No “Free-Market Clouds” for Blunt

I have a few comments to add about the Springfield News-Leader op-ed piece that David Stokes wrote about earlier today. The piece berates Rep. Roy Blunt for favoring private insurance reform to a public option model, and falls prey to a few logical errors in the process.

The article claims:

For-profit insurance companies milk 30 percent off the top for “administrative” costs vs. just 4 percent for Medicare.

These are very misleading numbers. For one, elderly and disabled Medicare patients require more care so that the administrative cost will be spread out over more patient dollars. In actuality, the per-patient Medicare administration cost is much higher for Medicare than for private insurance companies — it is just spread out over more health care dollars. This does not mean that Medicare is more efficient; a study from the Heritage Foundation debunks the myth of Medicare “efficiency”:

In 2005, Medicare’s administrative costs were $509 per primary beneficiary, compared to private-sector administrative costs of $453. In the years from 2000 to 2005, Medicare’s administrative costs per beneficiary were consistently higher than that for private insurance, ranging from 5 to 48 percent higher, depending on the year.

Private insurance companies must also pay additional taxes from which Medicare is exempt — as much as 4 percent in certain states. This must be factored into the administrative costs for private insurance. These costs do not go to “insurance execs” and their “cronies,” but to the government. Other administrative costs for private insurance include marketing expenses and profit margins; the latter is a significant factor, because profit helps motivate efficiency.

The author of the News-Leader op-ed rails against the fact that private insurance company executives take home “multi-million dollar salaries and huge stock options while the government pays its top Medicare brass just a few hundred thousand dollars a year.” Offering large salaries enables some insurance companies to attract the best in the business. Effective leadership is not an arbitrary factor in building a successful business; a good CEO can create profits that far outweigh his compensation. And it’s worth emphasizing that private insurance companies can’t survive in a competitive market if they merely take profit without providing good service to their customers.

Expanding measures to increase market competition would be more likely to “squeeze the profiteers” than the author’s proposed public option. A government-run option does not engender competition, because its taxpayer-subsidized nature means it does not have to compete for revenue or customers, and will be guaranteed to offer the lowest sticker prices (not counting the cost of the subsidy, of course).

The private insurance business as it stands today is not a free market at all — it’s restrictive and highly regulated. Potential competitors face significant barriers to entry in the insurance market because of the geographic and other regulatory barriers they face; this effectively drives up health care prices. However, even considering the limited competition that currently exists in the private insurance market, these companies manage to be more efficient than their government-run counterparts.