Real Competition Among Health Plans

The flash point of last year’s health care debate was the public option. The proposal, which calls for a government-created health insurer to compete with private insurers, was praised by President Barack Obama and its liberal supporters as a way of “keeping insurance companies honest.” Conservatives criticized it as a slippery slope to a government-run single-payer system.

The public option appeared to be dead when Senate leaders decided not to include it in their health care reform bill. But prominent liberals have recently called for the Senate to add it to the new reform proposal. More than 100 House Democrats, 37 Senate Democrats and major progressive groups like and the Progressive Change Campaign Committee have urged that the public option be added through reconciliation.

The public option now has “a new pulse,” says the liberal website Talking Points Memo.

So far, arguments have been largely theoretical. Or they refer — positively or negatively — to government-run health care systems in foreign countries.

A better comparison, however, might be to a “public option” Washington created in another part of the insurance industry.

Since September 2008, the government has infused billions into an insurer that provides coverage for cars, homes and business assets. Once this insurer got government funding, it began slashing premiums for many of the insurance policies it sells. Its private-sector competitors have cried foul, but new customers keep signing up.

Chances are that most readers have heard of this insurer — just not referred to as a “public option.” Rather, it is known by its initials: AIG.

Though the primary argument for the government to pour more than $180 billion into American International Group’s coffers was to save the financial system from the company’s bad mortgage bets, the infusions have given the company an advantage over its rivals in its daily businesses.

In the months after the bailout, The Wall Street Journal reported, “AIG at times has slashed insurance prices — by more than 30 percent in some cases — to fend off rivals and to keep or win contracts.”

AIG cut premiums by 34 percent, for example, to underbid three other firms and win renewal of a policy with the U.S. Olympic Committee, the Journal reported. It pried away a rival’s contract covering the city-owned airport in Mesa, Ariz., by bidding about 30 percent less. The company assuaged concerns about safety and soundness by pointing directly to the government infusion that, it says, “strengthens [AIG’s] capital positions.”

Rival insurers have complained loudly. So have trade groups like the American Insurance Association. But AIG’s competitors aren’t the only ones concerned.

The Government Accountability Office and the insurance department of Pennsylvania are investigating whether the company has been charging inadequate amounts for the risks involved in its policies since it received bailout money.

In a preliminary report, the GAO said it had not “drawn any final conclusions about how the assistance has impacted the overall competitiveness” of the market but did find that “AIG’s insurance companies have likely received some indirect benefit” from not having the parent company’s credit rating downgraded.

On the liberal website The Huffington Post, Don McNay, a personal finance columnist, decried AIG’s apparent use of its subsidies to distort the insurance market. “Undercutting the market,” he wrote, “is a bigger issue than the $165 million in bonuses. If AIG loses millions, or billions, in the future due to its ‘overly aggressive pricing,’ we are going to be picking up the tab.”

Indeed, liberals often complain about companies that use an advantage to allegedly engage in “predatory pricing,” even if it results in short-term benefits for consumers. They claim that airlines, discount retailers and other businesses that slash prices will drive out smaller competitors.

Though the Supreme Court concluded, in 1986, that “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful,” it is a different story when the government gives one firm a direct subsidy or regulatory advantage.

Yet liberals have abandoned their fears of underpricing driving out competitors when it comes to a public option in health insurance. Another Huffington Post contributor, Sahil Kapur, argued that “if private insurers don’t survive” competition from the government plan, “it’s because they were ripping off customers or operating inefficiently.”

A concern about unfair competition, he declared, “implicitly prioritizes the well-being of providers over consumers.”

Yet everyone eventually loses when the game is rigged through a subsidized insurance competitor — whether it’s AIG or the public option. Private insurers folding or leaving the market for a particular type of insurance means less innovation in pricing and risk prevention, leading to fewer options and higher costs for most consumers.

And if a price war engendered by subsidized competition meant premiums were inadequate to cover risk, the government might be faced with a bigger insurance tab. The quality of coverage could also suffer. Choice, in turn, would be limited even more.

Of course, competition isn’t the end goal of some public option advocates, who most likely see the public option as a way station for a single-payer system like Canada’s. But if that’s the case, why not have an honest debate, as Washington Post economist Robert Samuelson suggests, between single payer and “genuine competition among health plans over price and quality”?

To bring real competition, let customers buy health insurance across state lines and remove provisions of the tax code favoring employer-based health insurance.

But let’s not bring the “too big to fail” model, which proved such a disaster for the financial industry, into our health care system, under the guise of the public option.