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Free to Choose?
Why Private Health Insurance Won’t Survive Under the Clinton and Obama Health Care Plans

Benjamin Zycher, Ph.D.
Medical Progress Today
February 15, 2008

In a moment of honesty, Professor and New York Times columnist Paul Krugman, arguing in favor of a single-payer (government) system of health insurance coverage, noted that "...the public sector... sooner or later [would] have to make key decisions about medical treatment." And: "... health care—including the decision about what treatment is provided—[would become] a public responsibility." ("Medicine: Who Decides?" New York Times, December 26, 2005.)

It is useful in this season of promises to bear that vision in mind, because the Clinton and Obama proposals for health–care reform uniformly pledge the continued availability of private insurance to those who prefer it. Senator Clinton's plan wastes no time in making that promise prominent at the very outset: "If you are happy with your current health care coverage → Keep Your Existing Coverage." Similarly, the Obama plan features the continued availability of numerous private insurance options, however heavily regulated, and both propose as well a Medicare-type government option in competition with private insurance, among which Americans would be free to choose. No way, no how will government bureaucrats interfere with individuals’ health–care choices.

The larger reality is very different: "Your existing coverage"—indeed, all private health insurance—is almost certain to become extinct were the Democratic plans to be implemented, because they would lead inexorably toward a single–payer system of health insurance.

As Pravda in its glory years used to put it: None of this is by chance, the simple reason for which is the politics of wealth redistribution. At about 16 percent of GDP, the U.S. health–care sector offers gobs of wealth to be redistributed. But that goal cannot be achieved under conditions of market competition, because individuals and groups will avoid insurance plans—and their costs—that subsidize others. Only by forcing everyone into a system that substitutes government fiat in place of competition can such large–scale redistribution be realized. As with Medicare and Social Security, two massive programs of wealth redistribution from the young to the old, the Democratic plans would engender a transfer of wealth in the same direction, in varying degrees that depend upon the extent to which the unwilling are coerced into participation.

The Clinton and Obama proposals differ in terms of details, but would implement a requirement ("individual mandate") that some or all individuals obtain insurance coverage, a "pay or play" requirement that most employers offer coverage or pay a tax, and tax subsidies for small employers and lower-income individuals. There would be a guarantee of available insurance for all ("guaranteed issue"), and "community rating," that is, premiums largely unrelated to health status. Each proposal would require comprehensive benefits similar to those offered by the Federal Employees Health Benefits Program, whether through a private plan or the Medicare–type option offering the FEHBP array of benefits.

Would individuals continue to have private insurance options? Well, no. Consider first small groups (or employers), which must pool fewer risks and for other reasons also are more costly to serve; that is why small groups on average offer benefit packages worth around $8000 per year, while large groups offer benefit packages worth about $10,000–12,000 per year. If small groups are required to offer benefit packages similar to those in the FEHBP program, that implies an increase in the cost of coverage of around 30 percent or more.sanpost Even with moderate subsidies, small groups are likely to give their employees salary increases equal to the previous employer contribution for health coverage (perhaps minus the new pay–or–play tax), and then to turn them loose on the insurance market.

Because the Democratic proposals claim substantial administrative savings compared with private plans (more about this below), it would be difficult politically for Congress or the bureaucracy to charge a pay–or–play tax, or premiums for the Medicare–type government option, higher than the cost of private coverage. So the premiums charged by the Medicare–type option would be lower; and, in any event, the salary increases would be insufficient to cover the cost of the required FEHBP–level private coverage. Accordingly, it is the Medicare–type public insurance mandated in the Democratic plans that is likely to enroll most individuals formerly insured under small–group plans.

If, alternatively, the subsidies for small employers are sufficient to induce them to offer the more–expensive coverage, then the candidates' cost estimates would become far less credible, particularly as expanded subsidies for one group will induce others to demand increased slices of an expanding federal health–insurance pie. After all, FEHBP benefits are around 15 or so percent greater than those offered by Medicare; why, precisely, should Medicare beneficiaries accept a benefit package less rewarding than the FEHBP benefits to be offered to everyone else? The short answer: They will not. The AARP will work its magic on Capitol Hill, and the logrolling among numerous interests needed to enact this proposal will scatter the Democratic cost estimates to the winds.

The plans offered by large groups generally provide about the same benefit packages offered in the FEHBP, so that the pay–or–play decision by employers would be driven by the relative magnitudes of the cost of private insurance and the tax. If the latter is smaller, there would be strong incentives to increase workers' salaries and then to shift them onto the government plan. Again, the Democratic proposals claim substantial administrative savings for the government option; and because the fundamental (unadvertised) political goal is redistribution through a single-payer system, actual implementation of the Democratic proposals would create powerful political incentives to hide various costs so as to show greater "efficiency" for the government–sponsored plan. Accordingly, a tax equal to the individual cost of coverage in the new Medicare–like program indeed is likely to be smaller than the individual cost of private insurance.

Much of the administrative cost of private plans is invested in efforts to monitor and control claims, efforts emphasized far less in Medicare. This predictably weaker cost control on the demand side of government insurance will lead the government program to squeeze the doctors and hospitals even more in terms of reimbursements; and it will lead as well to stronger enforcement of the individual mandate in order to get low–cost patients into the system so that their payments would serve to subsidize others. That is one reason that the absence of an individual mandate for adults in the Obama proposal is unlikely to survive.

Moreover, the enhanced regulatory constraints outlined in the Democratic proposals for private insurers are likely to include limits on "profits," however measured, leading toward public–utility style price regulation. This means that private cost controls will weaken, since it will be difficult politically (and legally) to deny the insurers rates sufficient to cover claims payments. Because rising costs for the government plan can be covered in part with increased budget outlays, a source of cash not available for the private plans, private insurance rates are likely to rise more than those for the Medicare–type option, yielding an additional incentive to dump employees onto the government competitor.

And so the Democratic promise—Americans will be able to choose among a number of private coverage options as well as a government alternative—borders on the naïve or the cynical. Those private plans essentially will be available no more, as employers both small and large are confronted with powerful incentives to shift their employees onto public coverage. Thus would the Democratic proposals lead inexorably toward a single–payer system of health insurance, the adverse effects of which in terms of the long–term degradation of American health care are significant.

The proposals assume lower costs, due to administrative savings, even though FEHBP–level benefits exceed those of Medicare. But even in terms of administrative costs reported explicitly in the federal budget (ignoring such costs reported only indirectly or not at all), that hope is likely to be dashed because it almost certainly is based upon an assumption that the cost of enrolling those currently uninsured is the same as that for federal employees. But about 70 percent of the latter are college graduates; median annual income for federal employees is around $60,000–$65,000. For the uninsured, almost 30 percent have household incomes below $25,000, and another 33 percent are below $50,000. That will be a population much more difficult to reach and enroll, requiring efforts that are labor–intensive, that is, administratively costly.

Amusingly, the Clinton plan asserts that the new Medicare-type public option would operate "without creating a new bureaucracy," and that it "will not be funded through the Medicare trust fund." This suggests that it would be administered by an existing bureaucracy that obviously would have to expand—it's a tough job, but someone has to do it—and that the dollars would appear in some part of the federal budget other than that for Medicare, as if that makes any substantive difference.

* * *

The Clinton plan has a mandate but no enforcement mechanism; either one would have to be added, or more subsidies would have to be directed toward the young and others who otherwise would not find mandated coverage worth its cost. If the subsidy approach is used, the budget cost projections would prove far too optimistic. It is not hard to predict, therefore, that actual implementation of the Clinton proposal would bring with it more stringent enforcement than broadly advertised now during the election campaign; interestingly, Senator Clinton now has begun to talk about the possibility of garnishing the wages of those who fail to enroll.

Presumably, individuals would be required to show proof of coverage to the IRS. Put aside the implications of this coercion necessary to achieve "universal coverage." An individual mandate implicitly is a recognition that for some individuals insurance is not worth what it costs, and a requirement that they pay for it anyway is a way to redistribute wealth (in the form of lower premiums) to those for whom insurance is worth more than it costs. Some argue that by not buying insurance, the healthy are merely "gaming the system," intending to purchase coverage when their expected health–care needs rise. But it is far from clear why those who find insurance not worth its cost are "gaming the system," while those who eagerly accept the subsidies inherent in a "universal coverage" program are not.

In short, the individual mandate is the Democratic answer to the perverse incentives created by community–rating and guaranteed–issue regulations. By its very nature, a government takeover of the health–insurance market forces everyone into a game because the system creates subsidies among groups that the winners would like to expand and that the losers would like to avoid. Someone must pay the taxes and insurance premiums needed to finance the government compassion promised by "universal coverage," and that is particularly the case for proposals under which insurance coverage is guaranteed to all who apply and under which premiums—and, obviously, taxes—do not reflect relative risks. With universal coverage, "gaming the system" is the system.

The interesting aspect of the Obama proposal is the absence of an individual mandate for adults, and no enforcement mechanism is specified for the child mandate. If fewer of the unwilling are enrolled, less wealth will be available for redistribution through the health–insurance system; less coercion means less wealth redistribution among patients. Other things equal, therefore, the Obama plan is likely to result in higher insurance premiums or greater federal budget costs, or both, than does the Clinton plan. Interestingly, there is some polling evidence that the young (and healthy) represent a larger proportion of the Obama political coalition than is the case for Clinton.

* * *

Government does not have patients; it has interest groups, many of which would applaud less spending for a single–payer system of "universal" health–care coverage if that yielded more for their favored programs. Governments thus have powerful incentives to impose price controls both explicit and hidden upon the health–care system, by squeezing payments to medical providers, thus reducing access to actual health care (that is, to "coverage"), by engendering waiting lists, by denying coverage for certain services, and by underinvesting in medical technologies. The more "universal" the coverage, the greater the budget pressures, and so the more powerful the forces yielding the long–term degradation of health–care quality inevitable under coverage systems mandated by or financed through government. That is why "universal coverage" is the enemy of actual health care, and bureaucratized health–care decisions are the inevitable outcome of the Democratic proposals. Paul Krugman, for once, is utterly correct.

Benjamin Zycher is a senior fellow at the Manhattan Institute for Policy Research. Email:
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