In place of the variety of products that competition would generate, we would be forced "choose" among virtually identical insurance plans. Government would define these plans down to the last detail. Every one would have at least the same "basic" coverage, including physical exams, maternity benefits, well-baby care, alcoholism treatment and mental-health services. Consumers could not buy a cheap, high-deductible catastrophic policy. Every insurance company would have to use an identical government-designed pricing structure. Prices would be the same for sick and healthy.
In this respect, it wouldn't matter whether or not Congress created a "public option," a government insurance plan. In either case, bureaucrats would dictate virtually every aspect of the health-insurance business.
What Obama says in favor of a public option -- as of today, at least -- tells us how little he understands competition. The public option's virtue, he told Smerconish, is that "there wouldn't be a profit motive involved." But as St. Lawrence University economist Steven Horwitz writes in The Freeman magazine, profit is not just a motive. Profit (along with loss) is what enables competition to perform its discovery role:
"Suppose for a moment that we try to take the profit motive out of health care by going to a system in which government pays for and/or directly provides the services. ... (P)ublic-spirited politicians and bureaucrats have replaced profit-seeking firms.
"By what method exactly will the officials know how to allocate resources? By what method will they know how much of what kind of health care people want? And more important, by what method will they know how to produce that health care without wasting resources? ... In markets with good institutions, profit-seeking producers can get answers to these questions by observing prices and their own profits and losses in order to determine which uses of resources are more or less valuable to consumers. ... (P)rofits and prices signal the efficiency (or lack thereof) of resource use and allow producers to learn from those signals."
Profit is the key to competition. Anyone who claims to favor competition but looks down at profit has no idea what he is talking about.
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