Tuesday, June 23, 2009

Public Healthcare

According to the Associated Press, President Obama is arguing the merits of a government-run health plan by pointing out that if it hurts the private insurance industry, "It's their own fault."

His argument goes like this: You set up a government-run plan to take care of the people that would like to sign up for it. The worst thing that could happen is that nobody signs up, and then we're in the same place we were before. On the other hand, if people sign up with the government healthcare plan, that shows that the private industry isn't capable of competing with the clumsy government bureaucracies that they love to hate, and they deserve to fail.

The important point that President Obama failed to address is the fact that the government-run health plan will be funded by taxpayers who don't sign up for it, whereas the private plans are funded entirely by the people who are signed up for them. If the government plan were to rely entirely on proceeds from its premiums, then his point would be well taken. That would be the ultimate contest between government bureaucracy and private business. But since this isn't what he's proposing, his argument is paper-thin.

Think about it. Let's say you have two insurance providers to choose from. For an average customer, Provider A will collect $100/month in premiums, pay out an average of $60/month to cover their patients' healthcare costs, spend $20/month for administrative costs, and pocket $20/month as revenue. Provider B is less efficient, but isn't looking to turn a profit, so they pay out $60/month and spend $40/month for administrative costs. Everybody has to pay Provider B $20/month regardless of whether they use their service, so the premiums they charge will depend on how many people sign up with them:
  • If one person in five signs up, they break even (five people pay them $20 for every one that signs up), so they don't charge any premiums. If fewer people sign up, they can start paying out more and still don't have to charge premiums. How can Provider A expect to get any business?
  • If four people in five sign up, Provider B has to charge $75 in premiums. Provider A could forego their profits completely and still end up losing $5/month.
This scenario assumes that Provider A is more efficient, but is just out to turn a profit instead of providing better care. Obama's theory seems to be that Provider A is less efficient, and is also greedy. If he's right, then why can't Provider B compete without taxpayer money?

Some people might argue that Provider A currently makes so much money that simply having Provider B as an option would force them to reduce their prices so that they make just a little bit of money while still providing good service. If that were the case, why wouldn't Provider C have already tried it? If they can get more customers than Provider A, they wouldn't need to make as much money per customer in order to make a good profit. Simple supply and demand principles dictate that in a free market, companies can't really be making that much money per customer, or else some other company would come along that was willing to make slightly less and undercut them. The same principles say that in a free market, companies can't really be that inefficient, or some other company would have come along that could charge less and still turn a bigger profit. The only time these principles fail is when companies collaborate in price-fixing schemes or other similar practices.

I'll be the first to admit that something ought to be done about the healthcare situation in the United States. We're spending more than just about anybody in the world, and we're no healthier for it. I'll also admit that insurance companies are a part of the problem. But I can't imagine how replacing them with a government organization could help solve the problem. Our government is so heavily influenced by industry lobbyists, is it hard to imagine the government healthcare plan only covering drugs or services that are heavily supported by lobbying, while ignoring more effective, less expensive alternatives?
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