David R. Henderson  

Obama's Contradiction on Health Care: II

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Three commenters on my post last night (ed, mark, and Karl Smith) pointed out, correctly, it turns out, that I missed Obama's point. I accused him of contradicting himself by claiming that he wouldn't put any government funds into the "public option" and then saying, just three paragraphs later, that he needed to address how to pay for the plan. I thought he meant the plan that he had just finished talking about. It turns out that he meant the whole plan, including subsidies to people to buy health insurance.

Still, although there's not as big a contradiction as I had thought, there still is an internal inconsistency. Obama says that the "public insurance option would have to be self-sufficient and rely on the premiums it collects." OK, so imagine the Obama plan passes with this option. If it's going to be self-sufficient, it can't collect any funds from government. That seems to be the general agreement about what "self-sufficient" means. When you start a plan, you need employees and a building. You also need money to advertise. Where do you get it? The usual way in the private sector is that you get loans and or investments from venture capitalists. I'm assuming that everyone agrees that with a government plan, the second option, venture capital, is out. That leaves loans. But even getting loans requires putting out some kind of literature, getting some kind of permission, etc. So you probably need lawyers and a few other people. How do you pay them? You might say, "With loans," but you don't have loans yet and you can't get them without the lawyers. Will the lawyers just provide their services gratis? See the problem? Right from the getgo, the government would have to put in some money, thus breaking Obama's promise.

Now, you might argue that getting that first loan would require that the federal government subsidize the plan for only a few million dollars. But there's a bigger problem. Let's say that the plan gets set up but that the premiums required to get insurance are so high, given its low deductibles and co-payments, that very few people want it. So let's say at the end of the first year, it has only a few hundred thousand beneficiaries and looks as if it will lose money. That makes loans harder to get. What happens next? Does anyone really doubt that the government would come in with subsidies, massive ones if necessary?

Now, I'm not going to say that I'm shocked that a politician would break his promise. After all, one of Obama's apparently most deeply held views about health care reform, which helped him beat Hillary Clinton in the primaries, was that requiring people to buy health insurance was a bad idea. Yet that's what he now advocates. It takes more gall, though, to propose something that a little thought shows to be impossible.


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COMMENTS (6 to date)
forager writes:

You brought up exactly the problem I have with this. Even assuming everything Obama says was totally true and the public plan will be a completely fair competitor with all other insurance companies, what happens when it fails? There is no doubt in my mind it will be bailed out.

Just the fact there is this implicit guarantee on the government option will give it an advantage. If I recall, Fannie and Freddie got cheaper access to capital and other benefits just because everyone knew the government wouldn't let it fail. The company could even purposely undercut its rates because it knows it will be backed up. There is just no way this government option will be a truly fair competitor.

What is even more infuriating is that the government plan is absolutely missing all of the real problems with incentives and regulation. It's a trojan horse for a single payer system, plain and simple. Even if numerous liberals hadn't flat out said this, the insane focus on such a dumb solution basically gives it away.

Boonton writes:

Except in order for it to become single payer Congress must vote massive subsidies to the public plan to enable it to undercut all private insurance. Possible? Yes, Medicare is very much like that. In theory you could say no to Medicare and buy private coverage. But try to find private coverage that matches Medicare for $100 a month when you're 65 yrs old.

But Medicare is subsidized by payroll taxes, who will subsidize a public option? It's only going to become single payer if everyone loves it a lot. Will they?

As for being bailed out, yawn. If expenses are high then premiums go up. You renew your health insurance each year. The public plan would become a poor competitor and cover only a handful of people. Yes it may someday become a single payer system which is why I think many on the left and right are being very dogmatic about it but that's hardly a foregone conclusion. I think a more likely assumption is the Swiss/French model of public/private based coverage rather than the UK/Canadian model.

Zach writes:

You don't have to do all this hypothetical head scratching. HR3200 provides $2B to be used at the HHS Secretary's discretion to set up the public insurance option and paid back to the treasury over 10 years. The Senate HELP bill provides a similar amount but specifies how much will be provided each year for 10 years and, I believe, doesn't require it to be paid back though I might not be remembering correctly.

Regardless of where the start-up funding comes from and whether it needs to be paid back, Obama's clearly talking about self-sufficiency in the long run and not expecting the option to materialize unfunded. Initial money is needed not only for organization, but also for paying early claims until a trust fund of some sort is built up from premiums and subsidies.

This isn't breaking his promise; Obama obviously knows how these funding mechanisms work even if you are too lazy to figure it out.

Zach writes:

@Boonton - the public option is subsidized in the bills being debated, but the same subsidies are available to private insurers.

Also, there is no "UK/Canadian" model. The NHS in Great Britain is a network of public health providers (whose existence is paid for by everyone's taxes); in Canada, the government pays private providers to treat you with your tax dollars. Remember this: Canada = single payer = Medicare; Britain = nationalized healthcare = the VA.

Similarly, the Swiss system (a mixture of public and private care paid for by private, nonprofit insurers operating under strict government regulation with generous subsidies) is quite different from the French (national insurance with progressive rates scaling with income automatically deducted from paychecks; almost all insurance from a single organization; most hospitals are public - less than 1/5th are for-profit).

Zach writes:

@forager

"There is no doubt in my mind it will be bailed out."

To the extent that this is an issue, it's much more of a problem for the subsidization plan in general than the public option. Anything that would tank the public option's finances enough to require a bailout would also tilt the balance sheet between revenue dedicated to subsidizing care and the amount of subsidies doled out. If costs aren't controlled, but would have to be scrapped or bailed out w/ additional revenue generation or borrowing in the future. Obama's promising to fund them according to the best projections available (deficit neutral by the stingy CBO) which is infinitely more attention to sustainability than much larger items that we've passed recently. He's also committing to only signing a bill that is both neutral according to projections and contains a statutory requirement for spending cuts in case of exceeding its budget. That means actual legislation would be required to bail it out which obviously won't be easy if the program's proving to be a failure.

Jacob writes:

Casablanca... hehe. Good one.

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