Why Do We Need a Private Health Insurance Industry, Anyway?

We all know that people have different ideologies about the proper role of government. Some people, who tend to be left of center, think that the government’s role is to try to promote the general good, by providing basic services, protecting the poor and the sick, and ensuring a well-working economy. On the other hand, there are others, who usually place themselves right of center, who believe that the proper role of government is to redistribute as much income as possible to the wealthy.

These competing views of government are coming to a head in the debate over national health care reform. Those who think that the role of government is to serve the public good are likely to favor some form of universal Medicare. Such a system would almost certainly save a huge amount in administrative costs at the level of insurers, providers and government oversight.

Private insurers spend more than 15 percent of the money they collect in premiums on administrative costs. By contrast, Medicare spends about 2 percent. Part of the insurers’ administrative expenses go toward marketing – an expense that would be unnecessary in a universal Medicare system.

The other major factor driving administrative costs with private insurers is associated with their efforts to game the system. Gaming is the best way to make profits in the current system. If insurers can find effective mechanisms for either keeping sick people from being insured, or finding ways to deny coverage for expensive care, then they stand to make large profits. Naturally, profit-maximizing insurers will therefore devote substantial resources to trying to avoid ways to provide health care to people who need it.

At the level of providers, the wide range of divergent forms and policies employs hundreds of thousands of people in administrative positions in hospitals, doctors’ offices, nursing homes and other providers. These people are often quite adept at dealing with various insurers, which is an important skill in our current system, but a task that would disappear if we had a universal Medicare system.

Finally, the state and federal governments must devote substantial resources for oversight to police the practice of insurers. Oversight agencies are essential for limiting abuse. This task would be much simpler if there were not corporations that stood to profit by keeping people from getting needed care.

While we could in principle shift to a universal Medicare system immediately, this would be an extremely difficult task politically and would present some serious practical problems as well. During his campaign, President Obama proposed something far more modest: give employers and individuals the choice to buy into a public Medicare-type program. Under this system, if people are happy with their current health care insurance, they would have the option to keep it. However, if they decided that the plan offered by the government was better, they could buy into it.

In this situation, insurers would compete with the government plan in the market. If private insurers could offer health insurance that provided better coverage or charged less, then people would have the option to buy into a private plan. Of course, the government would also regulate the market so that private insurers could not cherry-pick their way to profitability by insuring only healthy people and dumping them when they became sick.

The insurance industry already recognizes that it will lose out in this sort of competition. A government-run plan will be more efficient. We already know this based on the experience with Medicare. When private insurers have competed side by side with the traditional government Medicare plan, in the absence of government subsidies, the overwhelming majority of beneficiaries opted to go with the traditional Medicare plan.

This is why the insurers are yelling that they don’t want to face “unfair” competition from a government plan. But, their complaint should be all the endorsement that the public needs to support a public Medicare-type plan. The public plan will be cheaper and better than what the private insurers have to offer. Why shouldn’t the public then have this option?

We all know that the insurance industry executives and the company shareholders want to make lots of money, but maybe they should try to find an industry where they can compete. If the government can provide health insurance better and cheaper, then why do we need private insurers?

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.