A “public option” health insurer would create a new government sponsored enterprise in our health care market.  Government enterprises are not merely inefficient – they are the harbringer of private competition’s slow death by regulation.  Previously, we noted how the government has jealously legislated an anti-competitive zone around the US Postal Service.  But there is an equally compelling example of government’s inability to tolerate competition in the health care market itself: Medicare.

In a Cato Policy Analysis publication, Kent Brown explains how Congress and the Medicare bureaucracy have systematically limited seniors’ choices to purchase health care outside of the Medicare bureaucracy.  Through a combination of penalties for seniors who opt-out, regulations on providers, and subsidies, the government has driven private competition out of the senior health insurance market.

For most seniors, enrolling in Medicare need not be a conscious choice.  Congress automatically enrolls most eligible seniors in the program.  In order to opt out of Medicare Part A (hospital insurance), a senior must give up all Social Security benefits – an extremely painful option for low or middle income individuals who have been forced to pay payroll taxes for their entire working lives.  Medicare Part B (outpatient care) is subsidized by general tax funds.  Most seniors pay only 25% of their Medicare Part B premium.  For every year that eligible seniors opt out of the program, their premiums increase cumulatively by 10%.

Between automatic enrollment, the loss of Social Security funds for opting out of Part A, punitive premium increases for opting out of Part B, and the artificially low cost of enrollment, choosing not to enroll in Medicare has become such an unrealistic option that, by 1997, private insurers had completely left the senior health insurance market.  Only seniors rich enough to pay their own unexpected health care fees can afford to seek health care outside of Medicare.

Once seniors have enrolled in Medicare, they essentially lose the option to pay for their own health care.  This is accomplished by a rule against “private contracting” for Medicare-covered services.  This rule prohibits physicians from accepting private reimbursement for procedures that would be covered under Medicare.  If a physician wishes to receive private reimbursement for these services, he must agree not to participate in Medicare for a period of two years.  Because nearly all seniors have been herded into the program, opting out entirely would cripple most providers’ practices.  Medicare ensures that providers will not find this alternative profitable by fixing rates for coverage of its beneficiaries.

Medicare has bullied away competition at both the insurer and provider level.  The government’s freedom from competition has allowed it to act as an arbitrary monopoly.  The result is predictable.  Medicare operates inefficiently and unresponsively.  Brown points to studies showing that nearly 30% of its provided care yields no health benefits.  Medicare does not bother to provide true catastrophic coverage; as Sue Blevins has noted, Medicare does not cover the expenses of hospital visits after they exceed 150 days.  Medicare also carefully regulates the legal amount of care that patients can purchase from even those providers who have opted out of the system – subjecting them to a government rationing scheme without alternatives.

These failings are not incidental to Medicare.  They are predictable results of government entrance into the market.  Because government enterprises rely on subsidies to provide “cheap” goods, people over-consume their products.  Only by arbitrarily limiting the services it produces can Medicare control its costs.  But if it allows competitors to remain in the market, consumers will notice the arbitrariness of these rationing decisions.  Since only private, unsubsidized competitors will offer the rationed-away services, consumers will realize that the government inherently does not give them “what they want”.  Killing private competition is the government’s way of covering up its own inevitable arbitrariness.

The public option can be no different from every other government venture.  Because it has no stake in success and a government guarantee against failure, it will be run inefficiently.  Subsidies will be necessary to ensure its health.  And if these subsidies do not drive away its competitors outright, the public option will still have the same incentives for undercutting the private market as Medicare and the Postal Service: the private sector makes them look bad.