Free Markets, Free People

John Stossel

IBD Stands By Story About Private Health Insurance

Last week Investors Business Daily ran an editorial claiming that the new 1018 page House health care reform bill had a provision (on page 16) that outlawed private insurance.

Well they caught some flak for that, with detractors claiming that they didn’t read far enough and had they done so they’d have found that wasn’t the case. IBD did the right thing and did indeed go back an revisit their claim.

Conclusion – they stand by their story. Here’s why:

Our impression was further confirmed Monday when Rep. Dave Camp, the ranking member on Ways and Means, told us that “any existing plan will not be able to enroll members.” There will be “a prohibition,” the Michigan Republican said, “on enrolling individuals in private health plans” after the bill becomes law in 2013.

It was also confirmed by Ways and Means staff director Cybele Bjorklund, who, in response to questions from Republican Rep. Paul Ryan of Wisconsin during a committee markup session, admitted last week that insurance providers “cannot create new policies outside of that window outside of the exchange.”

Many of those who have said we are wrong pointed to this health care exchange mentioned by Bjorklund as evidence.

But the exchange will not be a private market. It will be a program in which Americans can buy individual plans from private companies in competition with the “public option” provision of the bill that will provide taxpayer-subsidized coverage.

So in essence you’ll be limited to an insurer on the exchange, with all the regulation and mandates applied which is turn competing with a “public option” plan. You can’t just call up a private insurer and gin up your own brand and level of coverage.

Instead, you’re limited to the slim pickin’s the “exchage” will offer:

The exchange will be a highly regulated clearinghouse of providers that meet the government’s standards. Only those providers that follow Washington’s stringent guidelines will be allowed to join this exclusive club.

The government, through an unelected health choices commissioner, will set premiums, dictate benefits, determine deductibles and establish coverage. Exchange participants will be required to insure anyone who asks to be covered and to accept all renewals. Ryan believes the weight of the mandates will mean only five or six providers will be able to survive and sell coverage in the exchange.

Yes friends, as we’ve seen so often from this administration already, this is government picking winners and losers. From 1300 competing insurance providers today to “five or six”. That’s the government’s idea of “competition?”

And again, to reinforce the point, that is the only place you’ll be able to get your insurance should, for instance, you change a job. Or, as anticipated, your employer opts to quit providing it and essentially points you toward the exchange.

Even Henry Waxman admits this even while trying to convince reporters that IBD had it wrong in their first editorial:

In trying to prove the exchange will be a private market, the bill’s own supporters actually prove our point. Rep. Henry Waxman, D-Calif., complains in a letter that last week’s editorial is “factually incorrect and highly misleading” yet admits three paragraphs later that outside the exchange, providers “can’t continue to market” existing “policies to new customers.”

Restraint of trade by regulation. Insurers are limited to the “exchange” and if not on the exchange, they’re essentially not in the health insurance business other than servicing existing policies. Obviously as their pool shrinks, their prices will go up, causing their pool to shrink further. That’s competition? That’s a “market”?

As John Stossel said the other day:

Like the politicians, most people are oblivious to F.A. Hayek’s insight that the critical information needed to run an economy — or even 15 percent of one — doesn’t exist in any one place where it is accessible to central planners. Instead, it is scattered piecemeal among millions of people. All those people put together are far wiser and better informed than Congress could ever be. Only markets — private property, free exchange and the price system — can put this knowledge at the disposal of entrepreneurs and consumers, ensuring the system will serve the people and not just the political class.

Yet here again we have the central planners deciding what will be a “market” and of what it will consist. I hate to break it to them, but that’s not at all a market. It’s an artifice created by legislators to give the veneer of competition to a “market” that is decidedly not one.


Anything that is primarily steered by the hand of the government rather than the price signals that free markets so efficiently process on a daily basis would be an agency of the state.

The artificially legislated bars to entry will make this a captive process of the state.

And lastly:

Perhaps most damning to the argument of those who say we are wrong about the House bill outlawing new individual private coverage is the creation of the exchange itself.

If getting coverage from the exchange is the same as buying insurance in the private market, then why do we need it? The authors of the bill could have kept the private option by doing nothing.

In fact, if they really wanted a “market” and “competition” they should remove mandates and allow consumers to buy health insurance products across state lines. Allow the consumer to decide the type of coverage he wants and the amount he’s willing to pay. Review that with Stossel’s point about markets and you’ll begin to understand the power such a market would have in lowering insurance costs without the government having to do much of anything.

What Adam Smith said about the economic planner applies here, too: The politician who tries to design the medical marketplace would “assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

They don’t want competition, folks – they want control. And history tells us where that leads.


Busting Medicare’s “Low Overhead Advantage” Myth

One of the favorite arguments of the government health care crowd is the supposed Medicare low overhead argument – i.e. Medicare is more efficient than private insurance because its overhead is so much lower than private administrative costs.

It goes like this:

But the administration of Medicare is a miracle of low overhead and a model, despite all the fraud and abuse, of what government can do right. Three percent of Medicare’s premiums go for administrative costs. By contrast, 10 to 20 percent of private-insurance premiums go for administrative costs. Roll that figure around on your tongue. When you swallow and digest it, you’ll understand that any hope of significantly reducing health-care costs depends on a public option.

Right now, the Medicare average is 3% and private insurance averages 12%. But Tom Bevan points out, some of that difference is an apples and oranges comparison:

But here’s the catch: because Medicare is devoted to serving a population that is elderly, and therefore in need of greater levels of medical care, it generates significantly higher expenditures than private insurance plans, thus making administrative costs smaller as a percentage of total costs. This creates the appearance that Medicare is a model of administrative efficiency. What Jon Alter sees as a “miracle” is really just a statistical sleight of hand.

Furthermore, Book notes that private insurers have a number of additional expenditures which fall into the category of “administrative costs” (like state health insurance premium taxes of 2-4%, marketing costs, etc) that Medicare does not have, further inflating the apparent differences in cost.

However, when you make an apples to apples comparison, Medicare comes out much worse than private insurance:

But, as you might expect, when you compare administrative costs on a per-person basis, Medicare is dramatically less efficient than private insurance plans. As you can see here, between 2001-2005, Medicare’s administrative costs on a per-person basis were 24.8% higher, on average, than private insurers.

So, contrary to claims of Alter, Krugman, and President Obama, moving tens of millions of Americans into a government run health care option won’t generate any costs savings through lower administrative costs. Just the opposite.

Make sure you click through and check out the real Medicare administrative costs as compared to private industry.

Then there’s waste fraud and abuse. Did you happen to catch that little hand wave at “fraud and abuse” in the first quote touting Medicare’s efficiency? What, pray tell, is one of the primary jobs of an administive system? Would you imagine it to be the elimination of fraud and abuse – or said another way, to ensure that the company pays legitimate claims and avoids fraudulent and unnecessary payments?

How efficient is a system which is awash in both fraud and abuse? And, without profit, what incentive do they have to eliminate it?

John Stossel takes that part of the “Medicare efficiency” myth apart:

But there’s a bigger point – the connection between “low” administrative costs and staggeringly HIGH levels of fraud and waste. As Michael Cannon at the Cato Institute and Regina Herzlinger at Harvard Business School have pointed out, much of the 10 to 20 percent of private insurance administrative costs goes to preventing fraud. Private insurers, you see, care about whether or not they lose money. Medicare, with its unlimited claim on the public purse, does not. It’s only taxpayer money, after all.

The results are predictable, but breathtaking nonetheless: an estimated $68 billion (with a B) in outright Medicare fraud every year (About $3 billion in Miami-Dade county ALONE.) On top of that, according to well-respected Dartmouth researchers, roughly a third of Medicare’s total $400 billion annual spending goes to procedures which were medically unnecessary.

That’s, on average, 68 billion every year. Imagine a private insurance company surviving with loss figures like that. But as Stossel points out, without an incentive to eliminate fraud and abuse, it continues year after year after year, with politicians and Medicare administrators tut-tutting but never really doing anything about it.

That is the reality of Medicare’s efficiency. It is also the probable model any future health care insurance run by the government. Efficiency is an illusion brought about by a statistical sleight of hand and ignoring the systemic waste, fraud and abuse of Medicare.