Notes on Cannon

Today, I'm writing about Michael Cannon's Cato Institute policy analysis "Fannie Med: Why a Public Option is Hazardous to Your Health." The first thing to consider here might be the title itself. Why?

I'm not so familiar with Fannie Mae, but clearly Cannon is making an analogy between the proposed public option and Fannie Mae. The problem is that I don't have the context to understand the analogy.

But...with a little research, I now think I get it. I learn from the Fannie Mae website that:

Fannie Mae is a government-sponsored enterprise (GSE) chartered by Congress with a mission to provide liquidity, stability and affordability to the U.S. housing and mortgage markets.

Okay, so the public option would work similarly, I think (or would it?). It, too, would be government-sponsored. And the usefulness of this analogy for Cannon is captured in this passage, again from the Fannie Mae website:

On September 6, 2008, Director James Lockhart of the Federal Housing Finance Agency (FHFA) appointed FHFA as conservator of Fannie Mae. The U.S. Department of the Treasury has agreed to provide up to $200 billion in capital as needed to ensure the company continues to provide liquidity to the housing and mortgage markets.

I guess the point that Cannon is making, then, is that the public option could end up like Fannie Mae--bankrupt. And if that happens, what? Why is a public option "hazardous to your health"? Because you'll end up with no health care coverage (if you choose the public plan)? Presumably, the government would bail out the public option, though, so I'm not sure I fully get the analogy.

Okay, well, now I need to spend some time summarizing Cannon's argument--or arguments. It seems as though one main claim that Cannon is making is that a public health insurance program WILL NOT increase competition in the health care market. Instead, a public plan will lead to the end of the private health care market. He writes:

President Obama’s vision of a health insurance exchange is not a market, but a prelude to a government takeover of the health care sector.

In another passage, which I find persuasive, he draws on the President's own words. He quotes the President as saying:

No matter how we reform health care, we will keep this promise to the American people. If you like your doctor, you will be able to keep your doctor, period. If you like your health care plan, you’ll be able to keep your health care plan, period. No one will take it away, no matter what.

One of Cannon's main projects in this article is to show how this statement is not true ("You lie!")--to show that, in fact, many Americans will not be able to keep their doctors if the government creates a public plan and, perhaps more importantly, that we DO NOT want the government administering our health care plans.

Near the end of the article, Cannon succinctly states his position:

A new government program would supplant private insurance, despite offering inferior care at a higher cost.

There are three claims here and these are, I think, the central claims that Cannon is making:

1. A government plan would supplant (supersede and replace) private insurance

2. A government plan would offer inferior care

3. A government plan would have a higher cost (in dollars? in lives?)

Let's examine the support he provides for these claims.

CLAIM 1: A government plan would supplant (OED: supersede or replace) private insurance.

Why or how would a government plan supplant private insurance? Cannon provides two reasons:

1. the public plan's premiums will not reflect their actual cost (thus, private plans will be unable to complete)
2. the government has myriad ways of subsidizing its own programs, including a public health care program, so there is no way that a public plan could ever "go out of business" (whereas there are plenty of ways that private plans could)

As a result, Cannon suggests, there is no way that private plans would be able to compete with a public plan. A public plan will have lower premiums than private plans, forcing private ensurers to lower their premiums to a point that is unsustainable and a public plan will have government backing (as opposed to the "strategic reserves" that private plans are required to keep), so it will never face bankruptcy or insolvency.

CLAIM 2: A government plan would offer inferior care.

Cannon provides a number of reasons to support this claim.

1. "government programs uniformly lag private insurance in adopting quality innovations" (6).
2. "Government programs are not merely slow to innovate, they are outright hostile to quality innovations" (7).
3. "government’s lack of a profit motive may not be an advantage at all. Profits are an important market signal that increase efficiency by encouraging producers to find lower-cost ways of meeting consumers’ needs. The lack of a profit motive could lead a government program to be less efficient than private insurance, not more" (4).

CLAIM 3: A government plan would have a higher cost (in dollars? in lives?)

I'm not as sure about this one--Cannon is certainly making the point in this piece that switching to the public plan could lead to...having to change to a new doctor, being given inferior care, and, perhaps, even lost lives. Is this a scare tactic? Maybe.

Cannon writes:

As the new program’s artificially low premiums crowd out private insurance, the government would exert even greater downward pressure on quality. (12)

At the end of the article, Cannon suggests that

If Congress wants to make health care more efficient and increase competition in health insurance markets [it] should convert Medicare into a program that gives seniors a voucher and frees them to purchase any health plan on the market [and reform] the tax treatment of employer-sponsored insurance with “large” health savings accounts [that] would give workers the thousands of dollars of their earnings that employers currently control, and likewise free workers to purchase any health plan on the market.

Here, we get a sense of the ideology driving Cannon's position. According to its website,

The mission of the Cato Institute is to increase the understanding of public policies based on the principles of limited government, free markets, individual liberty, and peace.

When set against this backdrop, Cannon's hyper-concern about a "government take-over" of health-care and his proposal for how to reform the system with vouchers make sense. It's not just that Cannon and those at Cato are against the public option, it's that they are, generally, against an active federal government and for a more market-based approach.

So what are my questions about Cannon's article?

First, he assumes that the public plan will inevitably kill our private health insurance system. He sites some numbers (provided, again, by the Lewin Institute!) on how many Americans are likely to switch to the public plan:

A Lewin Group analysis estimated that Obama’s campaign proposal would move 32 million Americans into a new government-run plan. Lewin subsequently estimated that if Congress used Medicare’s price controls and opened the new program to everyone, it could pull 120 million Americans out of private insurance—more than half of the private market. The share of Americans who depend on government for their health care would rise from just over one- quarter to two-thirds. (3)

Despite the credibility issue for the Lewin group, it's worth asking--how many people will opt for the public plan. Is it going to change things as dramatically as Cannon suggests? He has a skepticism of government--is he just sketching a worse-case scenario or is what he is saying will happen going to happen, inevitably?

At another moment in this piece, he writes,

The “Blue Dog Coalition” of moderate House Democrats has offered several criteria that a new program would have to satisfy in order to do so. The Blue Dogs insist, for example, that the program would have to be completely self-sustaining (i.e., premium revenue would cover all costs), that the government not leverage its market power to favor the new program, and that government not enact any regulations that favor a new government program over private insurers. (8)

So, there are some who are taking steps to try to ensure that a public option does not automatically lead to the demise of the private system. Of course, Cannon is not buying what these folks are selling.

But it is, I think, important to point out that no publicly financed or government-based system is going to make Cannon happy. He's not for government playing a role in administering health care--at any level (note what he said about giving vouchers to seniors). Ideologically, he's going to argue that the market is the best way to distribute health care services, no matter what.

Notes on Balto

There are a few things I note about Balto's article "Why a Public Health Insurance Option is Essential."

If I understand is argument correctly, according to Balto, the problem with our current system, and the reason we need a public option centers around issues of competition. His central claim is that, currently, there is not enough competition in the private health insurance industry to ensure "consumer choice" and "honest competition." He supports this claim with the following evidence, which is fairly convincing:

Health insurance markets are extraordinarily consolidated at the state and local level, according to the American Medical Association. In 39 states two insurers control at least 50 percent of the market, and in nine states a single firm controls at least 75 percent of the market, the AMA found. In 2007 the group reported that almost 95 percent of more than 300 metropolitan areas are highly concentrated.

He reminds us that

No competitor likes competition, especially when they are able to exercise market power, avoid regulation, and reap supracompetitive profits.

Clearly, the way Balto sees it, or the way he is constructing it, we have these big insurance companies that are behaving, essentially, like monopolies. The story that Balto is telling is a simple one and it speaks to liberal or progressives like me: the little guy (the consumer) is getting screwed by the big guy (in this case, the few private insurance companies that have all the control). The "balance of power," as he puts it early on in the article, is skewed in the direction of the powerful (the private insurance industry). Consequently, the government must act to ensure that consumers don't continue to get screwed.

Now, here are a few important questions:

1. How did we get to the point where we have so few health care providers in all these states? Why is the private health insurance industry is so consolidated?
2. What are the other options for shifting the so-called "balance of power" and countering the consolidation problem?

(And here is a side question: what are my health care provider options in RI? According to the Office of the Health Insurance Commissioner's "Consumer Assistance" webpage, if you want to buy your own health insurance in RI ("direct pay"), "Blue Cross Blue Shield of Rhode Island (BCBSRI) is the ONLY insurer at this time that offers direct pay plans in RI." As far as employer-based insurance plans, it appears, from this page, that there are three options in RI: Blue Cross/Blue Shield, United Health Care, and Tufts Health Plan. Is three a reasonable number for a state with a population our size? [Hard to say, I have nothing to compare it to.] And how do the numbers break down when it comes to market share? )

In response to the first question, according to Balto, the high level of consolidation occurs for a few reasons.

1. "The entry barriers to these markets are substantial: employers are reluctant to switch plans and information is not transparent making it difficult to compare plan offerings. The time and cost to switch plans is substantial."
2. "...dominant insurers make entry all but impossible by locking up providers through most favored nations arrangements or all products clauses that make it difficult for them to facilitate entry by making a more attractive deal with a new entrant."

As to the second question, what are other possible solutions to the problem of consolidation?Balto lists two:

1. normal market forces will correct the problems eventually (won't happen, he says, again, because barriers to entry are too high)
2. antitrust legislation against health insurers will create more transparent markets (won't happen, he says, because during the past 8 years, under the Bush folks, no anti-trust legislation was filed; furthermore "any antitrust action could correct harm in only a single market and would take several years and a substantial dedication of resources.")

Thus, Balto brings us to the conclusion that creating a public option is the best way to take on the problems of consolidation, lack of competition, and egregious deceptive practices. Why does he believe the public plan will work?

1. A government-mandated public option will be able to break into markets otherwise closed to new entrants.
2. Because public plans (e.g. medicare) have lower administrative costs and no need to generate a profit, they are cheaper and, thus, will force private insurers to get more competitive. Since private health insurance companies will have to compete with the public plan, they will be forced to try to contain skyrocketing premium prices (which, he argues, are at least partially a result of high profit margins: "From 2000 to 2007, the 10 largest publicly- traded health insurance companies increased their profits 428 percent, from $2.4 billion to $12.9 billion annually.")

Additionaly benefits of the private plan, not related to addressing the problem of consolidation, as Balto sees it:

1. A public plan does not have "any incentive to flout or manipulate regulations. Its concerns are not profit, but the public health."
2. "a public plan will set a model of consumer protection compliance, not abuse."

In sum, he argues,

Overall, competition from a public plan would force insurers to respond to market forces, reducing prices and improving consumer protections.

In sum, Balto's argument applies the logic of market economics to the problem of health care. It's not that we need a public option to ensure that all Americans have affordable health coverage (although, to be fair, he does say this once in the article: "As a society we have an obligation to make sure people have access to affordable health care."). It's not an altruistic argument he's making. It's an economic one: a public plan will restore competition. This is an interesting strategy for a liberal or progressive to take. I would expect an argument more along the lines of "it's the right thing to do." Instead, I get phrases like "revives genuine competition"

or "offering Americans a meaningful choice." Words like "competition" and "choice" are, of course, what Lazere refers to as cleans--they are words that evoke positive images and feelings.

Two final things:

First, Balto does address the primary concern expressed by those who oppose a public option: that a public plan "will ultimately lead to the demise of the private health insurance market." Essentially, he dismisses these concerns by saying "Their arguments are inconsistent with the economic realities of these markets." In response to the argument that we do not typically create public firms to create more competition in private markets, Balto argues that the health insurance market is different from other markets and in response to the argument that a public plan will act in predatory ways, he responds that private insurers have plenty of "reserves" to draw on as they learn how to compete with this public player. I feel like he treats these concerns a bit too lightly, though. I also find the argument that we do not create public entities to create more competition in private markets compelling.

Second, a friend recently brought up the problem of consolidation and argued that the real problem is that states or the feds make it difficult for private insurance companies to operate across state borders. In other words, legislation is the thing preventing competition and, consequently, greater transparency, in the private insurance industry. And sure enough, one of the respondents to Balto's article writes:

If in ... “39 states two insurers control at least 50 percent of the market, and in nine states a single firm controls at least 75 percent ... then the easy answer is to open up the borders and sell policies across state lines. Get rid of all those junky minimum requirements that state legislatures insist are necessary but fail to deliver value... just cost.

If this is the case, then Balto's entire argument falls to pieces. We might, first, allow private insurers an easier time entering markets. If we find that it is still too difficult for new firms to gain a foothold, we might then push for a public option. Balto does not mention the issue of laws that might restrict movement across borders and state lines at all in his article. He chocks the entire concentration problem up to impossibly high barriers to entry and the "provider networks" that the dominant players set up to make it difficult for newcomers to get a foothold. This might be an example of what Lazere calls selective vision--leaving out facts that might contradict his argument.

Final thoughts: so much of this argument hinges on the necessity of restoring competition. His entire argument operates on the playing field of health care is a good that can be delivered most efficiently by markets. His is a market-based argument, despite the fact that he is arguing for a public option. But one could argue that if private players couldn't get enough Americans covered in a fair and affordable manner, why would introducing one more player make a difference? The problem is not how many players there are, the problem is that the players are competing with one another in the first place. A single-payer system would ensure that we are all covered, if that is the goal.

Also, I am not persuaded that the public option ISN'T a backdoor strategy towards a single-payer system (and if so, why not just propose the single-payer system now?). The other respondent who wrote in at the bottom of the article writes:

The president has repeatedly said that if you like your private insurance, you can keep it. For many the reality is quite different. Many private employers will drop their private plans leaving their employees no choice [but to accept the public plan]. The Lewin Group (2009) estimates that one-third of Americans will be enrolled in the government plan, whereas only 28.8 percent will remain in private plans (down from 55.7 percent). And those who keep their private insurance will pay higher premiums [in order to make up what he argues will be under-payments made by the public option].

I am persuaded by this. But I need to look into it more (and The Lewin Group might be a source worth looking into). The question employers will ask is this: which is cheaper, opting out of insuring my employees and paying the mandatory tax or continuing to offer employer-sponsored plans? If the cost of ensuring them myself continues to grow in order to make up so-called under-payments by public plan participants (question about this), then employers will have to outsource their employee health plans and pay the tax (that tax better be pretty high if g'ment wants employers to continue to offer employer-sponsored health care).

One last thing: that respondent who cited a study by The Lewin Group--apparently The Lewin Group, whom Republicans have been rallying to their cause to defeat the public plan, has a what Lazere would refer to as a conflict of interest: they are owned by a private insurance company (United Health Group, my insurance provider!). Take a look at this ad that was created by the Service Employees International Union (SEIU). Of course, SEIU is a liberal group with its own agenda. You can also look at the article that exposed all this, from The Washington Post.

(How long did it take me to do all this work? Two hours.)

Balto Annotation

Balto, David. "Why a Public Health Insurance Option is Essential." Health Affairs: The Policy Journal of the Health Sphere. 17 Sept. 2009. Web. 11 Nov 2009.

David Balto is a fellow at the Center for American Progress, a progressive research institute whose mission, according to its website, "is to advance and support a progressive national policy agenda and lay out our vision of a progressive America." According to his bio, Mr. Balto's work focuses on "competition policy, intellectual property law, and health care."

According to Balto, the problem with our current private health insurance system, and the reason why we need a public option, centers around issues of competition. His central claim is that currently, there is not enough competition in the private health insurance industry to ensure "consumer choice" and "honest competition." Balto argues that the high level of consolidation has occurred because barriers to entry in the health insurance industry are high and because existing insurers have set up provider networks with doctors that make it difficult for new insurers to get a foothold. He argues that a public option is the best way of countering the problem of consolidation because a public plan will, de facto, be able to enter all health care markets and because public plans have lower administrative costs and no imperative to turn a profit, thus, they will stir up the pot and create greater efficiency and more affordability in highly consolidated private markets. Additionally, he points out, a public plan will do a better job of following regulations and lead the way towards greater consumer protections.

Balto's argument assumes the importance of market-based concepts such as "competition" and "choice." He is speaking the conservative's language. One major concern I have with his argument: if private insurers have been constrained, by state or federal legislation, in entering new markets (i.e. across borders), then Balto's entire argument crumbles. The consolidation, then, is the result of regulation and policy and not monopolistic or collusive behavior on the part of private insurers. I'll need to look into this a bit more to try to gauge whether the causes of consolidation really are what he claims they are. One person who responded to Balto's piece wrote: "the easy answer is to open up the borders and sell policies across state lines. Get rid of all those junky minimum requirements that state legislatures insist are necessary but fail to deliver value... just cost." This respondent suggests that Balto may be applying selective vision when bullet-pointing the causes of consolidation in the private health care market.