NCPA - National Center for Policy Analysis


July 13, 2009

Virtually all current health care reform plans feature a monopoly health insurance store, operated by federal or state governments, for those who lack employer- or government-sponsored insurance and want to qualify for government subsidies.  Advocates claim these monopoly markets will control costs through their purchasing power and enhance price competition by simplifying comparison shopping, says Regina Herzlinger, the Nancy R. McPherson professor of business administration chair at the Harvard Business School and fellow at the Manhattan Institute.

It's true that retailing innovations can enhance productivity.  The retailing sector is credited for 34 percent of the 1995-1999 surge in U.S. labor productivity and continuing growth through 2002; retailers achieved these results through innovations such as convenient web outlets (eBay, Amazon, Netflix); inexpensive, stylish goods (IKEA, Target); and widening ranges of products that enhanced competition.

But before we get swept away, Herzlinger cautions, let us remember that these health-insurance markets would be monopolies run by government, two characteristics that normally do not enhance consumer welfare.  Previous experience suggests that government-run health insurance markets:

  • Limit choice, through plans with standardized benefits packages.
  • Crowd out employer-sponsored insurance.
  • And limit innovation through price setting.

Competition, says Herzlinger, lowers costs:

  • Switzerland has 84 private-sector insurers, and they've lowered their general and administrative expenses to 5 percent of their total costs.
  • This percentage equal to and likely better than the administrative costs of the monopolistic government Medicare program.

Some contend the American public needs a centralized market offering a limited choice of plans with standardized features because it is essentially too stupid to wend its way through a thicket of insurance plans, says Herzlinger.  But, in the rest of the U.S. economy, Americans have driven down the price and improved the quality of complex purchases such as personal computers and cars:

  • Automobile prices, for example, have inflated by only 35 percent since 1982-1984, while the CPI index more than doubled. 
  • And Americans wend their way through 43,000 items carried by the average food retailer to get what they want.

When it comes to health insurance, the appropriate role of government is to help subsidize those who cannot afford health insurance; to enable transparency so that people can shop intelligently; and to prosecute fraud, abuse, and anti-competitive behavior.  It's not the government's job to run markets, says Herzlinger.

Source: Regina Herzlinger, "Limited Choices: Can You Get What You Need in a Government-Run Health-Insurance Market," National Review, July 9, 2009.


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