Can Health Insurers Whine Louder Than Bankers?

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Dean Baker
Truthout, April 27, 2009

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The Wall Street bankers have impressed the world with their ability to take or borrow trillions of taxpayer dollars and then complain about excessive government intervention into their business. This display of audacity is extraordinary even by the standards of U.S. politics. However, the health insurance industry is gearing up to give the bankers a serious contest for top spot as the biggest whiners on the national stage.

At the moment, they share a common complaint over the Democrats’ plan to leave open the possibility of including student loan and health care reform measures in a budget reconciliation bill. The Democrats are pursuing this maneuver to allow them to pass these measures with a simple majority of both houses of Congress instead of the 60 votes in the Senate needed to overcome a filibuster.

While President Obama and the Democratic Congressional leadership have indicated a desire to negotiate bills that garner Republican support, they are reserving the option to move forward even if the Republicans take a stance of solid opposition, as they have done repeatedly this year. Contrary to the claims of the bankers and the insurers, there is no fundamental principle at stake in this move; the Republicans pursued the same parliamentary procedure to pass President Bush’s tax cuts.

Of course there is real money at stake in both cases. For decades, the banking industry has been making billions of dollars issuing government-guaranteed student loans. This was a sweet deal for the banks because they got to keep the fees they earned issuing the loans, while the government took all the risk in the event that the loans went bad.

In effect, the current system is government-guaranteed profits for private banks: a perfect “free market” in the Wall Street lexicon. President Obama wants to eliminate the extra expense from bringing in private banks and in the process will save students $90 billion in fees over the next decade.

Remarkably the banks have responded to the prospect of losing their subsidized loan business by claiming that it will lead to job loss in banking. That is what happens when you eliminate waste in the private sector, just as eliminating waste in the public sector often means laying off unnecessary workers. In principle, the economy should be able to find productive employment for these workers elsewhere, rather than having their salaries needlessly drive up the cost of student loans.

Of course the waste with health care is a much bigger problem. The most pressing immediate issue is the creation of a public sector plan, similar to Medicare, which would be open to everyone who wants to buy in.

The insurance industry has taken a creative tack to this prospect. They have argued that a public plan would put them out of business because everyone would want to buy into it. This is rather novel because it implies that the insurers don’t think they can compete successfully with the government.

They have some evidence for this view. Private insurers have long had the opportunity to operate within the Medicare system and compete with the traditional government-run program. The overwhelming majority of beneficiaries have always opted for the government program.

This is why the insurers insisted on a system of subsidies in the Medicare Advantage program that was put in place in 2003. Under this system, the government pays a subsidy of more than 11 percent to private insurers for the people who sign up for their plans, costing the government close to $10 billion a year.

Apparently, the private insurers don’t feel they would fare any better on a level playing field in the market for insurance more generally than they have in Medicare. Hence they are arguing against allowing the government-run plan because it would put them out of business.

This is extraordinary. In the old days, we used to think that private businesses could provide many goods and services more efficiently than the government. Now the insurers are complaining that because the government can provide health insurance more efficiently, they should not be forced to compete with a government plan. That ranks pretty high in the Chutzpah category.

The bankers may have a lead at the moment with the hundreds of billions of taxpayer dollars that they have already pocketed, but the health insurers clearly intend to give them serious competition. The race for whiner of the year in 2009 is far from over.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.