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Wall Chair in Corporate Law and Governance
University of Missouri Law School

Thomas A. Lambert is the Wall Chair in Corporate Law and Governance and Professor of Law. Professor Lambert’s scholarship focuses on antitrust, corporate and regulatory matters.

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Will the Public Insurance Plan Be a Predator?

Wall Street Journal columnist Thomas Frank inhabits a simple little world in which private enterprise, in its relentless pursuit of profit (i.e., charging more for something than it’s worth), is consistently a force for evil, and government, populated by wise and benevolent folk who have eschewed riches in favor of public service (see, e.g., Ted Kennedy), is always a force for good. Responding to Mr. Frank’s simple-minded musings is generally like shooting fish in a barrel, so I normally just leave him alone. This week, though, I feel compelled to respond.

In Health Care and the ‘Predator State,’ Mr. Frank expresses dismay that critics of Obamacare would refer to the so-called “public option” as a “predator.” He writes:

What makes government predatory, [these critics] seem[] to believe, is its public-mindedness. Were government to offer health insurance to everybody without the industry’s many devices for excluding risky individuals, some seem to fear, it might be able to offer consumers a price too fair for the profit-minded sector to match.

This is a curious reversal for a movement that ordinarily celebrates Darwinian struggle and the destruction of the weak by the strong. Just think of the conservative caricatures that must be inverted for this argument to work: All those soft liberal bureaucrats? Ferocious man-eaters. The welfare state? Law of the jungle.

And the actuarial-minded hardliners of the insurance biz, the ones who deny your claim or cancel your policy? A gentle but endangered species that needs our nurturing, sort of like panda bears.

Putting aside the second sentence’s nonsensical suggestion that including more high-risk individuals in a risk pool will lower, rather than raise, insurance premiums, the main problem with Mr. Frank’s rant is that he misunderstands what critics of the public option mean when they say the plan would be a “predator.”

In competition law, predation occurs — at least in theory — when a business drives out equally or more efficient rivals by charging a price they are unable to match. The classic example is predatory pricing: the predator lowers its price to a level below its own costs (and thus below the costs of all equally efficient rivals), holds its price at that level until the rivals are driven out of business, and then, freed from competition, charges monopoly prices to recoup its losses during the period of below-cost pricing.

Real-life predation is extremely rare for an obvious reason: most potential predators don’t have deep enough pockets to charge below-cost prices (and thereby incur immediate losses) for long enough to drive their rivals out of business.

Government, of course, doesn’t face this limitation. A government-sponsored enterprise can perpetually lose money without going out of business. A government-sponsored insurance plan would therefore be in a terrific position to engage in predation.

Defenders of the public insurance plan insist that it will be required to stand on its own, so if it charges prices that don’t cover its costs, it will eventually go out of business. But to accept that assurance, one must ignore gobs of history. When has a government-sponsored business ever been allowed to fail? Just look at the Postal Service. Whenever it begins running deficits (as it’s doing now), Congress ponies up money to keep it afloat. It’s not even required to cut back on high-cost services like Saturday delivery and rural outposts. When cost-cutting measures are proposed, entrenched interests lobby Congress for a subsidy. Given that legislative proposals with concentrated benefits and diffused costs almost always pass, such subsidies are routinely approved. The same thing will happen with a public insurance option.

Because there will be constant political pressure to keep the public plan’s prices low and benefits high, and because the plan will not need to break even, the plan will be perfectly poised to predate its private sector rivals. Critics’ claim that a government option will be a predator therefore has nothing to do with whether government or the private sector is a bigger meanie, as Mr. Frank supposes. It has everything to do with the political realities that a government-sponsored insurance plan will have implicit and explicit subsidies that allow it to charge below-cost prices and thereby drive out its equally efficient rivals.

To be fair, Mr. Frank does make one important point: “[G]overnment becomes a ‘predator’ when it adopts the agenda of the private sector, when it comes under the control of business interests.” Yes, all sorts of mischief results when government makes its powers available to private businesses.

Mr. Frank’s plan for avoiding that danger is, in his own words, “incredibly simple.” He offers the following advice as to how Congress should manage its government-sponsored business: “Don’t let insurance industry lobbyists give you advice. Don’t take their money. Just say no.”

Even if one were convinced that the current members of the legislative and executive branches could and would follow this advice, what’s going to happen when new, less noble and enlightened leaders are elected? If we create the government institution today, it will persist even after bad guys (i.e., Bush/Gingrich types) are elected to run it!

I have a simpler solution: Don’t create government-sponsored businesses in the first place. Have we learned nothing from Fannie and Freddie?

Posted in markets, politics