Jacoby on the ‘Public Option’

by Don Boudreaux on November 1, 2009

in Competition, Health, Myths and Fallacies

The Boston Globe‘s Jeff Jacoby reports some useful facts to counteract some of the stupid hyperbole spewed in the today’s health-care debate.  Here’s his closing:

The critics do have one thing right: More competition would bring down health care premiums. But the way to increase competition is not by adding a government-run health plan to the 1,300 private firms already providing health insurance. We do have a highly competitive national market for auto and life insurance, after all, and with no public option. There’s no reason we can’t have the same for health insurance.

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Anonymous November 1, 2009 at 10:53 pm

But, especially in Massachusetts, there is a “Risk Pool” of drivers (young, old, drunk) that the insurance companies are required to share amongst themselves in order to be licensed to offer insurance. Could the “public option’ be worked out this way?

Andrew_M_Garland November 2, 2009 at 3:47 am

A “risk pool” is an assignment of bad drivers (bad risks) to the licensed insurance companies, paying in premiums that are not enough to cover the costs incurred by those bad drivers.The licensed insurers treat this underpayment as a cost of doing business, and it gets figured into what they need to charge for insurance. In turn, this higher amount is approved by the state insurance commission when setting rates, so the rates are higher.This amounts to a hidden tax on the good drivers to keep the bad drivers on the road. It would be politically difficult to have a line item in the explicit state budget for the amount paid to subsidize the bad drivers. Consider the headline: “State pays $30 million per year to cover the destruction of bad drivers”. Instead, the state arranges for the insurance companies to charge the “tax” and pay the transfer.Politicians do this because bad drivers vote also, and are greatful for the state support.This should remind you of government controlled health insurance. Our laws require that hospitals and doctors treat many of the sick at no charge in emergency rooms, and at low charge under Medicare and Medicaid. They cover their unpaid costs by charging other sick people more, those that have insurance. The insurance companies respond to these increasing costs by increasing premiums. These increases are not funding skyrocketing profits.So, like risk pools, insurance rates go up as the insured pay for the uninsured, or pay for those willing to skip out on their routine medical bills. Then, politicians blame the insurance companies for raising premiums! It is merely a hidden tax system, to keep from disclosing the true cost of government policy.

DG Lesvic November 2, 2009 at 12:33 am

Proposal: A Bastiat Award, in honor of the clearest thinker and writer ever in economics, and, its first recipient, the man who best exemplifies that tradition in our time, Don Boudreaux.

And the Krugmans can have their Bastard Awards.

muirgeo November 2, 2009 at 1:45 am

Jacoby’s first bit of hyperbole to be dispelled is regarding health insurance profits.

It totally misses the point. What matters is health insurance expenditures.

As a health care provider overwhelmed with more patients than he can see safely in a day it’s unsettling to think of the legions of people employed selling insurance policies, advertising them, figuring out actuarial charts, reviewing and denying claims and coverage ect ect . If ever there was an example of the broken window fallacy. These people provide not one iota of health care but they suck away dollars from going to more providers, more nurses more treatment ect ect… They are worthless with regards to providing health care but invaluable to creating profits by providing the bare minimum of coverage.

This isn’t the equivalent of selling apples in an open market as might have applied to the days when the Wealth of Nations was written.

All of you out there will in the future, hope fully not near, face a severe illness of yourself or of a loved one.
When that day comes and it seems your doctor is too busy for you or your nurse is flying by the seat of his or her pants just think of all of your health care dollars that are going to the legions of health insurance workers and not into delivering you better care. Because that’s is exactly what will be happening. Your government subsidized health plan is putting profits before your care because the system is big enough and complicated enough to do that and to pay CEO’s ridiculous amounts because they think it’s ok for you to wait a little longer for your bed pan or your pain medicine.

This WILL happen to each and every one of you mark my words.

dano November 2, 2009 at 2:18 am

When that day comes and it seems your doctor is too busy for you …

I thought the supply of doctors (via Med. school admissions) was controlled by the A.M.A.

muirgeo November 2, 2009 at 1:56 pm

Yes and they oppose the public option and they were the reason for ?Truman’s failure to pass public health. We need MORE doctors and nurses for sure. And all those insurance claims deniers and executives could certainly be re-trained and put back to work doing something useful rather then scavenging from the system. And doctors salaries, especially specialist, could sttand a little trimming. I am not a member.

Mr. Econotarian November 3, 2009 at 10:55 pm

” We need MORE doctors and nurses for sure.”

Actually the US has about the same number of physicians per capita as the OECD average.

But doctors make far less in other OECD countries that have physician price controls.

We would be smart to not require a second residency for doctors moving from OECD countries to the US (just pass the USMLE and have previously been a licensed doctor in another OECD country). That way we can get all their “starving doctors”.

The Dirty Mac November 2, 2009 at 3:05 am

My health insurer has 50 individual state bureaucracies. Its illegal for them to have any fewer. Its as efficient as any other form of protectionism.

You imply that CEO pay results in a widespread recution in care. If that’s the case, then these CEO’s are making many times more money than even their most severe critics state.

Andrew_M_Garland November 2, 2009 at 4:17 am

To muirgeo,

You wrote: “Just think of all of your health care dollars that are going to the legions of health insurance workers and not into delivering you better care.”

Could you present a source and some numbers? You are effectively claiming that the government is going to administer healthcare more cheaply than current insurers do. It seems to me that government is also going to have “legions of health insurance workers”, but they will be called well-paid government workers.

Critics of insurers claim that Medicare uses just 3% for adminstration and overhead. This is commonly compared to 12% for insurance plans, and sometimes private overhead is exaggerated to “10% to 20%”.

It is astounding that anyone believes that the government is a master of efficient administration, or will be this time.

() Medicare serves an elderly population that receives much more medical care, so even higher administrative costs are a smaller percentage of total costs.

() Between 2001-2005, Medicare’s administrative costs were 24.8% higher than private insurers, per person.

() Private insurers have costs that Medicare does not have, like state taxes of 2-4% on health insurance premiums. These can’t be reduced by better administration.

() Private insurance provides more services than medicare, and they control fraud much better.

() Will insurance provided by the government provide the same bundle of services now mandated by the states for their approved medical insurers? I would prefer that the states stop specifying particular coverages, but they are doing so now, and this is a component of the high cost of private insurance.

Medicare Myth: Low Administrative Cost

muirgeo November 2, 2009 at 2:01 pm

Andrew the evidence is clear when one simply looks at the other 30 developed nations who per capita cost are far less then ours and overall quality just as good.


Sam Grove November 2, 2009 at 5:19 pm

The reason we spend more per capita is because we can afford to.
I bet if people in these other developed countries were wealthier, they would spend more on medical care.

Seth November 2, 2009 at 5:20 pm

Interesting note on the linked exhibit: “Source: For U.S. figures, authors’ calculations. For all other countries, “Organization for Economic Cooperation and Development…” Why’s that?

Also, these are absolute dollars. How does the chart look with % of income? Can the numbers be broken between required and elective?

What’s your proof on “overall quality just as good”? What about specific results? Like, once someone is diagnosed, what’s their survival rate? Chance of infection? How quickly are they treated, released and back to productive pursuits?

Mr. Econotarian November 2, 2009 at 9:29 pm

US health expenditures (and doctor and nurse salaries) are still pretty high compared with OECD averages even on a %GDP per captia basis.

Then again, I suspect our house prices & car prices are as well.

If you want to see a neat graph of cross-country health expenditures as % of total GDP and per capita PPP, the below link shows that the US has always been near the top of spending as far back as 1960, but the other OECD countries slowed down their spending growth as % of total GDP or as per capita PPP around 1980, while the US pulled far ahead.


Compare with General Practitioner income PPP:


Mr. Econotarian November 2, 2009 at 9:16 pm

Yes, and the majority of the difference in health expenditures is that those countries pay their doctors & nurses less, and use a much smaller percentage of new drugs (under three years old) and deploy fewer new medical devices.

Private health insurance companies are a scapegoat. We know the profit margins of the health insurance industry is very small (~3%, not to mention the non-profits.)

US doctors make twice the OECD average, despite the facts that we have about an average number of doctors per capita compared with other OECD countries.

I can’t figure out why US doctors make so much more than in other OECD countries. It isn’t just to offset medical school repayment and higher malpractice insurance costs than other OECD countries (although that does explain some of the difference).

I can only conclude that other OECD countries have decided to “stick it to the doctors” through lower “negotiated rates” with doctor’s unions. There was a huge doctor strike in France in 2002, which shows the pressure between them and the government.

Anonymous November 2, 2009 at 4:31 am

Oh, but it will be so much better when the money is going to legions of job-for-life, government-employed, union bureaucrats.

I keep forgetting that I get much better service at the DMV than I do at Texas Roadhouse. And that I actually look forward to the cheerful, smiling clerk that helps me when I renew my driver’s license, but dread putting up with those insolent waitresses that could care shit less if I get my steak before my lunch hour is finished.

muirgeo November 2, 2009 at 2:04 pm


I renewed my drivers license with 3 clicks on this computer. Haven’t spent more then 4 hours of my life at the DMV over the last 15 years.

Now the Texas Roadhouse had a 40 minute wait the other day. So we left.

Seth November 2, 2009 at 5:12 pm

So, did you take advantage of any other options the other day to find an acceptable dinner or did you go without?

Mr. Econotarian November 2, 2009 at 9:32 pm

I’d also like to point out that even if socialized medicine works well in certain European countries within a specific culture and political system, it may not work as well within American culture and the American political system!

For example, the Netherlands is considered by Transparency International to be much less corrupt than the US.

Anonymous November 2, 2009 at 11:20 am

muirduck,My little pet, I am pleased to see your progress after all these years of being exposed to sensible people here on the Cafe.That was a decent, incompetently written though it was, argument for the free market. I agree with you for once. There is an enormous amount of money being sucked out of patient’s pockets and directed into the pockets of bean counters and bureaucrats; but it isn’t the market that is causing that, it certainly isn’t private industry forcing people to throw their money away, it is government oppressive regulations and interference.Shut down all intermediaries between the doctor and the patient, eliminate all government dictates and rules about health care provision and payment, leave all that money in the pocket of the patient so that he and the doctor can bargain directly for the service and payment.:-) Everyone will be much better served;and, provision and purchase of healthcare will finally have fallen back to its previous pre-socialist interference level of efficiency.I guess you have proved the theory that if you leave enough Chihuahuas alone with enough keyboards for enough time, one of them will finally write something at least partially reasonable.

Randy November 2, 2009 at 3:16 pm

If you’re saying that much of the health insurance industry is a waste, I agree, but that’s how the government designed it. I would love to see a real “insurance” system. That is, I would pay in cash for minor visits, but have a catastophic coverage policy for major illness or injury. I don’t see how turning the existing government controlled system over to a government run system is likely to have that result.

Mr. Econotarian November 3, 2009 at 10:52 pm

“When that day comes and it seems your doctor is too busy for you or your nurse is flying by the seat of his or her pants just think of all of your health care dollars that are going to the legions of health insurance workers and not into delivering you better care.”

Of each dollar spent on health care in the United States 31% goes to hospital care, 21% goes to physician services, 10% to pharmaceuticals, 8% to nursing homes, 7% to administrative costs, and 23% to all other categories (diagnostic laboratory services, pharmacies, medical device manufacturers, etc.)

If the insurance (including Medicare) did not have the 7% administrative costs, then my premiums would be higher because of more insurance fraud. For example, Medicare fraud is around $60 billion per year as it is.

We can’t really compare Medicare and private insurance administrative costs beause they are very different patient mixes. Medicare “advertises” 2% administrative costs, but a better analysis that includes hidden costs shows about 5.2%, compared to private insurance 8.9%. But keep in mind that the sicker patients of Medicare lead to per patient administrative costs being higher for Medicare than private insurance. Plus it is likely that there is far more Medicare fraud than private insurance fraud, thus perhaps Medicare could save money by having a higher administrative cost!

Anonymous November 2, 2009 at 3:32 am

It would be nice to have insurance companies able to compete across state lines. I think, however, that states mandate certain procedures be covered by insurance providers in their state, right? So if we were to have insurance plan competition, would states have to dump these mandates? I have tried to find the laws on what is required of insurance plans in CA but cannot…

Mr. Econotarian November 2, 2009 at 9:42 pm

You are right – some states have greater mandatory requirements for private health insurance (like expansive IVF treatment policy) that the UK NHS does for it socialized medical care!

(lest you do not believe me, “Couples seeking infertility treatment in some parts of Scotland are having to wait up to three years longer than those in other areas”:



Individual and group health insurance policies are required to cover medically necessary expenses for infertility diagnosis and treatment. Infertility is defined as the inability to conceive or sustain a successful pregnancy during a one-year period.

Covered treatments include ovulation induction, interuterine insemination, IVF, uterine embryo lavage, embryo transfer, GIFT, ZIFT, and low tubal embryo transfer. Coverage is limited to individuals who have maintained coverage under the policy for at least a year.”


John Dewey November 4, 2009 at 3:24 pm

The Commerce Clause of the U.S. Constitution gives the U.S. Congress the power to regulate interstate commerce. Absent any other federal legislation, states cannot prevent an insurance company in one state from insuring a person in another state. So, absent any other legislation, a resident of California could purchase a health insurance policy from a Texas firm and not have to pay for all the mandates imposed by the state of California.Unfortunately, the U.S. Congress passed the McCarran-Ferguson Act in 1945. That Act gives to each state the power to regulate sales of insurance within state boundaries, until such time as the U.S. Congress passes future laws which do regulate the sales of insurance.The U.S. Congress could repeal the McCarran-Ferguson Act and enable interstate sales of insurance. The U.S. Congress could also establish national mandates which may be more extensive than state mandates in almost every state. I think the latter action is a more likely outcome as long as Democrats are in power.

Anonymous November 4, 2009 at 3:40 pm

What is unclear, however, is whether they can set minimum standards for anyone selling insurance in their state. But yes, the Court has been very clear that you can’t treat in state and out of state insurers differently.

Anonymous November 4, 2009 at 5:28 pm

very interesting, thank you.

Anonymous November 2, 2009 at 11:03 am

Here’s Mark Perry’s take…


Here’s the irony. This government, supposedly the best and the brightest, believes their ideas trump all others.

But, if that is truly the case why does the Senate Majority Leader feel the need to lie? Why does the rest of the administration, knowing that their leader in the Senate is lying, fail to correct the leader?

If the administration can lie and support that lie in the face of facts countering their lies what on earth leads anyone to believe that they’ll be honest in any other aspect of the medical care debate?

Insurance License Courses November 2, 2009 at 4:11 pm

I strongly disagree to that idea. We do have auto insurance and life insurance but things are not too great in those markets and health insurance is at a totally different level because millions of lives depend on it. Some how it doesn’t seem to me to be at the same scale of need. However, they are important and many people are finding it hard to afford them. Not that the public health option will be a great thing either. Insurance in general needs to be regulated even if run privately. The cost needs to be controlled so it’s affordable.

Anonymous November 2, 2009 at 4:31 pm

“I strongly disagree to that idea. We do have auto insurance and life insurance but things are not too great in those markets and health insurance is at a totally different level because millions of lives depend on it.”

Not true… What millions of lives depend on is good sound judgment on matters such as the intake of healthy food, exercise and the move away from risky behavior.

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