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View related content: Health Care
With the takeover of General Motors, President Obama is test driving how the federal government fares running a public company in the private sector. As work begins in earnest on health reform this week on Capitol Hill, Democrats are hoping to use the same approach by creating a government-run insurance plan to compete against private insurers. Private plans will soon find themselves in the same perilous predicament as Ford Motor Co.: the federal government has stacked the deck against them.
So far Ford has weathered the current financial storm on its own, forgoing any federal assistance. Ford’s longtime rival, GM, will end up taking $50 billion from the federal government and giving it a 70-percent stake of ownership. GM will be the public-plan option of carmakers.
Chrysler has also received billions from the Treasury Department, which will own 8 percent of the company after its arranged marriage to Fiat.
What can GM and Chrysler do with federal ownership and bailout money that Ford cannot? Plenty.
GM and Chrysler have used federal tax dollars to offer better financing options to consumers. GMAC, the consumer lending arm for both companies, has used federal guarantees to lower its borrowing costs. According to a Bloomberg report, Ford paid $107.5 million more than GMAC for every $1 billion it borrowed in recent bond offerings because its debt is not backed by the federal government.
GM and Chrysler are shedding nearly 3,400 dealerships, which will lower production costs, ease bloated inventory and streamline sales outlets. Ford is still trapped by state franchise laws that restrict dealer closings and prohibit this kind of flexibility.
GM will reduce its debt by 75 percent, from $70 billion to approximately $17 billion, while Ford’s long-term debt will remain more than $30 billion.
Ford released a statement, hoping “that the government’s majority ownership of GM will not change the industry’s competitive dynamics and that a level playing field will be maintained.”
Unfortunately, it is too late for Ford to find a level playing field. These lessons should be clearly understood before it is too late for private-sector health care as well; as the playing field for private plans will be far worse if they must compete against the federal government.
The main argument for a government plan is that private insurance is too expensive, and in order to expand coverage, Americans need an affordable alternative. The catch is that in order to be “affordable,” a government plan would have to dramatically under-cut private plans on price. A similar proposal by the left-leaning Commonwealth Fund concluded that premiums would be 30 percent lower than the typical private plan.
Aside from subsidizing affordability, what else could a government plan do that private plans could not?
Would a government plan have to comply with all the regulations private plans currently face? Would it be required to pay federal and state taxes? What about state premium taxes and other assessments? Would a government plan be subject to costly state benefit mandates and network requirements?
Private plans must set aside an enormous amount of capital to ensure solvency, which can often be the equivalent of three months worth of claims. Would a government plan be required to do the same?
Depending on how uneven the playing field is, the Lewin Group estimated that as many as 119 million Americans would drop private coverage and enroll in a government plan.
That is just what many on the left are hoping for. Rep. Jan Schakowsky, D-Ill., proudly said that private insurers “have every reason to be frightened” by a government plan, as it is a “strategy for getting (to a single-payer system), and I believe we will.”
Destroying the private sector in health would replace competition and consumer choice with bureaucratic power and planning. There would be no incentive to improve quality or increase efficiency–but every incentive in the long term to control costs by restricting access and choice.
That’s not the system Americans want. In a recent survey on government-run health care, two-thirds of Americans said they would fix existing problems within the system, like requiring insurance companies to cover pre-existing conditions, rather than create a government-run plan.
The wise approach to lowering costs and expanding coverage is not government competition, but private market competition. Creating a nationwide insurance market where any individual or group can shop for coverage will encourage private plans to create better products, improve services, and lower prices–just as it always does wherever competition thrives.
A government plan would create a playing field where a player is also the umpire. Government should never rig the game in its favor–especially when it comes to something as vital as our health.
Newt Gingrich is a senior fellow at AEI.
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