Investors Business Daily
IBD:2008 Feb 15
Sen. Hillary Clinton’s proposal for reform of the health care system makes a promise: “If you are happy with your current health care coverage, keep your existing coverage.”
That coverage usually is provided by private insurance companies, which retain a prominent role also in Sen. Barack Obama’s reform plan.
Ostensibly, the Democratic candidates recognize the importance of private insurance options, and the proposals add a Medicare-like government insurance option to provide enhanced competition driven by supposedly lower administrative costs.
The larger reality is very different: The government option would crush competition and render meaningless the Democratic promise to preserve choice.
That is because the proposals would lead inexorably to a singlepayer (government) system of health insurance in which private coverage would become extinct.
The proposals would implement a requirement (“individual mandate”) that some or all individuals obtain insurance coverage, and that most employers offer coverage or pay a tax (“pay or play”).
Small employers and lower-income individuals would get a tax subsidy. Coverage would be guaranteed for all (“guaranteed issue”) and premiums would be set largely without regard to health status (“community rating”).
Each plan, whether issued by private insurers or the government, would have to offer benefits as comprehensive as those offered by the Federal Employees Health Benefits Program (FEHBP).
Why would private options evaporate under such a system?
Consider first small businesses, which arrange coverage for many fewer policyholders than is the case for large companies.
Small groups thus cannot spread their risks as widely, and for other reasons as well are more costly to serve. As a result, their plans tend to offer benefit packages worth around 30% less than those offered by large groups.
Because Democratic plans would require small groups to offer benefit packages similar to those in the FEHBP program, the insurance costs of small businesses that continue to offer coverage to their employees could be expected to rise by at least 30%. Few small businesses would make that choice.
First, the subsidies directed to small employers are unlikely to reduce their cost of providing FEHBP-equivalent private coverage below the pay-or-play tax, which almost certainly would be determined by the cost of the government option supposedly enjoying lower administrative costs.
Accordingly, most small businesses would elect to pay the tax and set their employees loose on the insurance market. To compensate employees for their lost coverage, businesses would likely give them salary increases equal to the insurance premiums the businesses had been paying for private coverage.
That salary increase wouldn’t be enough to cover the cost of private coverage as comprehensive as that of the FEHBP, as required by the proposals. And so the employees would be induced to choose the supposedly more-efficient government option.
If, however, the subsidies for small employers were large enough to induce them to offer the more comprehensive coverage, then the cost estimates for the Democratic proposals would turn out to be too low.
Moreover, costs will increase substantially as expanded subsidies for one group induce others to demand bigger slices of an expanding federal health-insurance pie.
After all, FEHBP benefits are 15% or so richer than those of Medicare; why should Medicare beneficiaries accept packages worth less than those offered everyone else?
For large groups, the benefits of existing plans are about the same as those in the FEHBP. Accordingly, employers’ decisions on whether to assume the cost of private insurance or to incur the pay-or-play tax would hinge on a simple cost comparison.
Again, given the claim that the government option offers substantial administrative savings, it would be politically difficult for Congress to impose a pay-or-play tax that exceeds the purported cost of the government coverage.
Moreover, a Democratic Congress favoring government-provided insurance would be tempted to hide its actual costs. As such, just as with small employers, it makes economic sense for large businesses to shift employees onto the government plan.
And so the Democratic promise that those who prefer private coverage will be able to keep it, and that the health-insurance market would continue to enjoy the broader economic advantages offered by a private system, borders on the naive or the cynical.
Why does this outcome matter?
Because governments have interest groups, not patients, and thus face powerful political pressures to squeeze both providers and patients in response to the budget demands of others.
The inevitable result is waiting lists, denial of coverage, under-investment in medical technologies and the long-run degradation of health care quality observed under all single-payer systems.
The more “universal” the coverage, the greater the budget pressures, and so the more powerful the forces yielding reduced healthcare quality.
That’s why single-payer “universal” coverage is the enemy of health care, and it’s the inevitable outcome of the Democratic proposals.
is a senior fellow at the Manhattan Institute for Policy Research.