August 19, 2009

The Private Option: Consistency Is Sauce for the Gander

Hatched by Dafydd

Several pundits (I can no longer write "pundants," with Mr. Bush being gone from the scene) have quipped that if the Democrats are so anxious for a public (government) option in health-insurance reform, arguing that allowing the government to "compete" with private industry reduces cost without damaging quality, then why do they reject a "private option" for Medicare, Medicaid, Social Security, and schooling?

It's a grand idea; let's play with it a bit.

The putative government "option" works by allowing employers and perhaps private individuals who buy their own insurance to elect instead to buy the government insurance plan. All right... at the moment, while there are a few private insurance plans contained within Medicare, ordinary people have no option of paying for a private health-insurance plan for their sunset years instead of Medicare; if somebody wants such a plan, it must be supplemental coverage in addition to Medicare, which they also must fund via involuntary taxation -- part of the FICA taxes, which you can examine by looking at your W-2. (The self-employed must pay the entire amount directly, as SE tax.)

The same is certainly true for Social Security, paid for by the other part of FICA: You are not allowed, in general, to cease paying your FICA taxes. (There may be some exceptions for people already on government health care or retirement plans.)

Half the FICA tax is automatically deducted from your paycheck; the other half is "paid" by your employer -- but in reality, it passes that cost along to you, in the form of reduced salary. Employers certainly count that half of FICA as part of total compensation, just as they count the health insurance they offer; if they didn't need to make those payments, they would be free to offer that much more to lure the best candidates away from competing businesses.

So if Democrats really like public-private competition, how about this?

  • Allow citizens to opt out of public Medicare, instead directing their employers to deduct the amount of their Medicare taxes, 2.9% total of all income -- and pay it as a defined contribution to a health-insurance plan, selected by the employee, that will pay for medical care in old age. Those who pay SE tax could also opt out, paying that same amount instead into the same kind of plan.
  • Allow workers to opt out of public Social Security entirely -- all 12.4% of taxable wages, not just 4%, as President Bush proposed -- by instead having their employers direct the amount of the total FICA tax into a qualified IRA investment plan (same deal for SE tax). The plans would be offered by any broker willing to set them up... which of course would mean all of them, because every major broker already offers such plans.
  • And of course, allow parents to opt out of paying the portion of their federal taxes that go to government schooling, instead having a tax credit for that amount, which they can put into a special, qualified investment fund -- chosen by the taxpayer -- that could only be used to pay for non-government schools or for home-schooling. (Because the government would not directly be paying schools, the problem of whether to "fund" religious schools does not even arise, as it does with a voucher system.)

    This liberty is trickier, because people must continue to pay these taxes even after their kids are all grown and out of government schooling. Should the opt-outers continue to receive a tax credit for life, based upon what portion of their children's schooling was supplied by government schools (that is, when they chose to opt out)? Or should the tax credit diminish over time? These questions would be negotiating points to try to gain votes in Congress.

First, each of these is obviously an interim step between the current system of government monopoly and a system of actual liberty and personal responsibility; but we still must take into account that pesky First Rule:

[G]overnments conclude that it's very bad public policy -- political suicide, in fact -- to allow people to die of easily treatable injuries, illnesses, and conditions....

Let's call this the First Rule of Health-Policy Political Reality: If voters have to step over dead bodies to get to the polling place, it affects their vote.

In addition to health care, this rule also applies to standing by and allowing seniors to live in grinding, third-world level poverty, or allowing some parents to refuse to educate their children at all.

In economics, it's called the "free rider" problem; the classic example is a streetcar with a single driver who is also the ticket-taker, so he really has no ability to extract fares from riders not honest enough to pay voluntarily. These moochers start hopping on the streetcar without buying a ticket; eventually, as more and more people see others riding for free, even ordinarily honest riders start feeling like suckers. When they, too, begin doing the same, the streetcar line goes bankrupt. Then nobody gets the service.

In this case, if we have an unenforced system of health insurance, what happens when somebody without any insurance gets terribly sick or injured -- or worse, his child does. Given that Americans will not stand by and watch someone die from an easily treated disease or injury, the reality is that those free riders will, in fact, be treated. Maybe they'll be billed afterwards, but they can declare bankruptcy and weasel out of even that small bit of personal responsibility.

Similarly, Americans will never countenance senior citizens living on the streets or children growing up illiterate or otherwise uneducated: We have no stomach for willfully forcing people to pay a draconian, perhaps even fatal, price for stupidity... even less for making children pay the price of their parents' stupidity.

Without some solution to the free-rider problem, we cannot move to a system of full liberty. (I'm not saying it's insoluble, only that I personally don't know any solution.) But we can at least significantly pare back government intrusion to the least extent required to still leave nearly everyone covered for old-age health care, retirement, and some standard minimum level of education.

Second, these "private options" would naturally have to take into account that there are three groups of people:

  1. Those who have already retired (Medicare and Social Security) or whose children have finished secondary schooling, thus cannot choose not to partake of the private option.
  2. Those who have not yet begun to pay into the system -- primarily children -- who have the cleanest choice possible.
  3. And a vast remainder, including those who have already paid taxes for some number of years but haven't yet used any Social Security or Medicare, or who have children who are part-way through school, or various other combinations.

Group 3 is the toughest, of course; but all that is needed is a reasonable compromise, how much of taxes already collected would be returned to the taxpayer as a "start-up" balance in his account... because it would not be mandatory to switch to the private option. Every individual (or family) in Group 3 would have to decide which choice is best for him (them).

And of course, Congress will see a battle royal about how to fund the transition. But heck, the Democrats seem to be happy with only the least bit of hand-waving about how to pay for the government option -- ultimately, the full government control -- of health care; so why should they kick at any temporary transition cost of allowing people to opt out of Medicare, Social Security, and the government-run school system?

In any event, the cost saving of a private option is much more easily calculated than the cost of ObamaCare: Fewer people in Medicare and Social Security mean less money spent; fewer kids attending government schools mean states can consolodate and close some of them. And in both cases, a bunch of bureaucrats at all levels of government can be told to find honest work instead. Not that any of this would happen -- but that's a separate issue, the tragedy of immortal bureaucracy.

However, there is one killer argument that would persuade every Democrat in Congress, even the Blue Dogs, to vote against the private option: Demand for such a private option would eventually overwhelm the public programs, which would eventually dissipate into desuetude: Eventually, nobody in his right mind would stick with the lousy government plan, when he has the option of a much better private plan for the same money.

But of course, accepting that argument means accepting the corollary: The only way that a government option in health care could "complete" with private health-insurance (group or individual) would be for the government "option" to cheat... to take unfair advantage of the fact that the federal plan gets to write the rules for its competitors -- and it gets to operate at a loss so catastrophic, it would bankrupt any private company.

So Democrats have shot themselves in their own petard. Let's call their bluff by proposing an increase of liberty in areas of government monopoly to balance out the Democrats' demand for more totalitarianism in areas dominated by the private sector. Fair enough?

Cross-posted on Hot Air's rogues' gallery...

Hatched by Dafydd on this day, August 19, 2009, at the time of 6:18 PM

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Tracked on September 15, 2009 6:17 PM


The following hissed in response by: Dick E


All right... at the moment, while there are a few private insurance plans contained within Medicare, ordinary people have no option of paying for a private health-insurance plan for their sunset years instead of Medicare…

The key words above are “at the moment.”

I assume what you refer to are “Medicare Advantage” and “Medicare Cost” plans. There are variations, but basically what happens with these plans is Uncle Sam pays an insurance company (or other provider) to take the risk for them. The participant pays their regular Medicare premium to the government, plus they generally pay the provider an additional premium. In return, the Medicare participant gets better coverage through a private provider.

Unfortunately, this amounts to “the rich” (i.e. those willing to spend a few bucks a month more for coverage) getting better medical care than everyone else. This, of course, is a very bad thing and must be stopped.

Not to worry. The bills now before Congress outlaw Medicare Advantage (and, I assume Medicare Cost) plans. The rationale is that these plans cost the government more than traditional Medicare. We know this is true, because Congress tells us so. (Of course, we don’t really know what traditional Medicare costs, because nobody has calculated the fully loaded costs. But pay no attention to the actuary behind the curtain.)

Ed Morrissey is on this, but I’ve seen few others.

The above hissed in response by: Dick E [TypeKey Profile Page] at August 20, 2009 9:43 AM

The following hissed in response by: Dafydd ab Hugh

Dick E:

So I was correct that Medicare Advantage doesn't allow you to skate on paying the ordinary Medicare co-pays and other charges, nor on FICA taxes that amount to "premiums" for Medicare; it only allows you to pay extra for supplementary coverage.

But I didn't know that it would be even worse under ObamaCare... because -- if I understand correctly and if your claim is accurate -- that even this little bit of immunity from the decisions of the Medicare death panel (MedPAC, which decides what procedured Medicare pays for, for what classes of patient, and how much it pays) is going to be taken away under the House version of ObamaCare.

Is my understanding correct? What about people who have bought private insurance to supplement Medicare, but have bought it themselves, not through Medicare; can they still spend more (paid for by their own, completely private insurance) to get better care?

Or does Medicare permit no external payment to doctors or hospitals for treatment of Medicare patients outside of the Medicare Advantage program, which they intend to kill off under ObamaCare?

If you can find a link to these elements of Medicare and ObamaCare, I would be very appreciative.



The above hissed in response by: Dafydd ab Hugh [TypeKey Profile Page] at August 20, 2009 2:13 PM

The following hissed in response by: Geoman


How about this. Offer people the potential to keep just half their government sponsored contribution to medicare, social security, and schools. The understanding is that you could then use that money to take care of yourself.

Medicare - half your contribution is taken from you and goes into an HSA. In exchange you permanently lose you right to claim medicare benefits. Same for social security. Schools would have vouchers - parents get back half the government cost to educate the student.

Youd' reduce the goverment liability in these areas year after year. the aded benefit to social security and medicare - huge amounts of private capitol being invested in the markets.

Your analogy of the free rider is exactly right for health care. Why isn't any Democrat proposing we treat it just like medicare and social security - deduct it right out of the checks of everyone, not just the well off?

The above hissed in response by: Geoman [TypeKey Profile Page] at August 20, 2009 6:35 PM

The following hissed in response by: Dick E


Is my understanding correct?

Yes, if Obama has his way.

The Obamacle announced he wants to do away with Medicare Advantage on George Stephanopolous’ show back in January. I haven’t seen a retraction.

The plan currently weaseling its way through Congress apparently just cuts funding significantly for Medicare Advantage, rather than killing the plans outright. (Sorry, I was hyperventilating.) Naturally, the LA Times thinks this is peachy.

Of course, cutting funds enough to make a difference would be the same as eliminating MA. Less money means the plans that don’t shut down as a result must offer leaner benefits, so participants will have less incentive to join/remain with them and more incentive to go with traditional Medicare. RIP Medicare Advantage.

One wonders whether the Democrats have forgotten how to count votes: About a fifth of Medicare recipients (I’ve seen numbers as high as 25%) are in MA plans. Maybe they figure the only ones “rich” enough (and smart enough) to use MA are Republicans.

For a brief précis of how Medicare Advantage works, see the Wikipedia page. For more information than I’m sure you want, Medicare Advantage plans are covered starting on page 50 of the CMS booklet Medicare & You. (The latter is as official as it gets.)

What about people who have bought private insurance to supplement Medicare, but have bought it themselves, not through Medicare; can they still spend more (paid for by their own, completely private insurance) to get better care?

What you describe are Medigap policies. They’re regulated by Medicare, but purchased privately with no government subsidy. See Medicare & You, page 75.

Sorry, I can’t prove a negative. But so far I’ve seen nothing indicating Congress wants to limit or outlaw Medigap.

The above hissed in response by: Dick E [TypeKey Profile Page] at August 20, 2009 7:04 PM

The following hissed in response by: Dick E


I would guess you keep up with Hot Air, but just in case, here’s Ed Morrissey’s latest on Medicare Advantage.

The above hissed in response by: Dick E [TypeKey Profile Page] at August 27, 2009 11:42 PM

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