Wednesday, July 01, 2009

Public option and a level playing field

Advocates of the "public option" in health care insurance -- insurance offered by the government -- tend to argue that private providers of health insurance should have little to fear. If the private sector is truly more efficient than the government, they argue, then it should have little to fear from a little competition. This line of thinking has even been cited by President Obama, who claims that the public and private sectors would compete on an even playing field.

That claim, however, does not mesh with our experience with existing public options. The US Postal Service, which competes with Fedex and UPS, is currently facing losses of "historic proportion." While that might spell doom for some companies the USPS can count on the taxpayer to pick up the tab. (Such losses might be one reason that so many countries are fully or partially privatizing their post office operations)

Perhaps a greater indictment is education, where 11 percent of students attend private schools that charge an average tuition of $8,302 rather than attend public schools that are free. And to give you an idea of just how strong the allure of free is, I pass along this anecdote from Malcolm Gladwell:
[Behavioral economist Dan] Ariely offered a group of subjects a choice between two kinds of chocolate—Hershey’s Kisses, for one cent, and Lindt truffles, for fifteen cents. Three-quarters of the subjects chose the truffles. Then he redid the experiment, reducing the price of both chocolates by one cent. The Kisses were now free. What happened? The order of preference was reversed. Sixty-nine per cent of the subjects chose the Kisses. The price difference between the two chocolates was exactly the same, but that magic word “free” has the power to create a consumer stampede.
Imagine how many more students would attend private schools if public ones even charged a nominal tuition? How many more if public schools had to charge a tuition that covered their costs?

Furthermore, just as an intellectual exercise, let's imagine that a truly level playing field did exist, with the public option forced to cover its costs without taxpayer assistance. Let's also say that few people decided to participate in this because its costs are not much different than private competitors (which is not difficult to imagine given traditional government inefficiencies and the fact that with 1,300 private insurers out there costs are probably already about as low as they can go). Would politicians stand back and let this situation exist? After all, would it not be deeply embarrassing if the centerpiece of their reform agenda was rejected by the public?

It would seem that our experience with existing public options, as well as the reality of politics, would almost dictate that a level playing field would not exist.

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