Stanford Progressive

Socialism vs. Social Security

By Ross Raffin, published January, 2010


Socialism is one of America’s finest blanket accusations. Recently, socialism has been defined as returning the progres sive income tax to levels just after Reagan’s tax cuts for the wealthy. Now, the term “Socialism” is back to scuttle serious health care reform. The Public Health Insurance Option and the Health Insurance Exchange, two integral parts of Democratic healthcare reform, are miles from Socialist. The economic reasoning behind these institutions is to enhance free market interactions, not to create a single-payer system. The Public Option is no more “expansive” of govern ment than the Social Security Act. Creating universal health insurance in general is no more socialist than refusing to let the unin sured die outside a hospital.

Unlike most suppliers of goods in a free market, insurance companies do not com pete with each other by lowering prices or raising quality. Instead, they compete by excluding anyone who is likely to cost the insurance company money. This “adverse selection” is well known by anyone who has attempted to get an insurance company to pay for healthcare benefits. Thus, a ma jor reform is stopping insurance companies from denying coverage to those with “pre-existing conditions.” This is coupled with individual mandates which stop an inverse form of adverse selection. If there is no indi vidual mandate, the majority of people who sign up for healthcare will be those who are more likely to need it. This pools unneces sary risk on insurers. The individual man date fixes this by making the healthy buy insurance as well, thus lowering the general risk pool while raising overall coverage to over 90% of Americans.

The cost of healthcare reform is largely due to the affordability credits (see glos sary) which are necessary in order for indi vidual mandates to reach those in lower in come levels. The public option itself is paid for by premiums and is not a major source of cost. Neither is setting up the Health In surance Exchange.

The nation-wide Health Insurance Ex change proposed by reform advocates uses market powers to fix some of the inefficien cies that have plagued healthcare. The Ex change creates a market clearinghouse for health insurance plans similar to a stock exchange or farmer’s market. The market transactions for insurance plans are central ized, allowing for better informed citizens to choose among plans. By lowering infor mation asymmetries and allowing consum ers to see their options clearly, the Health Insurance Exchange increases incentives for providers to compete for observable changes in quality and cost. There is also a health commissioner set up to handle com plaints consumers have against insurance companies. In this respect, the commssion er’s analogue in the stock exchange would be the securities and exchange commission. The Exchange is, if anything, the embodi ment of the benefits of selective use of free market powers.

The more controversial proposal is the introduction of a Public Health Insurance Option into the Exchange. However, the Public Option is not a major extension of government power: the current incarna tion of the Public Option is purposefully modeled using powers already vested in the government by the Social Security Act. Among the many choices of insurance pro viders within the Exchange, consumers will be allowed to choose the “Public Option” if they like. Ideally, nobody would choose the government op­tion; private insurance providers would all cut costs to the bone and compete to the point where their plans are rivals. The point of the Public Option is to induce a frenzy of economic competition in order to improve in surance choices.

Several have made the case that because the Public Option will not be aiming to make a profit, making other firms will go out of business. First, this confuses making a “profit” with covering all costs and wages something which the Public Option must also do. In addition, a recent report by the Congressional Budget Office has debunked the claim that the public option would drive private insurers out of the market. The argu ment is on par with saying the postal office will put fed ex and every other private mail company out of business.

The theme behind the “Socialism” ac cusation is that America is redistributing wealth by using government funds to pay for people’s insurance. However, the exact same thing happens when a hospital has to treat someone without insurance. Instead of having the government pay for a basic insurance package which properly places risk, the uninsured heap costs onto public hospitals which are then paid by the gov ernment. It is like chiding the government for buying everyone car insurance when the government currently pays for the damages of car wrecks of the uninsured. The only way to truly divest from “Socialism” would be for public hospitals to refuse any patient without insurance or the ability to pay for expensive surgeries. This, America’s re fusal to let it’s citizens die on the sidewalk, is the “Socialism” which causes pundits to foam at the mouth.


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