Politics & Policy

Limited Choices

Can you get what you need in a government-run health-insurance market?

Virtually all current health-care-reform plans feature a monopoly health-insurance store, operated by federal or state governments, for those who lack employer- or government-sponsored insurance and want to qualify for government subsidies. Advocates claim these monopoly markets will control costs through their purchasing power and enhance price competition by simplifying comparison shopping. When insurers are forced to compete on price, they will prod health-service providers for increased efficiency.

It’s true that retailing innovations can enhance productivity. The retailing sector is credited for 34 percent of the 1995–1999 surge in U.S. labor productivity and continuing growth through 2002; retailers achieved these results through innovations such as convenient web outlets (eBay, Amazon, Netflix); inexpensive, stylish goods (IKEA, Target); and widening ranges of products that enhanced competition, a trend that produced more than 170,000 book titles, 211 car models, and countless custom-designed PCs.

But before we get swept away, let us remember that these health-insurance markets would be monopolies run by government, two characteristics that normally do not enhance consumer welfare. Picture the efficiency of your Division of Motor Vehicles, for example.

Also consider government-run monopoly liquor stores. Despite their ability as the single payer to extract better volume discounts from wholesalers than private liquor chains can, their prices are not lower than private stores’. Additionally, they slight consumers through shorter operating hours, inconvenient locations, limited brand availability, and inadequate advertising. By forcing consumers to adjust their shopping habits, they raise prices through loss of time. Although some advocates hope that these features limit liquor consumption, this is not the case.

The results attained by government-run health-insurance markets in Massachusetts and the Netherlands provide equally cautionary evidence: Such markets limit competition, do not control costs, discourage entrepreneurial efforts, and thus cause consumer dissatisfaction.

Government health-insurance markets limit choice, through plans with standardized benefits packages — insurance speak for “you can have it in any color as long as it is black.” Massachusetts’s government-designed insurance policies require enrollees to purchase 52 benefits, some of them very costly. In vitro fertilization, for example, raises the price of insurance by up to 5 percent by itself. We all should empathize with families needing in vitro fertilization, but is this the kind of medical care for which insurance is designed, and if not, is it fair to raise everybody’s family insurance prices by as much as $900 (at 2009 insurance rates) to pay for it?

Most likely, many consumers would not buy all of these government-required benefits if they had freedom of choice. For example, Swiss consumers — who are required to buy their own health insurance — are demonstrably price sensitive. There’s no reason to believe that Americans are any different, and researchers at a recent event at the American Enterprise Institute claimed that 12 million uninsured would find affordable insurance if they could shop for plans that required fewer benefits. Monopoly markets run by the national or state government obviate that possibility.

Massachusetts’s government also prohibits some plan features, such as very high deductibles. Surely some consumers would find lower-priced, high-deductible insurance better than none. But the 57,000 Massachusetts tax filers who are uninsured and cannot afford to buy insurance will not find this option in the government store. (These policies also control costs. The concern that high deductibles diminish health status was dispelled by a massive  RAND Corporation study and more recent results for middle- or more  income earners.)

Why do government-controlled markets require insurance plans that people may not want and prohibit others they may want? The reason is simple: Legislatures that run government markets respond to lobbyists financed by providers and insurers. These interests prefer to sell expensive policies rather than cheap ones; and no one lobbies for consumers. Also, the politics of empathy play a role: People with uncovered conditions often lobby, through the government and media, to force insurance companies to cover their maladies.

Government-run markets pose additional dangers. By “crowding out” employer-sponsored insurance, the government’s regulatory power enables the market to become a complete monopoly. In Massachusetts, for example, subsidies available only to the non-insured (for example, families of four earning up to $66,000) and relatively low penalties for employers who do not offer health insurance have already caused enrollment in employer-sponsored health insurance to slip from 85 percent in 2003 to 78 percent in 2007. Similarly, employer contributions for the payment of policies declined from 82 percent in 2001 to 75 percent, compared to 85 percent nationally, in 2007.

A monopoly government-run market can limit the entrance of innovative insurance plans. Consider the decade-long results achieved by an entrepreneurial South African insurer that financially rewarded joining gyms, screening for chronic diseases, and smoking cessation. Highly engaged members (up to 38 percent) achieved significant cost reductions, most notably in chronic diseases, which account for the bulk of health care costs — 7.2 percent lower for cardiovascular disease, 15.1 percent for cancers, and 21.4 percent for endocrine and metabolic diseases.

Government markets can also limit innovation through price setting. In the Netherlands, for example, the government controlled all the prices paid to suppliers. When it permitted hospitals and insurers to negotiate freely for a limited number of procedures, prices dropped, some hospitals offered warranties for their services, and insurers offered innovative policies, such as paying enrollees’ deductibles if they used lower-priced hospitals.

Rather than entrepreneurialism, government-controlled markets encourage consolidation. In anticipation of the government market “reform,” for example, Dutch insurers consolidated to control 80 percent of the market. The providers consolidated, too, so they could bargain effectively with these oligopolistic insurers. In the U.S., the economies of scale that such mergers allegedly achieve have not occurred. To the contrary, U.S. hospital and insurance mergers have increased prices and at times diminished quality.

Competition, however, lowers costs. Switzerland has 84 private-sector insurers, and they’ve lowered their general and administrative expenses to 5 percent of their total costs, a percentage equal to, and likely better than, the administrative costs of the monopolistic government Medicare program.

Limited choice, little price differentiation, consolidated insurers and providers, lack of entrepreneurs — this deadly brew causes price inflation. In the Netherlands, while total health-care-cost increases declined two years before the national market reforms, total costs rose by 4.4 percent and 5.1 percent, respectively, in the two years after the reforms were put into place. Individual health-insurance premiums rose about 8 to 10 percent in 2006–2007 and even more in 2008. Not surprisingly, the Dutch are unhappy with their insurance plans and the perceived quality of their health care.

Some contend the American public needs a centralized market offering a limited choice of plans with standardized features because it is essentially too stupid to wend its way through a thicket of insurance plans. But, in the rest of the U.S. economy, Americans have driven down the price and improved the quality of complex purchases such as personal computers and cars. Automobile prices, for example, have inflated by only 35 percent since 1982–1984, while the CPI index more than doubled. And Americans wend their way through 43,000 items carried by the average food retailer to get what they want.

When it comes to health insurance, the appropriate role of government is to help subsidize those who cannot afford health insurance; to enable transparency so that people can shop intelligently; and to prosecute fraud, abuse, and anti-competitive behavior. It’s not the government’s job to run markets.

– Regina Herzlinger, the Nancy R. McPherson professor of business administration chair at the Harvard Business School and fellow at the Manhattan Institute, is author of Who Killed Health Care: America’s $2 Trillion Problem — and the Consumer-Driven Cure.

Regina E. Herzlinger, a professor of business administration at Harvard Business School and a senior fellow at the Manhattan Institute, is the author of Who Killed Health Care?

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