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A Real World Example Of A “Public Option” In Insurance

10 September 2009 13 Comments

With the healthcare debate hot right now, I was recently explained a great real world example of a “public option” when it comes to insurance.  It was so interesting that I wanted to pass it on to my readers here.

The Citizens Property Insurance Corp was established in 2002 in Florida to serve the purpose of being a last resort for home owners in Florida who cannot get insurance from private insurers.  Due to hurricanes and other issues, home owners insurance simply was not affordable for many people and therefore, the public non-profit  insurer was created.  Sound familiar?

Today, the Citizens insurance company is the largest insurer in the state.  Also, it is typically the cheapest insurance policy available for people.  This is important to note: it’s the largest and the cheapest.

The Private Market

Because more and more people are moving to Citizens, private insurers have been struggling.  In fact, State Farm recently decided to completely pull out of the home owners insurance business in Florida due to unfavorable business conditions.

Consequence #1: When you have a government sponsored plan that can out-price private competitors, the result is that private competitors in the same market will lose business and possibly go out of business. This has clearly happened in Florida’s home owners insurance market.

Operating at a Loss

Why are public plans or government plans able to out-price the private competition?  It’s simple.  They can operate at a loss.  The losses are either absorbed by tax payer funds or by taxing or enacting fees on the other private insurers.  In our example here, if I own a home owners insurance policy through a private company in Florida, there is a fee detailed on my policy to go towards the Citizens Insurance plan.  So, I pay for Citizens even if I don’t have a Citizens policy!

Note: In Obama’s speech last night, charging private insurers “fees” to offset the cost of the “public option” is a part of Obama’s plan.  This is the same scenario as I’m describing in Florida.

Consequence #2: Not only do the fees get passed on to consumers through private insurance policies, but it also puts these private insurers at a disadvantage because it allows the public option to operate at a loss!

Conclusion

Look, the idea of a government option or public option is not a new idea.  Florida’s Citizens Insurance is a great example of just this.  The problem is that it is not self sustaining, it requires tax dollars and/or fees on private competition.  Because a government plan or program does not have to break even when it comes to revenues and costs, they can operate at a loss (i.e. Amtrak, post office, Fannie, Freddie, GM, etc.) and offer services cheaper than private competition.

When somebody tells you that you will be able to keep your insurance plan under the proposed health care reform, they aren’t telling you that you probably won’t want to because the “public option” will be cheaper.  It will be a natural transition to a single-payer type system… it’s only a matter of time.

Thankfully, Florida has been spared a serious hurricane in recent years, because if one hits, the state will be killed with claims for all the people holding Citizens policies.  If the state’s efficiency of handling simple things such as concealed weapon’s applications is any indication, it will be a giant mess.

The bottom line is that if we have a public option in health insurance, it may only have 5% of Americans on it at first.  Over time, it will become the largest insurer just like Citizens is the largest insurer in Florida.

13 Comments »

  • Kevin said:

    John,

    Thanks for that link. It provides some interesting information but still doesnt address my main point which is that Citizens can operate at a loss by being subsidized by taxes or fees from private insurers. Because of this, private insurers cannot compete effectively.

    I’d love to hear feedback. Thanks.

  • Deadhedge said:

    From what I have read, the fees charged to insurance companies would be for high end or gold plated plans.

    In fact, Obama said that the public option was not a requirement but rather a means to keep insurance rates affordable.

    The way that a public option would be cheaper than a private plan is by paying providers 75%-80% market rates, not paying brokers commission, and not building a network. This is not exactly helpful towards making insurance more affordable or care better. That’s why I’m against the public option since we don’t need another mediocre government plan.

    I suppose indirectly the money charged to high end insurance plans could be used to fund a public option but so could additional taxes. However, in Obama’s speech he backed off a public option so I don’t see how your analogy applies. It seems like a stretch.

  • Kevin said:

    Deadhedge:

    The problem is that who determines “gold plated” plans… as for the Citizens example, my standard home policy includes the fee. definitely not a gold plated plan.

    I’m skeptical.

  • Andrew said:

    As an employed college graduate slaving away at a corporation, I am able to afford health care insurance subsidized by my employer. This is fantastic, since I have one less thing to worry about. That said, I invite people to step out of the circle of their own existence and think about the people that can’t afford health care for a plethora of reasons. For the sake of simplicity let’s say that Obama’s plan slowly becomes a nationalized system and that it becomes mired in inefficiency. The question is, would I be willing to sacrifice great service for decent/adequate service if it meant that the less fortunate could at least receive some form of health care? The answer is yes.

  • Deadhedge said:

    In Baucus’s proposal (which I can only assume Obama referenced), a gold plated plan is defined as one with an $8,000 annual premium has a 35% excise tax paid for by the health insurance company. It’s like an NBA luxury tax.

    That tax goes back to the government and I have seen nothing that states it will be used to fund anything specific.

    To cover that fee, the private insurance company can 1) increase rate for everyone, 2) increase rates for only companies that purchase the $8,000 plan, 3) not sell any plan that costs more than $8,000. There’s no direct connection to the public plan.

  • Qi24 said:

    The reason Citizen is the largest insurer in Florida is because insurers like, State Farm stop insuring in Florida. See this article (http://www.floridatoday.com/article/20090906/NEWS01/909060320/1006) and specifically this part “The onslaught led the state’s largest private insurer, State Farm, to pull out of Florida…”

    And another thing, Citizen attempts to first match you with an outside agent to find you insurance from other companies first and only use Citizens as a last resort ref: https://www.citizensfla.com/policyholder/obtaininsurance.cfm.

    Regarding your Private Market analysis, State Farm is interested in staying in the state if there was a “national catastrophe backup fund”. You know why? Because if you let the private market operate sometimes certain things, say like say INSURANCE is too expensive! Sometimes you have to have a government backed plan (ex. a national catastrophe backup fund) to make it attractive for private insurers operate (guess what that means more taxes).

    Here’s the point State Farm is not pulling out of Florida because it has to compete with Citizens. It is pulling out of Florida because regulators rejected State Farms request for 47% and later 67% rate increase.

    Guess what State Farm might stay if there was a national catastrophe backup fund.

    And finally your pie in the sky “Government bad. Private industry good.” mentality is disheartening. Here’s my real world example I pay 2800 year for insurance in Florida. I pay it to a private company. I haven’t filed one claim and I got hit by three of the those hurricanes in ’04. Guess what that money I’ve been paying for 10 years. Where has it gone? To pay for others that did file claims, to help build a 2nd or 3rd home for a insurance company VP? I don’t know. What I do is that I pay my premium every year in the event that I will need that insurance coverage.

    I am FINE with the big bad government as my insurer. I am fine with sharing the burden of Katrina victims. I am fine supporting our military. I am fine paying for police, fire, libraries and schools. Remember our Government is supposed to be ‘by the people and for the people’. (btw- always good to re-read the Gettysburg Address…http://showcase.netins.net/web/creative/lincoln/speeches/gettysburg.htm)

    You say that the public option is not self sustaining? WHAT ARE YOU TALKING ABOUT??? And the private option is? OK, I’ll type real slooooow. Repeat after me the government taxes me for services. And now… private sector business bill me for services. OK what is the difference? Oh, yes the government has better collectors. 🙂

    I wish you the best and enjoy most of your writings. Good luck with your entrepreneurial pursuits. Remember to evaluate risk/reward ratio.

  • Kevin said:

    Qi24:

    Thanks for your comments. You made several points and I’ll respond to a few.

    My point is why does government regulate what State Farm can charge? They already have Citizens in place to “Keep them honest” with competition right? If State Farm is way above Citizens, nobody is gonna use State Farm.

    With regards to the public option not being self sustaining, IT’S NOT SELF SUSTAINING. an insurance company is self sustaining if the premiums cover their expenses. Citizens’ premiums don’t. They have to charge fees to other insurers and thus they have an advantage in the market.

    My point isn’t necessarily to say Citizens is bad. It’s not. But there are effects of having this public option. Namely, they are able to out compete because they can operate at a loss and take market share from private companies. If you are fine with the government option becoming the largest, then I guess this isn’t bad. Let’s identify what we’re really talking about though when Obama presents a public option for healthcare. Just like Citizens, it will become the largest insurer over time.

    Thanks

  • Kevin said:

    In a similar, but not so similar note, how about the FHA loans for homes these days? They’re requiring 3.5% down and many people are using a government credit to use as that down payment. Looks to me like we’re sowing the seeds of future foreclosures in 2012, etc.

    Government programs have their purpose, but don’t discount their unintended consequences. There always are negative consequences when politically motivated parties make economic decisions.

    The private market isn’t 100% perfect, but I prefer it to politically motivated economics.

  • Kevin said:

    Forgot to mention in the last comment, FHA loans have skyrocketed from 3% to 25% of all mortgages being issued.

    Hopefully, soon, everything we get will be from Uncle Sam!

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  • sales items said:

    I totally agree, but the points can easily be stated in a clearer manner, that’s all I was saying. No prob here bro, I’m not that much of a stickler….