Category Archives: Myths and Bad Ideas
One of President Obama’s claims during his ABC News health care reform TV special last week was that a public health insurance option would have lower administrative costs than competing private plans. This, he claimed, would allow the public plan to offer lower premiums.
The only way that is going to happen is if the government significantly undercounts the costs it actually incurs in operating its health insurance GSE (government sponsored enterprise). Such book cooking is something that, despite the President’s pledge of a “level playing field,” is a virtual certainty.
To understand this, look no further than Medicare. It signals a dire warning that any government-run GSE’s actual administrative costs will be billions of dollars higher than will ever be reported or factored into its premiums. Despite Medicare’s published reports that it spends only about three percent on administration, that figure leaves out the costs of even more costly and necessary support services provided by other government agencies, such as the GSA and IRS. An apples-to-apples comparison shows Medicare’s administrative costs are actually about 8%, with private insurers running 16.7% (including profits). That’s still a sizable difference, but a highly deceiving one.
During his extended TV appearance on ABC news last week, President Obama defended his idea for a public health insurance plan. He said one of the reasons it will be competitive with private insurers is that, as a nonprofit government sponsored enterprise (GSE), it will offer lower premiums, since it won’t have to earn any profits.
His statement echoed a widespread misconception that nonprofit health insurers, hospitals, and co-op health plans are somehow a better deal for consumers because, without shareholders, they don’t need to earn profits. It is true that for-profit businesses strive to earn something we call profits, but it is equally true that nonprofit businesses work just as diligently to earn equivalent surpluses. Both are the excess of revenues over expenses.
What’s the difference between a profit and a surplus? Just this: the former is taxable and the latter is not. Either way, profits/surpluses are a necessary requirement for any operating enterprise if it is to be a self-sufficient, unsubsidized economic entity. That’s because profits/surpluses are necessary for repaying debt, building reserves against potential losses, buying new plant and equipment, and expanding to meet increased demand.
A key feature of President Obama’s proposed public health insurance plan is the employer pay-or-play mandate that would require America’s companies either to provide employee health insurance or to pay a penalty tax or fee to the government. The purpose is to prevent employers from dropping their health insurance and dumping their employees on the public plan. It won’t work. Companies survive by selling things for more than the cost of making them. Producing and selling things require paying employees. Long ago, an employee’s pay was whatever he took home at the end of the week. Later, employee compensation expanded to include various so-called “fringe” benefits, most notably health insurance.
Wednesday night (6/24/09) ABC News ran a special commercials marathon with frequent and brief interruptions by Charlie Gibson, Diane Sawyer, and others to ask President Obama about his health care reform plans. The commercials were more informative.
But a few points leaked out that did illuminate, however dimly, the President’s plans to reform our universally-acknowledged mess of a health care system. Among the more interesting was the pledge that his public health insurance plan would operate on a level playing field in competing against private insurers while presenting a better deal to America’s self-employed and uninsured. Among his points were these:
- As a nonprofit organization, the public plan will offer lower premiums because it won’t have to earn profits.
- The public plan will not be subsidized by the government, but will float on its own bottom with its own premiums and expenses.
- Any government subsidies will be for individuals—not the public plan—to help them buy insurance, whether they choose the public plan or private insurers.
If there’s one thing that both sides of the congressional aisle seem to agree on, it is that health reform based on increased medical prevention and the adoption of electronic medical records(EMR) will save us all a lot of money. Unfortunately, they won’t do any such thing.
The enduring prevention myth emerged during the 1960s and became an anchor tenet of the government’s major push into HMOs in the 1970s. It followed the common-sense notion that preventing a disease is a lot cheaper than paying the horrendous costs of treating it later. However, in reviewing the extensive four-decade literature on the subject, the journal Health Affairs recently conceded:
Hundreds of studies have shown that prevention usually adds to medical costs instead of reducing them. Medications for hypertension and elevated cholesterol, diet and exercise to prevent diabetes, and screening and early treatment for cancer all add more to medical costs than they save.