One of the ideas being circulated around Washington is a government run health care plan as an alternative to private coverage. Simply put Americans would have the option of keeping their employer based coverage, buying private coverage or enrolling in the government plan, presumably with their employer’s contribution that otherwise goes to the employer plan.
At first glance this sounds fair, after all who can argue with choice and competition. The problem is that this competition is not on a level playing field. If Medicare is any indication of how a government “alternative” plan would operate, the options of enrolling in a government plan may soon be the only plan.
Medicare manages costs by cutting fees and paying health care providers and hospitals considerably below market rates for their services. Currently these providers make up the difference by shifting costs to the private sector. For example, Medicare reimburses hospitals about 12% below market rates (that needed to cover costs).
Now, let’s say the government alternative plan under health care reform does the same thing (to keep it “affordable”). As more costs shift to the private sector, the health benefits offered by employers become more expensive and as the government plan becomes less expensive to the alternatives, more Americans enroll in that plan and the cycle continues until there is only one plan that is “affordable.” Of course, one problem is how the health care providers survive payments that are insufficient to cover costs and there is no place to make up the difference. In addition, once there is no place to shift costs and all of the adverse selection is within a single government plan, costs rise beyond expectation.
Are these really unintended consequences of adding