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Insurance supermarket risks
Question of the Day
Breathing a sigh of relief after President Obama seemed to waffle about the public plan?
Not so fast.
In the shadows lurks another potential doorway for federal takeover of your health care. Disingenuously labeled as an "exchange" -- countless people wonder what the heck it represents -- it is Uncle Sam's Monopoly Health Insurance Supermarket: the only market open for those who want federal subsidies for health insurance.
Reformers claim that the tens of millions of shoppers on the centralized exchange will create massive economies of scale and that the exchange will simplify health insurance shopping. The Massachusetts government exchange, the Connector, is Exhibit A of efficacy. It has enrolled about 200,000 previously uninsured people.
But why do we need a government to achieve these results? Will competent, private-sector retailers not respond to the opportunity to serve millions of people spending about a trillion dollars in new subsidies?
After all, the retailing sector is a core strength of the U.S. economy. World-class entrepreneurs -- Steve Jobs, Michael Dell -- are drawn to it. Their competence and imagination -- and our freedom to respond -- explain why retailing has been a major contributor to U.S. productivity growth. As for economies of scale, entrepreneurs also can create them. Dell and Apple are Fortune 500-sized, but, unlike a government monopoly, they grew by winning consumers' loyalty.
The moribund health insurance sector badly needs the innovations entrepreneurs would bring. Insurers' sales channels are archaic -- they have only recently opened retail stores in malls and ethnic enclaves, belatedly discovering that some consumers prefer face-to-face encounters for major financial purchases, and their Web presence is minimal. Their products are just as antiquated. This trillion-dollar market is dominated by one policy, a PPO, or preferred provider organization, whose consumer unfriendliness is indicated by its obscure name.
Contrast this with the vibrancy of other retail markets -- 42,000 stock-keeping units in the average supermarket,170,000 book titles published annually, and 211 models of automobiles. Innovative insurance products do exist, but not in the United States. South Africans, for example, could long purchase a demonstrably cost-effective plan that pays people who get healthier. The incentives lowered the costs of endocrine diseases by 20 percent, among other laudable achievements, but this product has barely dented the United States.
The competition created by entrepreneurs could control costs better than monopolies: Switzerland's 84 private health insurers spend a lower percentage on average general and administrative costs than Medicare. (The many Swiss insurers also show that a monopoly market is not the only way to provide the cross subsidization that enables the purchase of health insurance for the sick. Instead, the Swiss insurers have formed a reinsurance pool for coverage of the sick, in which they all participate.)
But a government-controlled monopoly insurance market is an unlikely host for competitors and their innovations. For one, entrepreneurs distrust markets controlled by one buyer. Then too, governmental elitism will lead to product standardization to protect consumers from the confusion that excessive choice creates. Unsurprisingly, the Massachusetts Connector's board recently voted to standardize the policies it sells and reduce their number by two-thirds.
Meanwhile, the slim budget for the Massachusetts government transparency agency, created to protect consumers from bad choices by giving them good information about the quality of their health care providers, was gutted.
Last, most government officials believe in economies of scale more than entrepreneurialism. After the Netherlands instituted its national health insurance market, four insurers consolidated to control of 80 percent of the market. As they consolidated, so did the providers. Not surprisingly, in a market dominated by oligopsonists and oligopolies, health care prices increased, reversing price trends before the national exchange was enacted.
As in the Netherlands, instead of controlling costs, a government market likely will increase them. Because governments are more responsive to highly organized lobbyists than to the discordant voices of individual consumers, the insurance policies sold in the government market will likely require a host of benefits that health care lobbyists pitch.
In 2009, the Council for Affordable Health Insurance notes that Massachusetts mandates 52 benefits. They include in vitro fertilization (IVF), a benefit that raised the cost of the average 2008 Massachusetts family policy by $400 to $600. Reasonable people might debate whether IVF is as essential a health insurance benefit as, say, cancer care, but not in Massachusetts.
The Massachusetts Connector legislation came with a promise of budget neutrality -- the costs of the newly insured would be offset with reductions of the subsidies to the safety-net hospitals that once served them. Although the promised costs were real enough, the promised offsets turned out to be spurious. As prices rose in Massachusetts, which boasts the nation's highest health insurance premiums, a government payment commission came to the rescue: Under its proposal, the government would set all health care prices.
This was a reprise of the Dutch government's response to its rising costs. It is instructive that while the prices controlled by the Dutch government continue to rise, the few uncontrolled health care prices dropped through entrepreneurial innovations.
The government exchange can complete this march toward a single-payer system by underpricing all competitors. After all, unlike its private-sector competitors, the government can borrow from our progeny, via deficits, and force us to pay taxes. Medicare's $38 trillion deficit provides worrisome validation of the government's willingness to underprice health insurance through these means.
To clarify these dynamics, imagine Uncle Sam running the only car dealership for the poor. To protect them from getting confused, Uncle Sam standardizes the design of all cars but accedes to the automobile lobby by requiring that they come loaded with features. Your little tushie will have a heated seat even if you live in South Florida. To achieve economies of scale, Uncle Sam turns a blind eye toward the consolidation of automobile manufacturers and may underprice his cars to attract more, non-poor customers. Of course, he would respond to demands to sell only American cars. As prices inevitably rise with option-loaded cars and absence of competition, Uncle Sam steps in to regulate all automobile prices, thus effectively controlling all distribution channels and manufacturers.
Sad to say, the defeat of the public option opens the door for the exchange. This victory may go down in history as yet another example of winning the battle and losing the war.
Regina E Herzlinger is the McPherson Professor at Harvard Business School and the author of "Who Killed Health Care? And the Consumer-Driven Cure" (McGraw Hill 2007).
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