Profits and the public option

One of the justifications being advanced for a government-run health insurance service -- the "public option" -- is that it will promote competition and reduce prices. The problem with this thinking, however, is that there are already 1,300 health insurance companies out there. Logically then, competition should already be pretty fierce and the benefit of a public option very low.

But how competitive is the health insurance market? A good proxy for competitiveness are the profits being earned by companies in that market, with high profits typically corresponding with an uncompetitive environment and low profits indicating pretty cutthroat competition (think airlines). So how are the health insurance companies doing? Well, take a look at this graphic:

Assuming that the graphic, produced by a health insurance association (apparently based off a PWC analysis) is accurate the profit margins are 3 percent of every dollar spent. In contrast medical liability consumes 10 percent of every dollar.

It would seem that to achieve real cost savings that the health care reform effort should concentrate on either the 25 percent taken by physicians or 35 cents taken by hospitals. The most logical way of achieving this is through increased competition.

Update: A look at some of the inefficiencies found in hospitals.