The biggest flashpoint in the ongoing debate over the future of the U.S. health system is whether Congress should change the balance of power that now favors the private health insurance industry. Opponents of the idea argue that a public health insurance plan competing with private insurers would lead to inferior health care, harm providers, and drive the multibillion dollar for-profit health plans out of the market. Fears of Armageddon are without merit and inconsistent with reality.

The U.S. has a health care crisis created by the private insurance companies that some are so worried about protecting.  Health care costs are out of control, threatening the viability of American businesses and the hopes of millions of American families. More than 47 million Americans are uninsured, and according to Consumer Reports, as many as 70 million more have insurance that doesn’t really protect them.  In the past six years alone, health insurance premiums have increased by more than 87 percent, rising four times faster than the average American’s wages, according to a Kaiser Family Foundation report.  American families in the lowest income group spend 20 percent of household income on health insurance.  Health care costs are a substantial cause of three of five personal bankruptcies.

The Broken Health Insurance Market

While opponents of a public insurance plan proclaim their fealty to consumer choice and honest competition, any who dare to take the economic temperature of the existing health insurance marketplace would find few markets so clearly lacking in them. Health insurance markets are extraordinarily consolidated at the state and local level, according to the American Medical Association. In 39 states two insurers control at least 50 percent of the market, and in nine states a single firm controls at least 75 percent of the market, the AMA found. In 2007 the group reported that almost 95 percent of more than 300 metropolitan areas are highly concentrated.

What has been the result of this lack of competition?  Rapidly increasing premiums, declining service and escalating profits.  As noted above, health insurance premiums have almost doubled in the past seven years, while the number of uninsured has escalated. Without significant reform, this situation will only worsen:  premiums are expected to rise to nearly a quarter of the median family’s income by 2020

Consumers have suffered while the for-profit insurers have had record profits.    From 2000 to 2007, the 10 largest publicly-traded health insurance companies increased their profits 428 percent, from $2.4 billion to $12.9 billion annually. In addition to profit, the seven largest for-profit insurers boosted their earnings per share by repurchasing $52.4 billion of their own stock from 2003 to 2008—money that could have been spent on improving the health care system or cutting premium rates. These profit margins have come directly out of customers’ pockets in the form of escalating premiums and worsening service. The Congressional Budget Office found that overhead and profit account for 11 percent, on average, of private insurer’s premium revenue.

Moreover, one cannot expect that normal market forces will “correct” the problems in these markets.  In a competitive market, one could expect that entry would occur when dominant firms exercise their market power.  But in health insurance there has been little or no meaningful entry in the past decade into markets that are highly concentrated.  The entry barriers to these markets are substantial:  employers are reluctant to switch plans and information is not transparent making it difficult to compare plan offerings.  The time and cost to switch plans is substantial.  Moreover, dominant insurers make entry all but impossible by locking up providers through most favored nations arrangements or all products clauses that make it difficult for them to facilitate entry by making a more attractive deal with a new entrant.

We cannot hope that antitrust enforcement will correct these problems.  Unfortunately during the Bush Administration there were no federal antitrust or consumer protection actions against health insurers.  None.  During the eight years of regulatory neglect there were almost 400 mergers and the DOJ required only minor restructuring of two mergers.  Certainly there can be efforts to reverse this regulatory neglect in the Obama Administration, but any antitrust action could correct harm in only a single market and would take several years and a substantial dedication of resources.

Moreover, health insurance markets lack the essential elements of a competitive market: choice and transparency.  This is because of the lack of meaningful consumer protection regulation.  The lack of transparency is crucial   Health insurance products are complex and terms are not uniform, making it extremely difficult at best for consumers to meaningfully compare their options. Insurers make special efforts to prevent transparency and information. As Wendell Potter, a former insurance executive, testified before the Senate Commerce Committee, “Insurers make promises they have no intention of keeping, they flout regulations designed to protect consumers, and they make it nearly impossible to understand—or even to obtain—information we need.”

The degree of ongoing harm to consumers is substantial.  In testimony before the Senate Commerce Committee, Consumers’ Union characterized the insurance system as plagued by “a swamp of financial shenanigans”—including a lack of transparency, conflicts of interest, and deceptive practices—and called on regulators and enforcers to step up actions to “prevent egregious consumer ripoffs.” To combat this conduct, State Attorneys General, Insurance Commissioners, and private parties have brought over 50 cases securing potentially over $1 billion in damages and fines since 2000.  Insurers have been found liable or settled charges for a wide variety of fraudulent and deceptive conduct including: utilizing falsified data to calculate reimbursements, refusing to pay for visits to providers erroneously listed as in-network; wrongfully denying claims for sick patients; failing to pay reimbursements in a timely manner; overcharging customers for premiums; refusing to cover emergency treatment; failing to provide notice of rate increases; ignoring customer complaints; and various other similar methods of denying needed care while maximizing profit. There are countless complaints by hospitals and physicians that preapproval provisions prevent them from providing adequate and safe care. 

 This record of countless enforcement actions is all the more remarkable when one considers that self-insured plans – which make up almost half the health insurance industry – are not subject to state regulation and have limited liability in the courts. Even under employer-sponsored plans, insurers regularly employ an arsenal of tools on behalf of employers to deny coverage and shift medical costs to consumers.

No other industry has such a comprehensive record of violating consumer protections. Take the recent scandal involving Ingenix, the UnitedHealth Group Inc. subsidiary that for years ran a database that has been discredited. New York state investigators found that health insurers, including Aetna Inc., Cigna Corp. and WellPoint Inc., contributed to and made use of a system that consistently low-balled reimbursement calculations for out-of-network care by doctors and hospitals. Families paid the difference. A California investigation revealed a common practice in which multiple insurers retroactively canceled policies of patients who developed costly illnesses. The insurers based these many of these decisions on thin allegations that consumers had provided incomplete medical information on their original applications.  

 The Need for a Public Plan

The lack of competition and record of egregious deceptive practices demonstrates the need for a public plan.  A public plan offers the promise of being able to enter these markets currently controlled by monopoly or oligopoly for-profit insurers.  The entry of the public plan, based on a nonprofit model and with greater efficiency and lower costs, will disrupt the cozy life of these dominant insurers.  This will force down premiums in a fashion that antitrust enforcement will never achieve. 

A public plan will be the type of competitive “maverick” in the market that offers the potential to restore competition. Unlike the current for-profit insurers, a public plan does not have the need or incentive to raise and protect its profit margins.  Nor does it have any incentive to flout or manipulate regulations.  Its concerns are not profit, but the public health. 

Moreover, a public plan will set a model of consumer protection compliance, not abuse.  With a public plan, the rival insurers will not be able to compete down the level of consumer protections or engage in collusive practices to harm consumers, such as the Ingenix example.  Rather, the public plan will serve as a model of consumer protection compliance.  The marketplace will then compel rival insurers to meet those standards or face the potential loss of consumers.  As President Obama put it, the check of a public plan would keep health insurers “honest.”

Overall, competition from a public plan would force insurers to respond to market forces, reducing prices and improving consumer protections.  Those who survive the competitive battle will be those with reasonable premiums and superior customer service.  As the Urban Institute puts it, “Incentives for them to innovate in the areas of cost containment and service delivery will be enhanced by the presence of a well-run and effective public plan.” 

The Misplaced Criticism of the Public Plan

Health insurers decry the emergence of the public plan.  That is not surprising.  No competitor likes competition, especially when they are able to exercise market power, avoid regulation, and reap supracompetitive profits.  To counter competition, the opponents suggest that competition with the public plan will ultimately lead to the demise of the private health insurance market.  Their arguments are inconsistent with the economic realities of these markets. 

The public plan opponents argue that Americans normally don’t respond to lack of competition by creating a government-run entity, such as a grocery store or a gas station. But those aren’t oligopoly markets with high entry barriers in which prices and profits have escalated rapidly.  Besides, health care is a different kind of marketplace. As a society we have an obligation to make sure people have access to affordable health care.  Moreover, grocery and gas station businesses are essentially transparent, unlike the health insurance business, whose customers do not know what their premium dollars will get them. The primary goal of for-profit insurance companies is to make money for their shareholders. Because they have successfully shielded their coverage rules and policies from public inspection by labeling them trade secrets, they can use egregious practices to deny coverage with inadequate accountability.  

The opponents also suggest that the public plan will drive its rivals from the market, perhaps through predatory conduct.  This claim is simply inconsistent with the strong position of these powerful dominant health insurers.  The major health for-profit health insurers – United, Aetna, Cigna, Wellpoint, Humana, and others — have tremendous financial reserves.  In addition, as publicly traded companies they can call on the market for even greater financial support.  The nonprofit Blue Cross firms, which dominate dozens of markets, have tremendous financial reserves.   Simply, these firms are not about to be driven from the market by the emergence of a public plan.

Insurance companies complain that the proposed public health insurance plan will have unfair advantages and drive them from the market. These claims bear little relation to market realities. These firms are well-funded, sophisticated, and endowed with tremendous financial and human resources. As a former federal antitrust enforcement official, I know that they complain for the reason every competitor complains when a new rival arises – competitors never like competition.

Opponents of a public plan suggest that a plan will become too powerful and will exercise concentrated buying power that will hurt the quality of care.  Unlike for-profit firms, a public plan has no incentive to cut corners and prevent providers from giving their patients quality evidence-based care, because its ultimate goal is public health, not private profit. Nor does it have any interest in sideswiping regulations and shortchanging consumers.  Free market proponents argue that private health insurers should be lightly regulated to give Americans the best value. We have seen the results of that sort of regulatory neglect in many industries in the past eight years; the harm to all Americans, businesses and the overall economy could not be more profound.

Lawmakers from both sides of the aisle in Congress should recognize that there is no way to achieve meaningful health reform that does not include substantial structural and regulatory changes.  Initiating health care reform in the existing environment will not work without a component, such as a public health insurance plan, that revives genuine competition by offering Americans a meaningful choice and setting benchmarks on costs, service and consumer protection.  Incremental reforms without this essential component will be smothered by dominant health insurers that have decades of experience manipulating the market.

Editor’s Note: For another view on the public option, see this article published earlier this week by Health Affairs.