind this isn't just about competition and saving money. Although we must deal with the cost of health care and the cost of insurance, just as large and equally as pressing is the issue of access to insurance in the first place.
In my estimation the public plan is needed to get coverage to those people who might otherwise not have coverage. That’s an important issue. In the interest of protecting shareholders and not in the interest of making sure everyone has access to health care, insurance companies are sometimes (I dare say often) overly cautious in terms of who they will provide coverage to. This is most often about pre-existing conditions and not about the ability to pay. Which to me has always been extremely silly. I need insurance because I may need to go to the doctor and insurance helps me pay for those costs. If I have a pre-existing condition I and the insurance companies already KNOW I have to go to the doctor and they can probably get a pretty good handle, based on my medical records of how much that’s likely to cost them over time (isn’t that why they spend all that money on actuaries?).
Now the comparison that Mr. Calfee makes between the public plan option and Fannie Mae is that Fannie Mae moved away from an entity that could help undeserved customers, who are often discriminated against and treated unfairly by mortgage companies, get mortgages, into an entity used to fulfill the philosophical position that everyone has the “right” to own a home. And that if we have a public plan it will quickly become a type of entitlement with poor risk management techniques, allowing everyone to have subsidized health care and in the process bankrupting the country. Now of course Fannie Mae should simply have provided for everyone who could afford to pay a reasonable mortgage, based on his or her income and willingness to accept the responsibility of indebtedness. Everyone doesn't have the "right" to own a home if they aren't willing to take on the responsibility of earning that right.
I suppose opponents of the public plans could say that this could happen here and that these plans could turn into health care entitlements destined to blow up and swallow up more taxpayer resources when outlays exceed the participant’s ability to pay premiums. The only problem with this is that I believe having access to a doctor is much more of a right than having the ability to own a home and that in a nation with the financial resources that we possess, that we all help generate as workers, consumers and financiers, we do have a responsibility to provide insurance coverage to those who are either less fortunate than us or legally shut out of the system due to a lack of moral leadership at the private insurance companies.
Sure, there’s plenty of competition for the most favorable customers and large businesses. The problem is that all of the insurance companies have the same or similar models for those people who they feel aren’t worth the potential costs of insuring. And if this is the additional “risk” that Mr. Calfee assumes that could be taken on by public plans if they had a government subsidy well then that’s a good thing.
Mr. Calfee finally attacks the administrations claim that the public plan option will lead to an organization that will be a superior negotiator of prices for medical services and technology. Mr. Calfee claims this would be a disaster of calamitous proportions because with the governments subsidy of the public plan in place, it will drive prices down to the point where everyone moves to the public plan, like happened with Fannie and Freddie (oh wait, that didn't happen...ok, let's not get bogged down with facts), private plans would all go out of business thus creating a single buyer of health care services (or a monopsony), resulting in diminished profits for pharmaceutical companies who would naturally abandon R&D investments which are essential to our health care system. The only problem with this is that if you know anything about US monopsonies and innovation there's really no evidence that any of this would actually happen.
First of all the fix for a runaway public plan is pretty easy if you focus in on what it's really needed for. You limit the ability to go onto the public plan to those who are priced out of traditional coverage because of income and / or pre-existing conditions. Period. This solves the stupid argument that all employers will dump their private plans and force everyone to go on the public plan. Let's not even talk about how incredibly silly that notion is in the first place...just like private mortgage companies didn't go away, neither would private insurance companies, but never mind. Design the plan correctly and this won't be a problem.
But putting that aside, let me address Mr. Calfee's claims about monopsony power and innovation. Do we have any models to look at here in the US to understand what monopsony power does to prices, profits and innovation? Well I know of one monopsony agency in the US Government. This agency accounts for 21% of USG Discretionary spending (2nd largest expenditure), there is no other US Based buyer for what this agency purchases. (By definition, a monopsony; single buyer many sellers.) Does this arrangement drive down prices? Sure, to the level that most CEOs of the sellers would probably concede are reasonable based on the scale of what they can sell and the amount of dollars at stake. Are these companies profitable? While I haven't researched comparative profits for these companies and other companies of the same scale in other arenas, I can tell you from personal experience that the shareholders and executives in these companies aren't at a loss for financial resources. And what about innovation and R&D? Given short shrift in these companies because of the buying power of the single purchaser? In fact many of these companies are among the most technologically advanced and innovative in the world..in ANY Industry. I'm of course talking about that single buyer Mr. Robert Gates over at the Pentagon. (I'll post another memo about why this is...why companies innovate, even in a monopsony type relationship.)
If we get a public plan and those 18MM - 50MM uncovered Americans start paying premiums, perhaps big pharma shareholders will have to accept a smaller percentage profit on a much larger pie? As I said, If designed properly I don't even see that happening. Or perhaps if we as a society decide that coverage is important, then we shareholders will have to adjust our notion of what profit percentage is acceptable in the pharma industry, based on lower prices, lower profits and stable R&D expenditures that come as a result of this monopsony.) Although again if the public plans are created correctly the likelihood of this monopsony manifesting itself are really slim and none. The right way is:
Subsidize the public plan if needed, base eligibility on the ability to pay and / or prior rejection due to an existing condition. Those who are being priced out of the market or who have been shut out of the market by the private insurer’s would be eligible for coverage. This way everyone would not be “entitled” to public health insurance, only those who need it for financial or “risk” based reasons. Monopsony avoided, uninsured insured, increased sales for big Pharma, R&D profits left in tact. Sounds simple I know…isn’t that a good thing?
I feel like I could have spent a lot more time on this and been a lot more thorough but if you disagree or have questions, send them along and I'll respond. But the bottom line is, this is pretty simple; the chicken Little argument are pure bullshit, The sky won't fall if we implement a public plan correctly. We need to add competition that is ethical to drive down prices and we need to make sure everyone in the US can afford health insurance. In the immortal words of Kevin Bacon, "These are the facts of the case, and they are undisputed."
