Robert Reich's Flawed Analysis of Public Healthcare

Robert Reich, former Clinton labor secretary and liberal economics professor, now at UC Berkeley, wrote an extensive defensive of a governmental healthcare option in yesterday's Wall Street Journal entitled "Why We Need a Public Health-Care Plan."

My overall reaction to Reich's poorly-reasoned argument is that, if this is an example of his thinking, I can't understand how he managed to receive an academic appointment, let alone a PhD in his field. His logic is flawed and his reasoning is sloppy.

Essentially, the error Reich commits is to assess the impact of a public health option in the future as if vibrant, profitable private healthcare options were still available, which therefore would be carrying much of the burden of the true cost of healthcare not paid by that same public option.

For example, Reich wrote,

"But before we even get to this point, it's important to recognize that those terrifying CBO cost projections significantly overstate the costs. They did not include potential cost savings from the lynchpin of health-care cost containment: a so-called public option that would give people who don't get health care from their employer the choice of a public insurance plan. Why? For the simple reason that the Senate committees hadn't yet agreed on a public option. Yet without a public option, the other parties that comprise America's non-system of health care -- private insurers, doctors, hospitals, drug companies, and medical suppliers -- have little or no incentive to supply high-quality care at a lower cost than they do now."

Reich's final statement in this passage is simply untrue, and displays his ignorance of how business, as opposed to economics, actually works. Implicit in Reich's statement is an accusation of illegal oligopolistic behavior by private healthcare providers. Even without a public option, each healthcare insurer/provider has a motivation to supply lower-cost care in order to secure a larger market share and, thus, enjoy economies of scale and higher profits for shareholders. With each provider attempting to do this, they all have to keep up with each other in competing for healthcare dollars.

Of course, allowing cross-state-line competition would make this motivation even stronger.

Reich later wrote,

"Critics say the public option is really a Trojan horse for a government takeover of all of health insurance. But nothing could be further from the truth. It's an option. No one has to choose it. Individuals and families will merely be invited to compare costs and outcomes. Presumably they will choose the public plan only if it offers them and their families the best deal -- more and better health care for less."

This is highly disingenuous of Reich. He ignores, or fails to understand, that practitioners of medicine, and drug manufacturers, can only give special discounts to the federal government's "public option" so long as they can make up the profits on the private healthcare plans.

In effect, Reich fails completely to realize that subsidization will occur, in part, as a result of government's coercive behavior with providers of medicine and medical care.

Ask yourself this question. If the government did not, itself, provide a 'public option,' but, instead, issued limited-purpose, government back debt specifically to fund a standalone, independent provider of the 'public option,' licensed to do so by the government, but without coercive legislation or other actions, how many pharmaceutical companies, doctors and hospitals would cut special deals with this firm?

Wouldn't that new 'public option' firm's attraction for healthcare deliverers be its potential market share? Why would it have any competitive advantage over existing private firms, other than government coercion?

Reich continues his misleading and wrong-headed reasoning in the following passages,

"But, say the critics, the public plan starts off with an unfair advantage because it's likely to have lower administrative costs. That may be true -- Medicare's administrative costs per enrollee are a small fraction of typical private insurance costs -- but here again, why exactly is this unfair? Isn't one of the goals of health-care cost containment to lower administrative costs? If the public option pushes private plans to trim their bureaucracies and become more efficient, that's fine.

Critics complain that a public plan has an inherent advantage over private plans because the public won't have to show profits. But plenty of private plans are already not-for-profit. And if nonprofit plans can offer high-quality health care more cheaply than for-profit plans, why should for-profit plans be coddled? The public plan would merely force profit-making private plans to take whatever steps were necessary to become more competitive. Once again, that's a plus.

Critics charge that the public plan will be subsidized by the government. Here they have their facts wrong. Under every plan that's being discussed on Capitol Hill, subsidies go to individuals and families who need them in order to afford health care, not to a public plan. Individuals and families use the subsidies to shop for the best care they can find. They're free to choose the public plan, but that's only one option. They could take their subsidy and buy a private plan just as easily. Legislation should also make crystal clear that the public plan, for its part, may not dip into general revenues to cover its costs. It must pay for itself. And any government entity that oversees the health-insurance pool or acts as referee in setting ground rules for all plans must not favor the public plan."

This last paragraph is Reich's most egregious error of logic. He points to a sort of portable voucher which he hypothesizes being given to each consumer, with which to purchase healthcare. But he simply omits, and denies the potential for the 'public option' program to additionally run at a loss, charging below-market prices in order to gain share. Were it a standalone firm, the 'public option' purveyor would be charged with anti-competitive pricing behavior. In anti-trust law, it's called "predatory pricing."

The legislation to which Reich refers is hypothetical, and, in the event, will never have real force. The phrase "it must pay for itself" is laughable, and simply reveals Reich, even with his Washington experience, to be hopelessly naive about how the healthcare plan which he champions will really work.

Honestly, if the terms on which Reich insists a public option were actually used, and enforced, there wouldn't be a problem, because the effort would fail miserably. However, you can be sure that none of Reich's provisos will be included in Congressional legislation or, if included, will not be enforced.

Just consider what a mess Congress made of the mortgage markets by failing to oversee Fannie and Freddie. Thanks to Congress, both parties, by the way, private mortgage conduits were elbowed out of business by GSEs which ran amok and ruined a big chunk of our financial system.

Do you want the same type of results in the healthcare sector?

Reich makes another statement near the end of his editorial,

"As a practical matter, the choice people make between private plans and a public one is likely to function as a check on both. Such competition will encourage private plans to do better -- offering more value at less cost. At the same time, it will encourage the public plan to be as flexible as possible. In this way, private and public plans will offer one another benchmarks of what's possible and desirable."

Again, he's off in academic economic dreamland. This is not what will occur.

Instead, a heavily and stealthily-subsidized federal 'public option' will drive private healthcare insurers out of business by underpricing care and risk. When employers realize that they can more cheaply fund their healthcare benefits by buying the public option, private plans will disappear.

Reich simply ignores that almost all US consumers are covered by third-party payer plans, and, thus, don't even make their own decision about who provides their healthcare insurance.

Why did the Journal even print this naive blather? Perhaps to embarrass and reveal Reich for the misinformed, lazy analyst that he obviously is?