In the New York Times, Reed Abelson published an article talking about President Obama’s plan for a government operated healthcare system. The article is a good one which I found to be fair both in its description of President Obama’s proposed system (at least, to the extent that it has a description) and of some of the criticisms which surround it. The bulk of the article is spent discussing how a government healthcare system could coexist with private healthcare with a particular emphasis placed on how the government could be a fair competitor in the marketplace. Although the article raises several good points, I believe it misses certain fundamental flaws in the notion that the government could compete fairly.

As both I and Mr. Abelson understand President Obama’s proposed healthcare plan, the President’s idea is essentially that the government would become a health insurance company. It is distinguished from other healthcare plans proposed by Democrats by the fact that it is not, on its face, a single-payer system. Instead, the government would enter the insurance market as a large nonprofit insurance organization in competition with private insurance. The apparent theory is that the government would be able to use its size to negotiate price reductions with healthcare providers and drug makers while simultaneously having lower overhead than private insurers because the government plan would not be a profit seeking venture. Cost savings would then be passed on to consumers in the form of lower insurance premiums.

From this point, Mr. Abelson spends most of his article presenting one major reason that the government would not be a fair competitor. The government, the argument goes, would have such a size advantage that it would be able to push prices well below anything a private insurer could accomplish. In so doing, the government would effectively out compete private insurance. To the extent that this argument is true, it is ultimately uninteresting. If the government’s competitive advantage is volume leverage, then so be it.

The real threat to fair competition comes not from the first part of the theory, but from the second. Not only would the government not need to seek profit, it would not even need to break even. This immediately gives the government an advantage that even private nonprofits do not have. The government could easily charge below cost and still remain viable by subsidizing the shortfall out of tax revenue. Indeed, a government insurance plan would almost be forced to do this if it is truly going to guarantee some form of coverage to every American, even those with $0 available to spend on premiums.

The only way to have truly fair competition is for the government to restrict its healthcare funding to premiums paid by actual participants in the plan. Of course, there is no chance of that happening, because doing so would entirely defeat the purpose. Private insurers will, therefore, be forced to compete in a market dominated by a competitor which, in the private sector, would almost certainly be found guilty of anti-competitive predatory pricing.

With no meaningful hope that the government would act in the market as a fair competitor, it strikes me as highly unlikely that private insurance would be able to compete. Perhaps private insurance would take on a role similar to what we see now with Medicare gap insurance, with private insurers picking up the slack where government insurance cuts off. For the bulk of coverage, however, the real question will not be if private insurers will be able to compete, but how long they will try before closing their doors.

Tags: free markets, healthcare