# Will a public option kill private insurance **URL:** \ **Category:** Great Debates\ **Created:** [August 11, 2009, 4:51pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079 "2009-08-11T16:51:12Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Grumman](https://avatars.discourse-cdn.com/v4/letter/g/43a26b/32.png) [@Grumman](https://boards.straightdope.com/u/Grumman)\ **Post date:** [August 11, 2009, 6:34pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/21 "2009-08-11T18:34:47Z")
> [@Squink](#): > > The insured behave otherwise? No. The insured, _in a system where consent is not required_, behave otherwise. > [@](#): > > Regardless, the uninsured would be better off after their transaction if they did not have to subsidize other users who happen to have large companies negotiating rates for them. So? The insurer is not obligated to reduce their margin, even if it would make their service go from a good deal to a great one. Once the customer has bought a service worth $100 for less than $100, they’ve got what they came for. ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [August 11, 2009, 6:35pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/22 "2009-08-11T18:35:14Z")
The government does not have to cheat. The insurance companies will actually have to compete. That is a new concept to them. Looting is their business. What are they afraid of, don’t they always claim the private sector is more efficient? How can the poor government stand a chance. ---
**Author:** ![Rumor\_Watkins](https://avatars.discourse-cdn.com/v4/letter/r/d9b06d/32.png) [@Rumor\_Watkins](https://boards.straightdope.com/u/Rumor_Watkins)\ **Post date:** [August 11, 2009, 6:43pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/23 "2009-08-11T18:43:31Z")
Hopefully. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [August 11, 2009, 6:46pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/24 "2009-08-11T18:46:14Z")
> [@gonzomax](#): > > What are they afraid of, don’t they always claim the private sector is more efficient? How can the poor government stand a chance. If one competitor makes all the rules for - and imposes requirements on - themselves, their competition, their suppliers and their customers, the competition doesn’t stand a chance, regardless of how they compare in efficiency. ---
**Author:** ![Rysto](https://avatars.discourse-cdn.com/v4/letter/r/ecccb3/32.png) [@Rysto](https://boards.straightdope.com/u/Rysto)\ **Post date:** [August 11, 2009, 6:57pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/25 "2009-08-11T18:57:41Z")
> [@Fotheringay-Phipps](#): > > Because whatever the HC providers can’t bill the public plan, they will have to make up by charging more to the private plans (which will in turn make these plans even less competitive than they are now). Bullshit. Economics doesn’t work that way. If the HC providers could make more money by charging private plans more, they’d do it no matter what the public plan does. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [August 11, 2009, 7:03pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/26 "2009-08-11T19:03:10Z")
Not so. Currently they can’t charge more because they would be undercut by other providers who don’t charge more. If all other providers are being hit with the same public plan, then that part goes away. I imagine you understand the general concept of buyers passing along added costs to sellers, and where you’ve erred is in not appreciating that being forced to provide some services at a loss is another form of added cost. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 11, 2009, 8:06pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/27 "2009-08-11T20:06:55Z")
> [@athelas](#): > > As Greg Mankiw [said](http://gregmankiw.blogspot.com/2009/06/whats-point-of-public-option.html):The notion that a public option would compete on a level playing field strikes me as naive. Existing public options don’t do this. The USPS is currently facing massive losses that are picked up by the taxpayer, unlike Fedex or UPS. 11% of K-12 students attend private schools rather than the public option even though the public option is free while private schools have an average tuition of over $8K. The USPS losses are temporary, and caused by the shift in communications from the Internet. I think their volume was down some large amount. Are they any different from private companies also getting hit? As for private schools, how many are in private schools for religious reasons, a market segment the government has taken itself out of? > [@](#): > > Given the inefficiencies that predominate in government and competition already found in the health insurance sector (I read profit only accounts for 3% of health insurance dollars) I see no obvious way the public option could offer a similar service at comparable costs. That is the real guarantee that a public option won’t compete on a level playing field. If it did there is the chance that hardly anyone would use it, which would be deeply embarrassing to the politicians, that have made this a centerpiece of reform. Will anyone be willing to admit that it was a failure and then scrap it? They will have to tilt the field to ensure its success. Compare efficiencies of Medicare vs. private insurance, please. When you look at ways of making a business more competitive, you do not look at profit margins. (3% on this high volume business is pretty darn good, btw.) You look at overhead and areas of fat, and these the private insurers have got in spades. One of the ways you improve efficiency is to reduce the product line to something supportable, and from the Marketplace report it sounds like insurers have a ton of plans, each with different levels of payments, need for approval, and covered conditions. A doctor can have three patients needing the same service, each with the same insurance company, and get three different answers. They are just now getting around to standardizing the forms. For 99% of the cases, it should be possible to get authorization on-line in seconds - not take 15 minutes on the phone, standard. My body shop has a more efficient connection to the insurance company than my doctor does! The one place where there will be a subsidy to a public plan is the subsidy for those who cannot afford insurance. That will build the customer case and improve efficiency. If private companies and people now paying a lot for individual coverage goes to the public plan because covered benefits are designed for the customer, not to maximize profits, too bad for the insurance companies. Do you really believe that they are anywhere near maximally efficient today? ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 11, 2009, 8:13pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/28 "2009-08-11T20:13:03Z")
> [@Grumman](#): > > The difference there is that the uninsured only buy healthcare because they believe the benefits are greater than the costs. Even if they are subsidising other users, they still better off after the transaction. So even for the uninsured, it impossible for the system to be worse than breaking even, because if it was nobody would participate. _That_ is why requiring consent is so important. That is the simplistic classical economics view of the situation. In reality, those who might be able to afford it might not buy insurance because they have an incorrect view of the probability of needing it, like the young person convinced he will never get sick. They also may have a discount rate for the money to be spent now on insurance much higher than is rational, as Thaler has shown in experiments. A person who would have to delay paying a bill (or worse) in order to get insurance to cover a potential future benefit might well make an unwise decision from the strictly rational view. So it is very possible for the uninsured to do worse than breaking even, and it is not from them being stupid or anything other than human. ---
**Author:** ![Rysto](https://avatars.discourse-cdn.com/v4/letter/r/ecccb3/32.png) [@Rysto](https://boards.straightdope.com/u/Rysto)\ **Post date:** [August 11, 2009, 8:25pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/29 "2009-08-11T20:25:53Z")
> [@Fotheringay-Phipps](#): > > I imagine you understand the general concept of buyers passing along added costs to sellers, and where you’ve erred is in not appreciating that being forced to provide some services at a loss is another form of added cost. But that cost is a fixed cost with respect to the services they provide to private plans. It doesn’t matter how much or how little business they get from private plans, their “cost” to serve the public plan remains constant. Producers will only raise their prices when _variable_ costs increase. ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [August 11, 2009, 8:33pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/30 "2009-08-11T20:33:55Z")
> [@Rysto](#): > > Producers will only raise their prices when _variable_ costs increase. That’s not logical or true. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [August 11, 2009, 9:17pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/31 "2009-08-11T21:17:26Z")
Intelligent arguments, but there are pieces missing, pieces I’m not sure can be quantified. First off, are we really getting insurance, or are we getting the feeling of insurance? I’d wager that everybody here knows someone who has been dicked with by their health insurance company. Do they have to do that, to make a profit? Are they compelled by market forces to savage ruthlessness that wears a nice suit? If yes, can it be fixed? If no, why aren’t they in prison? But you can sue! Well, that’s another place I’d like to see some reliable statistics: like, for instance, how many attorneys take cases like that, how often do they win? In America, the law is a profit-geared enterprise, maybe you can afford one lawyer, they’ve got at least ten. As well, they’ve spent years advising our legislators how best to craft laws to foster a healthy and vigorous climate for business. Yes. Your insurers screws you for fifty grand, you gonna risk 200 grand to _maybe_ get it back? And then, of course, there’s the people who cannot afford any health insurance at all. But since nobody else seems to care about them, why should we? ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [August 11, 2009, 9:40pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/32 "2009-08-11T21:40:41Z")
Health care premiums go up 8 percent a year. They have a 3 percent profit margin? They are doing a bang up job. They have been increasing prices far over inflation for many years. They pay their executives like a financial company. They fight their customers and deny coverage they took premiums for. They make 3 percent? No way. Creative accounting strikes again. ---
**Author:** ![DMC](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dmc/32/18049_2.png) [@DMC](https://boards.straightdope.com/u/DMC)\ **Post date:** [August 11, 2009, 9:40pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/33 "2009-08-11T21:40:58Z")
> [@athelas](#): > > Given the inefficiencies that predominate in government and competition already found in the health insurance sector ( **I read profit only accounts for 3% of health insurance dollars** ) I see no obvious way the public option could offer a similar service at comparable costs. You might want to find new sources of reading material. While, as **Voyager** points out, 3% is nothing to sneeze at, it’s actually over 6% for the “[Health Care: Insurance and Managed Care](http://money.cnn.com/magazines/fortune/fortune500/2008/industries/223/index.html)” industry group in 2008. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [August 11, 2009, 9:44pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/34 "2009-08-11T21:44:21Z")
Would it be fair to assume that that figure represents profit after such expenses as are necessary to pay for the very best executive talent available? Those guys are pretty expensive, I understand. ---
**Author:** ![Rysto](https://avatars.discourse-cdn.com/v4/letter/r/ecccb3/32.png) [@Rysto](https://boards.straightdope.com/u/Rysto)\ **Post date:** [August 11, 2009, 10:50pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/35 "2009-08-11T22:50:59Z")
> [@Fotheringay-Phipps](#): > > That’s not logical or true. Look, if you’re going to argue this from an economic perspective, it’d behoove you to actually, you know, understand a thing or two about economics. Look, companies try to maximize their profits. Let’s call P(x) the profit they get from selling x units. P(x) = R(x) - C(x), were R(x) is the revenue they get from selling x units and C(x) is the cost of producing x units. C(x) can be further broken down into variable costs and fixed costs. Variable costs are those which change depending on how many units are produced. Things like the cost of the materials used to product each unit are an example of a variable cost – the more you produce, the more material you need to buy and the higher your costs are. Let’s call variable costs VC(x). Note that variable costs are a function of x, the number of units we product. There’s also fixed costs. Fixed costs do not change no matter how many or few units are produced. An example would be property taxes on a factory. No matter how many units the company produces, the property tax on the building will remain the same. I’ll call fixed costs FC. Note that this is a constant, not a function of x. This leaves us with the profit function P(x) = R(x) - VC(x) - FC Now suppose we have a company that has maximized its profits and is producing x[sub]0[/sub] units. What happens if its fixed costs increase from FC to FC[sub]1[/sub]? Well, it’s profit function is now P[sub]1/sub = R(x) - VC(x) - FC[sub]1[/sub]. To maximize its profits, it needs to find the point where the derivative P’(x) of its profit function is equal to 0 – this is basic calculus. More basic calculus: P[sub]1[/sub]‘(x) = R’(x) - VC’(x) Note that we got to discard FC, because it’s not a function of x. Now, it just so happens that the derivative of its original profit function is identical because of this: P’(x) = R’(x) - VC’(x) Now, remember that the company maximized its profits with x=x[sub]0[/sub]. Therefore: P’(x[sub]0[/sub]) = 0 R’(x[sub]0[/sub]) - VC’(x[sub]0[/sub]) = 0 P[sub]1[/sub]'(x[sub]0[/sub]) = 0 Therefore, despite the increase in fixed costs, x[sub]0[/sub] is still the profit maximizing point. This analysis will be true for all companies in the market, so the supply of the good doesn’t change, and so the market price won’t change either. ---
**Author:** ![tagos](https://avatars.discourse-cdn.com/v4/letter/t/bbe5ce/32.png) [@tagos](https://boards.straightdope.com/u/tagos)\ **Post date:** [August 12, 2009, 9:49am UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/36 "2009-08-12T09:49:26Z")
> [@Squink](#): > > Only if private insurers are unable to compete for customers. > If people still prefer private insurance, that market will survive. It survives in the UK quite happily. They’ll just have to up their performance. ---
**Author:** ![tagos](https://avatars.discourse-cdn.com/v4/letter/t/bbe5ce/32.png) [@tagos](https://boards.straightdope.com/u/tagos)\ **Post date:** [August 12, 2009, 9:51am UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/37 "2009-08-12T09:51:33Z")
> [@Grumman](#): > > As **Fotheringay-Phipps** says, it won’t unless the government cheats. Unfortunately, they’re practically guaranteed to cheat. > > If the government can afford to subsidise its service by forcing taxpayers to contribute to the cost, instead of relying on consenting customers like everyone else, there’s no way that a private business can compete. Yet somehow BUPA struggles on decade after decade in the UK. Anyway - the only goal is to ensure decent health care for all. If the private sector can’t compete then tough. ---
**Author:** ![AHunter3](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/ahunter3/32/368_2.png) [@AHunter3](https://boards.straightdope.com/u/AHunter3)\ **Post date:** [August 12, 2009, 10:00am UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/38 "2009-08-12T10:00:41Z")
> [@DigitalC](#): > > I don’t know whether it will not but if it does i would consider that a huge positive side effect of the health care reform. Yeah, this. Could not happen to a more deserving segment of the business market. ---
**Author:** ![glee](https://avatars.discourse-cdn.com/v4/letter/g/b5a626/32.png) [@glee](https://boards.straightdope.com/u/glee)\ **Post date:** [August 12, 2009, 11:36am UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/39 "2009-08-12T11:36:58Z")
I have no idea why this is being suggested when all the evidence is that UHC and Private Health Care work perfectly well side by side in countries already. For example, here in the UK I get treatment on the National Health system. I (and my employers) have paid for it through taxes. My current employer (a private school) also offers me a Private Health Plan. They pay for it as a staff benefit. (I think I effectively pay something as it counts as a taxable benefit.) If I need standard medical treatment, I go to my local doctor on the National Health. If I want exotic medical treatment or to skip any waiting list or to get a private hospital room, I use my Private Plan. It seems to me that the current US opposition to improving health care is based on fanatical Republicans with no use for evidence. Rather like Creationists. :rolleyes: ---
**Author:** ![Fotheringay-Phipps](https://avatars.discourse-cdn.com/v4/letter/f/d9b06d/32.png) [@Fotheringay-Phipps](https://boards.straightdope.com/u/Fotheringay-Phipps)\ **Post date:** [August 12, 2009, 1:59pm UTC](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079/40 "2009-08-12T13:59:40Z")
> [@Rysto](#): > > Look, if you’re going to argue this from an economic perspective, it’d behoove you to actually, you know, understand a thing or two about economics. Conversely, I would suggest that before you get bogged down in complex math formulas, it might be a good idea to understand what the formulas represent and what the conceptual framework of what you’re doing is. Otherwise you run the risk of having a lot of valid formulas, with all sorts of algebra and calculus, all mathematically correct but measuring the wrong things. See below. > [@](#): > > Look, companies try to maximize their profits. Let’s call P(x) the profit they get from selling x units. P(x) = R(x) - C(x), were R(x) is the revenue they get from selling x units and C(x) is the cost of producing x units. C(x) can be further broken down into variable costs and fixed costs. Variable costs are those which change depending on how many units are produced. Things like the cost of the materials used to product each unit are an example of a variable cost – the more you produce, the more material you need to buy and the higher your costs are. Let’s call variable costs VC(x). Note that variable costs are a function of x, the number of units we product. There’s also fixed costs. Fixed costs do not change no matter how many or few units are produced. An example would be property taxes on a factory. No matter how many units the company produces, the property tax on the building will remain the same. I’ll call fixed costs FC. Note that this is a constant, not a function of x. This leaves us with the profit function P(x) = R(x) - VC(x) - FC > > Now suppose we have a company that has maximized its profits and is producing x[sub]0[/sub] units. What happens if its fixed costs increase from FC to FC[sub]1[/sub]? Well, it’s profit function is now P[sub]1/sub = R(x) - VC(x) - FC[sub]1[/sub]. To maximize its profits, it needs to find the point where the derivative P’(x) of its profit function is equal to 0 – this is basic calculus. More basic calculus: > > P[sub]1[/sub]‘(x) = R’(x) - VC’(x) > > Note that we got to discard FC, because it’s not a function of x. Now, it just so happens that the derivative of its original profit function is identical because of this: > > P’(x) = R’(x) - VC’(x) > > Now, remember that the company maximized its profits with x=x[sub]0[/sub]. Therefore: > > P’(x[sub]0[/sub]) = 0 > R’(x[sub]0[/sub]) - VC’(x[sub]0[/sub]) = 0 > P[sub]1[/sub]'(x[sub]0[/sub]) = 0 > > Therefore, despite the increase in fixed costs, x[sub]0[/sub] is still the profit maximizing point. This analysis will be true for all companies in the market, so the supply of the good doesn’t change, and so the market price won’t change either. This all seems impressive to someone who isn’t paying attention, and you can frequently get away with this because a lot of people’s eyes glaze over when you start whipping around math formulas so they just assume someone capable of writing all that knows what he’s talking about. Here’s your error: Your algebraic formulas represent profit as a function of _the number of units sold_ and they thus are based on other formulas that are derived from the number of units sold (i.e. revenue per unit and variable cost per unit). Thus your calculus is about maximizing profits _as a function of the number of units sold_, IOW the optimum number of units sold in order to maximize profits. What you’ve proved is that the optimum number of units sold in order to maximize profits does not depend on fixed costs, and depends only on variable costs. What you did not show, or even address, is what we happen to be discussing, which is what the impact of an increase in fixed costs on optimum price. None of your formulas have anything to do with the optimum price. I would guess that you’ve made a mistake and been confused by your math rather than deliberately skewed the issue. So I would suggest that you consider the above carefully before replying. But in general, I would note that if something seems intuitively obvious - as does the idea that providers pass along fixed costs to sellers - you need to think long and hard in a more conceptual manner before trying to disprove it with fancy mathematical formulas. [Previous page](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079.md?page=1) [Next page](https://boards.straightdope.com/t/will-a-public-option-kill-private-insurance/506079.md?page=3)