Profits, competition, and the public option

On Aug. 20, President Obama was interviewed by Michael Smerconish on his radio show. Responding to a question about choice and the public option, he stated the following:

But the important thing that I think I have to make absolutely clear: Nobody would be obligated to choose the public option. If you went on that Web site and you said, you know what, Aetna or Blue Cross Blue Shield are offering a good deal and I would rather choose that plan than the public plan, you'd be perfectly free to do so. Nobody would be saying you are obligated to go into a public plan.

Unfortunately, President Obama seems to be confused by basic economics and ignorant of key facts. Under the proposed insurance exchange incorporating a public option, government would be able to 1.) set the terms for all other participating insurers, and 2.) undercut them, driving them out of the competitive space.

Eventually, there would be no Aetna, BCBS, UnitedHealth , or other providers for this type of insurance.

Politicians eager to pass the current proposed legislation are promising to increase competition by providing a "public option". Even if government were to miraculously level the playing field between itself and private insurers by compensating doctors at the same level as private insurance companies (which would increase, not reduce health care spending), one more participant in a health insurance market thick with 1,300 participants wouldn't make any impact at all on competition. It certainly wouldn't come close to the competitive effect of all 1,300 companies competing in a national market for health insurance - without a "public option".

Worse, it seems the politicians want to not only control the "public option", but all insurance companies as well using strong-arm tactics. In an effort to demonize the health insurance industry, the largest insurance companies were recently targeted by various pro-reform politicians for “immoral profits.” This is nonsense - health insurance companies aren’t that profitable. As Brett Arends observed in the Wall Street Journal,

Returns on assets, a key measure of profitability, are typically pretty modest too. According to analysis by FactSet, WellPoint's ROA has averaged 5.8% over the past five years, Aetna's, 4.2%. Those were, remember, supposedly boom years. UnitedHealth was higher, at 9.6%, but fell to 6.4% in 2008. These are reasonable, but hardly spectacular, results. By comparison, Wal-Mart averaged a 9.2% return on its assets and Dell, Inc. 12.4%.

[Will a Public Option Hurt Insurance Company Profits? WSJ, 8/5/09, more profit margin analysis here: What Does Pelosi Define as “Immoral” Profits? Greater than Zero?]

Perhaps before promising maximum choice and large cost savings from eliminating “immoral” 4% profit margins, President Obama and his supporters should do better research on the actual operating environment of health insurance providers, as well as take a few economics courses.

Here’s John Stossel’s take on health care competition: The Case for Real Health Care Competition
[h/t Coyote, Reason]