A Medicare-Style Public Option in Healthcare Would Kill Private Insurance

What works in higher education won't work in healthcare.

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My father's first teaching appointment in North America, after fleeing communist Hungary, was at a state university. I went to a public university. One day, my daughters may pursue their education in the state college system.

University students have the freedom to choose between private and public colleges—between the private and public sectors—and post-secondary education is the better for it. Yale and the University of Pennsylvania are strengthened by UCLA and Penn State.

Many feel passionately that the government needs to do something to increase competition in health care. A majority of American workers have a choice of one healthcare plan. I understand the frustration. The Manhattan Institute offers two options on health benefits for those eligible: Take the company plan or leave it. In many states, like Vermont, it's worse: The whole market is dominated by just one or two companies.

And so, the call for change: President Obama campaigned on the idea of creating a health insurance exchange with a menu of competing options, including a public plan option, which would be government-run and modeled after Medicare. President Obama explained recently: "This will give them a better range of choices, make the healthcare market more competitive, and keep insurance companies honest."

The proposal has broad support in Washington. Nancy Pelosi, speaker of the House, stated that she can't support health-reform legislation without a government option. And the enthusiasm stretches past the beltway. More than 70 percent of Americans support the idea. It seems to work for higher education; why not for healthcare?

Here's the problem. The model for the public plan, Medicare, isn't an insurance, it's a federal program. As such, the public plan option would overwhelm even the best private insurers, thanks to the unfair advantage of federal status. How? Let me count the ways.

Private insurers must comply with state regulations like what services and procedures must be covered where Medicare coverage doesn ' t. Such regulations, according to the Council for Affordable Health Insurance, push up the cost of a policy by 20 to 50 percent. As well, private insurers are taxed by state governments; Medicare isn't.

Properly funded insurance plans must capitalize future costs; in contrast, a public plan option can simply tax or borrow enough to cover costs from one year to the next (think Fannie Mae).

A Medicare-style plan will set prices with providers, not negotiate them.

The last point is probably the most significant. By paying providers less, a government option would have a major and immediate advantage over its private rivals: It could charge artificially lower premiums and provide a magnet for enrollment. In April, the Lewin Group released an analysis concluding that about 120 million Americans would shift from private plans to the public option. Lewin's John Sheils doesn't mince words: "The private industry might just fizzle out altogether."

Yes, there is public and private competition in post-secondary education. But note the dramatic difference there: State colleges still pay market wages for professors. UCLA needs to reasonably compensate a talented chemistry professor, or he can pack up and move. By employing price controls, the public plan option would be at a serious advantage over its private competitors. It's not honest to allow one athlete to start at the halfway mark of the marathon.

Fast forward 10 years and the "affordable" public plan will have captured a huge market share. President Obama will be in Illinois drafting his memoirs, but Congress will face stark choices as the plan's costs inevitably spike. The challenges will be eerily similar to the decisions made every day by legislators in countries with government-run healthcare systems. A public plan option will lead to government-dominated healthcare, then government-rationed healthcare.

Let's be clear: Democrats are fundamentally right in their diagnosis. American healthcare in general, and health insurance in particular, lacks enough competition. But the government plan is bad medicine, pushing the country down the road toward socialized medicine on the installment plan.

Dr. David Gratzer is a senior fellow at the Manhattan Institute and the author of
The Cure: How Capitalism Can Save American Health Care.