Health Insurance Public Policy

Should a Government Health Plan compete with Private Health Plans? A Rebuttal

Last month, I blogged about allowing a government-sponsored health plan to compete with private insurers.  Joe Paduda gives one argument in favor of a public health insurer that any economist would love: increased competition.  

“The reality today is that almost every market is already dominated by a very few health plans, so much so that in most markets, there really is very little market competition amongst health plans…In 96% of markets, at least one insurer has share higher than 30%; in almost two-thirds of the markets, at one insurer has share greater than 50%.”

Could a public health plan actually increase competition?


  1. Initially, yes. You would increase competition in the market by one (the government). Over time though, the government plan would crowd out private companies that could not compete with a federally subsidized program.

  2. I’m not so sure, Brian. It seems that a public plan, especially if the Lewin Group is correct about it having significantly lower premiums than private plans, could spark a great deal of innovation in the private industry. Insurers would have to reduce administrative costs – a far larger portion of their current business model than Medicare, for instance – and to innovate and offer plans that actually appeal to people and offer them benefits that they need.

    But if Brian is right – that in the long run, private plans simply won’t be able to compete with a public plan – is that really such a bad thing? If millions of people decide that they’d prefer the public plan over their current options – plans purchased on the individual market or the typically-more generous and less-expensive plans obtained through employers – the insurance companies, who have been jacking up premiums and deductibles while reducing benefits, all the while becoming a complete hassle for every healthcare professional I’ve spoken to and a nightmare for the average consumer to deal with, will have no one to blame but themselves.

  3. I have a question that you could perhaps help me answer. I’m a physician and I’ve been considering supporting a public option plan called EMBRACE

    My question is would a public plan that eliminates insurance companies from having to compete for this sicker group of patients, what this plan is calling Tier 1 patients (also the group that costs private insurance the most money) increase profits for private insurance? Insurance companies would still be able to compete for healthier tier 2 patients. I’m interested in any comments you may have.

    Thank you

  4. A public plan that would take the sickest patients would in theory not affect average insurance company profits, but may decrease the variability of these profits. When the government takes over sick patients, insurance company costs drop. However, insurance premiums would also fall because the insurance company wouldn’t have to pay for sicker patients. Thus, insurance company profits should not change in a competitive market. However, in some markets where there are only a handful of insurance companies, they health plans could use their market power to keep premiums high and increase profits.

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