All insurance should be public (and no, I'm not a socialist)

The idea of a public health insurance option is getting kicked around congress right now. I'm strongly in favor of a public option, but I think both sides of the current debate may be missing a crucial point:

Public health insurance must be cheaper than private health insurance, assuming no shenanigans on either option. Of course, any system could be made artificially more expensive than any other, but let's consider the general case where both are somewhat fair.

The reason for this is really pretty clear. If on average, $X is needed to treat everyone who needs medical care, an insurance plan that does not seek to make a profit will charge its members a collective sum of $X + $Y, where Y is the necessary operating costs such as employee salaries, etc. A private insurance company, on the other hand, needs to make a profit. They will necessarily charge $X + $Y + $Z, where Z is raised capital that goes to their shareholders, executives, etc. Of course, so far in the story, this is no different from any other capitalist enterprise. When buying any product, we pay more than its strict manufacturing value because whoever is selling it to us is making a profit.

But there's a reason we like capitalism in cases of most products -- for that Z margin by which we overpay compared to a socialized system, we get things in return. We get research and development of better products and services. We get competition between companies, which further leads to better products. We get, essentially, all of the much-touted benefits of the "profit motive" of capitalism.

And here lies the problem -- we do not get any of that with the private insurance industry, for one very simple reason. Insurance can't get any better because it really only does one thing. It is basically a collective money pool that works to average out risk between individual participants. I may not need an expensive operation at all, but if I do, it would bankrupt me, so I choose to pay a regular, smaller sum of money that won't bankrupt me. The expected value of what I pay should, in a well-calculated insurance plan, be equal to having no insurance at all (not counting the Y or Z costs, above). The reason I, and you too, need insurance, is to minimize the fluctuations of variance which would drive me bankrupt if I happened to get unlucky.

But the point is, there is no research and development. There is no better product. The only product possible in the insurance industry is this collective pool of money. Even the actuarial methods used to calculate risk, as far as I know, are basically worked out. They're not getting any more accurate, and there's no competition between companies for who has the most accurate expected value calculations, where accuracy would, of course, result in cost savings, which in a competitive free market could be passed on to the consumers, thereby working in a healthy capitalistic way. The only people who do not need insurance are people who are so rich that they could pay any unforeseen medical expense out of their own pocket (Bill Gates, say, should really not have any insurance, either public or private, if he wants to save money. A public plan would cost him $X + $Y, and a private plan, $X + $Y + $Z, but by paying out of pocket, his expense would only be $X).

This is where opponents of public health care will bring up the issue of choice. First, we must distinguish between two kinds of choice. There is the kind of choice politicians often rail about on TV -- choice of doctor or treatment. This is, obviously, a completely independent issue from anything discussed above. There is no reason why a public plan should provide any less choice than a private one. In Canada, where I'm from, I can switch doctors and ask for second opinions as much as any American, and if this is an added cost on the system, a public system should still be able to handle it cheaper than a private system -- This is again the X+Y versus the X+Y+Z argument from above, only the extra cost of doctor choice is included in X in both insurance systems.

The more relevant type of choice is choice of coverage. This is the only domain, as far as I can see, where private options may have any advantage over public ones. One person may think that the potential cost of operation A is manageable, and so this person may not want to pay costs $X + $Y for insurance that covers it, when they could avoid the insurance and end up paying just $X should they ever need operation A done. However, that person may still want coverage for operations B, C and D, while other people may think A is not out-of-pocket affordable for them, and want it covered too.

This is tricky territory. I admit that it may be that the profit motivate could be beneficial in providing people a variety of different coverage options. But I still think a public system could offer the same kinds of choices. Just as well as competing companies, you could have a government office that looks at what kinds of coverage options are most in demand, and creates different options with different costs tailored for this purpose.

We can and would want to modify the system further if we get into the issue of social justice -- who should have health insurance -- and away from the preceding strictly economic considerations. In order for health insurance to be meaningfully universal, there would still have to be a basic level of broad coverage out of which members cannot opt out at all -- this is necessary to make the system at all progressive; to have the prototypical Bill Gates shoulder some of the costs of healthcare for the poor who cannot afford to be taxed sufficiently to cover their share of the cost. I don't mean to propose a specific system, and I don't know which system is best, but the main point is that I don't see any inherent reason for why public insurance should not work the best. Perhaps it can work alongside with private options, which can provide for extra-basic choice at slightly greater cost due to the necessary added $Z private profit factor, as above -- if people want the choice and think they can save more money by not paying $X + $Y to be covered for a specific set of procedures, they may be willing to pay more -- $X + $Y + $Z for a smaller set of procedures, while saving money in the end. In other words, the Xs are of different sizes (containing different procedures), which may make up for the Z. Alternatively, if people want more coverage than is offered by the basic plan, a coexisting private plan may offer them greater coverage, if they are willing to pay the extra $Z profit cost.

Of course, everything I've said up until now applies not only to health insurance, but to all other forms of insurance as well. And I think the logic extends naturally there. For exactly the same reasons as the arguments above, car insurance should probably be public, or at least have a public option -- an idea I haven't seen proposed by anyone, really.

The key in all of this, I think, is to get away from the idea that a capitalistic, profit-driven system is automatically best. Ethical and social concerns are crucial, especially in domains like healthcare. But even when these are put aside there may be strictly economic reasons for why a more "socialized" system is better, depending on the exact nature of the product or service at hand. Capitalism should be one of several possible options, the merits and flaws of which ought to be compared to other options before the best is chosen. In the realm of insurance, I do not see what a capitalistic structure buys any of us.