Electronic Medical Records

Here’s a great explanation of why President Obama’s proposed public option health plan, or Government HMO (Fannie Med), would cheat competitors and customers and drive private insurers out of the market.

Steve Steckler, Chairman and founder, Infrastructure Management Group (IMG):
When Government Competes, It Usually Cheats: Why A Public Option Is A Very Bad Option for Taxpayers

The debate over a public option in health care has exposed a core public policy issue that until now has been seen only at the local level: what services should be provided directly by the government and its employees versus simply having the government ensure access to those services in the open market. Enlightened conservatives like the late Jack Kemp, who respected the power of free markets but wanted to make sure that low- and moderate- income citizens were empowered to benefit from them, have argued passionately that government has a moral obligation to ensure access to these services but a near-equal obligation to stay out of the service business itself. Kemp—and Al Gore, incidentally—once said government works best when it steers rather than rows, otherwise it tends to become bloated and—when competing with private firms—gluttonous. Indeed, in the few opportunities I had to discuss Kemp’s populist ideas with him, he was quick to cite the painful experiences of local service firms and non-profits in their competition against federally subsidized, book-cooking and rule-bending local governments.

Our various levels of government provide many essential services, from the city planning and law enforcement to safety inspection and professional licensing. These particular types of services are direct expressions of the government’s police power, and so are rightfully and for the most part confined to public providers. A second service category is more discretionary, which means they could be provided by the private market but, for both good and bad reasons, the government has intervened as the monopoly provider. These usually include mass transit, water and sewer services, etc. Rarely—as in almost never—has a government allowed private firms to continue to compete for customers once it has established itself as a provider, and truly never on a level playing field.

For example, private jitney services are forbidden in most US cities, especially in densely-traveled bus corridors (i.e., where the customers are). And as President Obama prepares to push billions of new dollars into intercity high-speed passenger rail, Amtrak is already claiming with legislative justification that it has a monopoly to operate the trains in almost every corridor in which the services are being planned, despite the existence of dozens of US and global companies eager to do so. Solid waste collectors are routinely blocked from offering their services in service areas attended to by a public operator. And then there’s K-12 education, where any family using anything other than government schools must pay twice (once through their property taxes and again through tuition), while the poor are economically prohibited from choosing at all. In fact, many public union teacher contracts allow the sale of surplus school property to almost anyone, such as liquor store operators and shopping mall developers, but not to private school foundations that might build a competing facility. Reduce…

Other barriers are less obvious but equally effective. They amount to cheating, and they have a huge and readily calculable cost to taxpayers. Here’s how they work:

1. Cooked Cost Accounting: For a time in the 1990’s, numerous city governments invited private companies to bid against their public in-house operations to provide services ranging from wastewater treatment to city vehicle maintenance. Unfortunately, the cities usually limited the contracts to 3-5 years, too short to allow private firms to recover the cost of the equipment they’d have to buy or to earn back their other start-up costs. Moreover, when comparing their own service costs to the private option, the government usually left out much of its general overhead and long-term liabilities, such as pensions and equipment replacement, arguing that they would have to carry those costs whether the service was contracted out or not. The private competitors, on the other hand, had no choice but to include these costs in their bid. So they often lost. Once the private competition was wiped out or otherwise deterred, the public operator breathed a big sigh of relief and usually returned to its normal cost escalation or lower service level.

2. Debt and Capital Subsidies: Government debt is subsidized by federal taxpayers; that is, the interest on the government’s debt is generally tax-free, while interest on a private provider’s debt is taxed at combined rates of up to 50 percent. This means that, by comparison, taxpayers pays up to half of the debt service cost of public option vis-a-vis private companies. The result is that public operators can borrow at 3 or 4 percent while private service and infrastructure companies—and health insurers—must raise their capital in private debt and equity markets at normal, much-higher rates. Even worse, the equity component of a private operator’s financing is taxed twice: once at the corporate level (corporate income tax) and then again at the individual shareholder level. Government providers almost never include the enormous taxpayer cost of these subsidies in a public-versus-private comparison.

3. Implicit Service and Revenue Guarantees: There are two main types of public service operating agencies: internal enterprise fund units, such as the Chicago Department of Aviation, and independent public authorities, such as the Port Authority of New York and New Jersey. Bonds issued by or on behalf of internal enterprise funds may or may not have the explicit backing of the participating government; that is, the government has varying hurdles (sometimes none) it must clear to backstop one of its financially underperforming business units. This contrasts somewhat with bonds issued by independent (but still government-owned) public authorities, which are usually prohibited by their covenants from being backstopped by general government revenue. But what governments can almost always do fir their captive operators is to direct customers, and therefore revenue, to its business units. It does so by adding additional communities to its client base (e.g., incorporating smaller suburban jurisdictions into its service area, thus improving its economies of scale) or by driving private providers out of the market, either through regulation or temporary or customer-class marginal cost pricing. It can also use its monopolist oligopolist pricing power to simply raise rates to cover bloated costs.

4. Artificial Scale: The government is almost always the largest provider of public-use services in its region. A private company hoping to provide potable water or other infrastructure alternatives therefore finds itself competing against not just the “natural monopoly” aspects of infrastructure, with miles of existing pipe and connections already in the ground, but against the enormous economies of scale that benefit the government in the first place. It’s the same advantage that a handful of private companies like Wal-Mart and Verizon enjoy because of the relative size of their customer base. It manifests itself in enormous, competition-killing way, including input pricing (e.g., Wal-Mart’s power to squeeze its suppliers) and installed service structure, such as Verizon’s numerous cell towers in its Bell-legacy regions. The US health insurance market has a large number of private providers, but state-by-state regulation has kept many of them confined to their regional customer base. A Fannie Med public option, by contrast, would operate nationally and, as Medicare does in many cases, would surely use its scale to force its will on hospitals, doctors and drugmakers while other insurers pick up the real tab.

5. The Fannie Mae Lesson: Fannie Mae and Freddie Mac were supposed to be stand-alone, corporate-like purchasers of home mortgages (this should be sounding familiar already). The authorizing legislation that created them and the language of their founding charters refer many times to their full operating and financial independence from the government and, by exclusion and more, the absence of taxpayer liability for any possible corporate mishaps. In its subsequent competition with other firms offering the same mortgage bundling services, the feds were never supposed to be able to step in. But that’s exactly what happened in late 2008, to the tune of hundred billions of dollars of taxpayer dollars. You can be absolutely certain that the new managers of any public option—and most of its prospective customers—will remember that comforting golden parachute. And while the Congressional Budget Office can tell you how costly it is to taxpayers, Lehman Brothers can tell you how it is not to have had it.

No doubt President Obama will make promises that the House and House-Senate conference committee’s won’t keep when it comes to the financial independence and honest accounting of the public health insurance option. But even if they don’t explicitly empower a new public entity to cheat as it competes with private insurers, and even if they do offer the usual platitudes about ensuring a level playing field, there are at least five big reasons and many billions of dollars of experience to convince you not to believe a word of it.

Wal-Mart, Intel and several other large employers in 2007 will roll out the Dossia database of medical records for their some 2.5 million employees, an another corporate effort to reduce the rate of increase in health care costs.

While making the information more accessable and, hopefully, more accurate, should improve treatment outcomes, it’s not clear how Dossia will reduce the rate of increase in health care costs as long as employers select health plans for their workers and pay most of the premiums. The auto industry and other employer groups have failed to make much of an impact on health care cost increases, even in their local markets.

I’m skeptical about this effort. The news release is here.