Big Insurance Companies Are Sure to Fight Obama's Public Option

  It may not be as exciting as the Thrilla in Manila, but its outcome will have far more impact on the lives of tens of millions of families across the country. The story is straightforward. President Obama had stepped up to challenge the insurance industry in order to reform the health care system in the United States.

    Specifically, he is proposing to create a public health insurance plan, like Medicare, that people would have the option to buy into. Ideally, this would ensure that everyone had a good health insurance option available to them and provide real competition to the existing private plans.

    For the private insurers, competition is the crux of the problem. Insurers don't want to have to compete with a well-run public plan. That's not how they make money. The most effective route for a private insurer to make money is to avoid insuring people who get sick, not by providing good care for those who need it.

    If workers and their employers had the option to buy into a well-run public plan, instead of dealing with the Aetna, Cigna and United Health types, tens of millions would take advantage of this option. In spite of the industry's propaganda, the public sector actually provides health insurance more efficiently than the private sector.

    Medicare's administrative costs are equal to about 2 percent of what it pays out to providers. For private insurers the ratio over expenses to payments is typically over 15 percent. Blue Cross of North Carolina, which was prepared to take the lead in bashing President Obama's plan, boasts that its ratio is now under 20 percent. This compares to an expense to payout ratio of more than 25 percent earlier in the decade.

    It is easy to see why private insurers have such high costs. Their top executives boast paychecks that run into the millions or even tens of millions of dollars. They have large marketing and advertising costs, and don't forget the dividends to shareholders. It is understandable that they would be upset about competing with a public plan that doesn't have these expenses.

    The competition with a public plan would hit insurance industry profits in two ways. First, fewer customers means less profit. If 20 to 30 percent of the industry's customers migrated to a public plan, profits will drop by 20 to 30 percent, other things being equal.

    But, it gets worse. In order to avoid losing even more customers, the private insurers will almost certainly have to lower their profit margins. As a result, they are likely to make less money even on the customers they are able to keep. The net effect could be a 50 percent, 60 percent - possibly even 70 percent - drop in profits. For the folks who profit by not paying for care, you're talking about an economic disaster.

    The insurers are not about to take this threat to their profits quietly. They could lose hundreds of billions in profits over the next decade if they face competition from a robust public plan. They will get Harriet and Louise bulked up on steroids for this one, pushing every crazy scare story in the world. At the same time, they will be making promises (i.e. bribing) and threatening every member of Congress within their reach.

    They will also enlist allies. The axis of evil in this story includes the pharmaceutical industry, the hospital lobby and highly paid medical specialists, all of whom worry that a successful public plan could reduce the size of their trough. As it stands, these providers are able to charge prices that are hugely out of line with what their counterparts receive elsewhere in the world.