By using this site, you agree to the Privacy Policy and Terms of Use.
Accept
Health Works CollectiveHealth Works CollectiveHealth Works Collective
  • Health
    • Mental Health
    Health
    Healthcare organizations are operating on slimmer profit margins than ever. One report in August showed that they are even lower than the beginning of the…
    Show More
    Top News
    bowl of vegetable salad
    Raw Foods: benefits and harms
    November 9, 2021
    pros and cons of the keto diet
    Read This Before You Follow the Keto Diet
    May 18, 2022
    spinal cord injuries
    4 Potential Causes of Spinal Cord Injuries (and How to Seek Compensation)
    May 25, 2022
    Latest News
    7 Most Common Healthcare Accreditation Programs: Which Should You Use?
    August 20, 2025
    Hospital Pest Control and the Fight Against Superbugs
    August 20, 2025
    Hygiene Beyond The Clinic: Attention To Overlooked Non-Clinical Spaces
    August 13, 2025
    5 Steps to a Promising Career as a Healthcare Administrator
    August 3, 2025
  • Policy and Law
    • Global Healthcare
    • Medical Ethics
    Policy and Law
    Get the latest updates about Insurance policies and Laws in the Healthcare industry for different geographical locations.
    Show More
    Top News
    TBI: Some Surprising Statistics
    February 9, 2016
    Your Keys to Safer, Even More Secure Healthcare Cloud Services
    January 13, 2015
    4 Career Options in Healthcare Industry that Combine Big Data & Healthcare
    February 5, 2021
    Latest News
    How Social Security Disability Shapes Access to Care and Everyday Health
    August 22, 2025
    How a DUI Lawyer Can Help When Your Future Health Feels Uncertain
    August 22, 2025
    How One Fall Can Lead to a Long Road of Medical Complications
    August 22, 2025
    How IT and Marketing Teams Can Collaborate to Protect Patient Trust
    July 17, 2025
  • Medical Innovations
  • News
  • Wellness
  • Tech
Search
© 2023 HealthWorks Collective. All Rights Reserved.
Reading: Is Private Health Insurance More Costly Than Public Health Insurance? Five Principles
Share
Notification Show More
Font ResizerAa
Health Works CollectiveHealth Works Collective
Font ResizerAa
Search
Follow US
  • About
  • Contact
  • Privacy
© 2023 HealthWorks Collective. All Rights Reserved.
Health Works Collective > Policy & Law > Health Reform > Is Private Health Insurance More Costly Than Public Health Insurance? Five Principles
Health Reform

Is Private Health Insurance More Costly Than Public Health Insurance? Five Principles

JohnCGoodman
JohnCGoodman
Share
12 Min Read
SHARE

Uwe Reinhardt had a post the other day at The New York Times economics blog comparing Medicare with Medicare Advantage (MA) plans. He basically sifts through the evidence on which is less costly: Medicare (a public plan) or the private MA plans. But while his column is definitely worth reading, it does not go far enough.

Uwe Reinhardt had a post the other day at The New York Times economics blog comparing Medicare with Medicare Advantage (MA) plans. He basically sifts through the evidence on which is less costly: Medicare (a public plan) or the private MA plans. But while his column is definitely worth reading, it does not go far enough. In fact, given the persistent obsession with this question — especially by people on the left — I don’t understand why competent health care economists don’t clear the air of nonsense more decisively.

I consider the titular question of this post a silly question. People who think this is a legitimate issue invariably are making errors in economics or committing errors of logic or misunderstanding  institutional details or (as is the case with Paul Krugman) making all three mistakes in a single editorial. Notice I didn’t say anything about empirical evidence. Tom Saving and I did a bit of that for Health Affairs sometime back. But, we don’t need empirical evidence to resolve issues that arise only because someone hasn’t mastered the syllogism.

To help everyone think through this, I offer five principles.

More Read

United pulls out of ACA exchanges: Should we care?
Plan B’s Balancing Act
Countdown to the Physician Sunshine Act: Gloomy Days Ahead
Uninsured Fall Head First Into Gaping Coverage Gap
October 1st: A Date to Show That Everyone Matters

Principle 1: There is almost nothing the government can do that the private sector cannot do as well or better.

Do you think a surgeon is likely to perform better surgery or more efficient surgery if he gets his fee from the government instead of Blue Cross? How about a nurse? Or a hospital administrator? If the answer is “no,” and it surely is, what is it about government that could possibly lower the cost of health care? The answer is: almost nothing.

It is sometimes said that government can produce things at a lower cost because the government doesn’t have to earn a profit. But people who say this never learned the concept of profit in Econ 101. Every hospital, every physician’s office, every other health care business requires capital. There is a cost of capital. If there are risks involved (the risk, for example, that aggregate fees will not be high enough to cover outlays) then the cost of capital is higher. These costs have nothing whatsoever to do with whether the entity is public or private.

Here is what is true: accountants do not typically record the cost of capital in the financial statements of public entities. But failure to record a cost doesn’t make it go away. To the contrary, ignoring the cost of capital in public accounting unquestionably makes public ventures prima facie less efficient — because investment decisions will tend to be made without regard to their real costs.

What about the idea that whole systems (with all their complexity) might work better if they are public rather than private? For example, for years the auto companies have complained that health care costs are so much higher in the United States. than for auto workers across the border in Canada. If so, there is a straightforward remedy.

There is nothing that the Canadian government is doing that the auto companies and the unions cannot do for themselves. As I have written before, the auto companies can form an HMO and tell it to ration medical care the same way the Canadians ration care.

That the auto companies don’t even seriously consider this option (all the while urging government to consider it) is understandable. The reason is cultural. When a Canadian doctor has to ration care, she is likely to tell the patient, “There is nothing more we can do.” The doctor almost never says, “We could save you, but the government cares more about money than it cares about you.”

An American doctor, however, might well say, “We could save you, but your employer cares more about profit that it cares about you” — thus generating a lot of employee ill will.

This is a cultural issue, though, not an economic one.

Principle 2: The few things government can uniquely do can be done without public insurance.

The advocates of socialized medicine frequently claim that government can use its position as a monopsony (single) buyer of care to negotiate lower provider fees. This is what they envision happens in Canada, for example. In fact, governments usually don’t bargain with medical providers. They simply announce a low price they intend to pay and the suppliers of care can take it or leave it. That’s what happens in the U.S. Medicaid program, for example, and almost a third of doctors decide to leave it — refusing to accept any new Medicaid patients.

However, and this is key, the government doesn’t need to pay provider fees in order to suppress them. It can simply impose price controls on all providers. In fact, if paying providers below-market fees is socially desirable, that is exactly what the government should do for all patients, not just the patients the government happens to insure. Such an act would not make health care more efficient, however, it would just shift costs from patients to the providers of care.

Remember: shifting costs is not the same thing as lowering costs.

Principle 3: Most public insurance in this country is actually administered by private insurance companies.

I can’t begin to count the number of people I have met who believe that BlueCross is evil because it is private and that Medicare is good because it is public. I usually ask, “Who do you think runs Medicare?” Following an awkward silence I usually supply the answer: “It’s BlueCross!” And other insurers.

From the beginning, Medicare and Medicaid have been mainly run by private contractors. Who else was going to do it? The government certainly had no experience doing so.

Now do you think that when BlueCross is called “Medicare” it suddenly becomes more efficient than when it is called “private insurer”? If not, then can we put this nonsense aside once and for all?

Principle 4: Most people with public insurance are in private sector health plans.

More than one out of every four Medicare beneficiaries is in a private Medicare Advantage plan and two-thirds [see here, page 13] of all Medicaid enrollees are in private plans under contract with state governments. In the future those numbers will likely rise. In fact, almost all of Medicaid will eventually be contracted out to the private sector as state governments desperately try to cope with the impact of Medicaid on state budgets. Why turn to the private sector? Because of the next principle.

Principle 5: It is only in the private sector that one finds anyone who has an incentive to lower costs without rationing care.

Most providers have an incentive to increase costs rather than lower them. Their incentive is to maximize against the payment formulas of third-party insurers — whether public or private. And surprisingly, most private insurers also have no incentive to lower costs other than by negotiating lower provider fees. BlueCross, for example, has no incentive to lower Medicare’s costs when it is administering Medicare. When its clients are private employers, BlueCross (for reasons that are historical and institutional, but ultimately because of bad government policies) rarely interferes with the practice of medicine. In Dallas, for example, virtually every hospital in the Metroplex (no matter how efficient or inefficient) is in the BlueCross network.  Similarly just about every doctor (no matter how good or how bad) can be in the BlueCross network if he or she chooses.

However, there are providers who do have an incentive to lower costs and they appear to be responding to those incentives. Surprisingly, they are using some of the techniques the Obama administration says it likes (medical homes, coordinated care, evidence-based medicine, etc.) and that appear not to work well when the government funds pilot programs to try them out. Even more surprising, where these efforts to make medical care more cost effective are most visible is in the Medicare Advantage plans — the very plans that president Obama and many Democrats in Congress seem to be hostile to.

I have previously reported on the efforts of IntegraNet, which appears to achieve good medical outcomes while holding costs down to about 70% of premium income. (Technically, that’s a 70% MLR.)

Two things are important to keep in mind when comparing what I have just said to the table in Uwe Reinhardt’s post. First, the people who are holding down costs and daily searching for new ways of doing so are not the insurance companies (the Medicare Advantage HMOs) — at least as far as I can tell. They are separate companies (e.g., independent doctors associations) operating under contract with the HMOs. Second, if what I am saying is true, the real cost of delivering care under the Medicare Advantage program is much lower than anyone realizes and it’s mainly going to the profits of the HMOs and the entities they are contracting with.

That implies that more competition (ah, more privatization!) has the potential to considerably reduce the taxpayer’s future burden.

  

TAGGED:health insurance costs
Share This Article
Facebook Copy Link Print
Share

Stay Connected

1.5kFollowersLike
4.5kFollowersFollow
2.8kFollowersPin
136kSubscribersSubscribe

Latest News

engineer fitting prosthetic arm
How Social Security Disability Shapes Access to Care and Everyday Health
Health care
August 20, 2025
a woman explaining the document
How a DUI Lawyer Can Help When Your Future Health Feels Uncertain
Public Health
August 20, 2025
physiotherapist at work
How One Fall Can Lead to a Long Road of Medical Complications
Health care
August 20, 2025
Common Healthcare Accreditation Programs
7 Most Common Healthcare Accreditation Programs: Which Should You Use?
Health News
August 20, 2025

You Might also Like

White House’s Obamacare Support Tweet Attracts Haters

September 6, 2013

Bipartisan Cooperation on Medicare: I’m Getting More Optimistic

May 24, 2011
eHealthHealth ReformPolicy & Law

ICD-10 Delay 1 Year to 2014, HHS Announces

August 25, 2012

Interest Groups: Hurtling Us Down the Road to Ruin

June 25, 2013
Subscribe
Subscribe to our newsletter to get our newest articles instantly!
Follow US
© 2008-2025 HealthWorks Collective. All Rights Reserved.
  • About
  • Contact
  • Privacy
Welcome Back!

Sign in to your account

Username or Email Address
Password

Lost your password?