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