November 7, 2009
The Price of the Public OptionBy Jon N. Hall
For decades now, prices in the health care industry have outpaced the overall inflation rate. Health care takes up a larger and larger portion of the economy. While health care's share of GDP has very recently been a 7th, it now makes up a 6th (and is soon to be a 5th), and there's no end in sight. So is there anything the health care industry could learn from enterprises that have stable prices?
One industry that regularly sees dizzying downdrafts in prices yet manages to survive in business and innovate is consumer electronics.
The price of Blu-ray players (for hi-def DVDs) has rapidly come down by more than 75 percent to well under $200. When the first plasma HDTV came out, it cost more than an automobile. Pioneer priced its first 50" plasma at $25,000. Now you can find a fabulous HDTV for less than 5 percent of that. And the latest thing, the gorgeous LED, is well under 15 percent of it. So average Joes can have theatre-quality cinema in their home for a song. And we're all moviemakers now, as the price of digital video cameras is no longer an issue. (Here's a charming example.)
The case of computers is similar: As the power, capacity, speed, reliability, etc. soar, the prices plunge. Kids now play computer games on PCs that have more power than NASA's computer did when it put a man on the moon. The personal computer has empowered the common man in ways that the richest potentates of yore couldn't even imagine. And this has come about only because of affordability, i.e. price.
Here we have this industry whose products go up and up in value but down and down in price...yet it still turns a profit. What does electronics know that health care doesn't?
Of course, the two industries aren't exactly analogous; one is mass-production, the other very individualized. One is very straightforward in pricing; the other is Byzantine. But consumer electronics is governed by one principle that is absent from health insurance: choice. Also, the consumer of electronics can choose not to buy.
When pricey products like electronics first appear on the market, consumers resist. Who needs a TV when radios are good enough? Who needs a computer if you have a calculator? But then more companies enter the fray, embarking on a relentless campaign to refine their products. Pretty soon the consumer has a dazzling array of ever-better options. But even after everyone is "hooked" and would be lost without their electronics, prices continue to fall. Why? Competition.
At a recent town hall meeting, President Obama said, "Now, the only thing that I have said is that having a public option in that menu would provide competition for insurance companies to keep them honest."
But government itself is responsible for the dearth of competition in the insurance business. That's because Congress enacted the McCarran-Ferguson Act in 1945, which allows the states to limit the number of players in their insurance markets, and explains why "in 64 percent of all metropolitan areas, a single health insurer commands a market share of at least 50 percent."
Government created the insurance monopolies in the states, thus destroying competition. Government is therefore responsible for the "dishonesty" that Obama decries.
With its business and individual mandates, Obamacare does nothing less than claim a portion of the nation's future wealth for a particular enterprise. And just like Medicare, the money will all come off of the top. Since all this preempted wealth will be funneled into this one industry, the insurance companies know that one of them will get each person's business. They know they'll get paid. If a business knows it is going to make the sale, why lower prices? What is the incentive to offer lower prices? How does competition work in a system in which you must buy?
If there is any single thing that would lower the price of health insurance, it is repealing McCarran-Ferguson. The repeal would potentially create a thousand times more competition than the "public option" would. And the price of repeal would be...nothing. Compare that to the trillion-dollar price tag of Obamacare.
America hasn't had a real market (the free market) in health insurance since 1945. Congress has used the Constitution's Commerce Clause to justify just about everything, but won't use it for actual commerce, such as opening up the health insurance market to cross-state sales. But cross-state purchase of insurance wouldn't be enough to ensure real competition. We'd need two more things: more types of policies (including bare-bones catastrophic plans), and the right not to buy (think consumer electronics). With these three features, the consumer would be king, prices would fall, and we'd have some change we could believe in.
Have you seen any new Osborne or Kaypro computers on sale lately? No? That's because with real competition, enterprises sometimes fail. Speaker Pelosi assures us that the "public option" won't be funded with taxes (except during the startup phase, which will all be repaid). If so, the "public option" would be unlike the government's "eternal" programs (entitlements) in that it could indeed...fail. If you believe Congress would allow something it created to fail, I have a brand new Kaypro I'd like to sell you.
The price of the "public option" is too dear. Don't buy it.
Jon N. Hall is a programmer/analyst from Kansas City.