JOHN R. LOTT, JR: ObamaCare Will Save Money? Don't Believe a Word of It...

By John R. Lott, Jr.Senior Research Scientist, University of Maryland

President Obama is selling government health insurance to the American people as the way to save money. That government health insurance will merely provide competitionto keep private insurance companies from gouging their customers.



Indeed, Obama even claimed on Monday, in a speech before the American Medical Association, that a government insurance system is essential to holding down medical costs: "if we fail to act, federal spending on Medicaid and Medicare will grow over the coming decades . . . . and impose a vicious choice of either unprecedented tax hikes, overwhelming deficits, or drastic cuts in our federal and state budgets."

There are a couple of problems with Obama's argument. Government is just not known for its cost effectiveness or quality. And the way for government enterprises to survive is with massive taxpayer subsidies and charging customers prices below the firm's actual costs, driving more efficient private firms out of business. These subsidies mean that when government enterprises "win" they do so by driving more efficient private firms out of business.

Milton Friedman was well-known for pointing to a very good rule of thumb in evaluating government enterprises: "on the average anything government does costs twice as much as if it were being done by private enterprise." Whether it is education or the post office, the reason is very simple: When people have their own money at stake they are much more careful in how it is spent.

Despite lower costs, private schools still do a better job. Americans send their kids to private schools despite having to pay taxes for public schools, too. How bad must public schools be if parents are willing to pay private school tuitions even though price for public schools is "zero." Academic evidence consistently shows that children in private schools learn fasterthan those in public ones.

A second problem with government-run firms is that they typically engage in what is called "predatory pricing." Obviously public schools don't charge anything for students attending them, limiting competition from private schools. Also take the post office. The U.S. Postal Service would often increase its first-class mail rate, where it had a monopoly, to raise money to subsidize its overnight delivery service where it faced stiff competition. For example, it raised first-class mail to thirty-three cents in January 1999 and simultaneously reduced the price of domestic overnight express mail from $15.00 to $13.70, even though it was already losing money at the $15.00 rate. The price, which was lowered in response to increasingly successful competition in overnight delivery from FedEx and UPS Overnight, remained below $15.00 for the next seven years. Clearly the Postal Service was not able to drive its competitors out of business with this maneuver, in part because its on-time delivery record and quality was poorer.

The Postal Service lost money on its overnight deliveries despite advantages that FedEx and UPS could only dream of. The Postal Service is exempt from paying state sales, property and income taxes. And it uses some of the most expensive real estate in the country -- rent-free. The competition that Obama advocates between government and private insurance companiesisn't going to be any fairer.

The reality of the situation has begun to enter into the health care discussion. Larry Summers, Obama's chief economic adviser, claimed in April that the government insurance would be so efficient that $700 billion would be saved each yearjust from stopping unnecessary surgeries -- that is almost 30 percent of all heath care costs he claimed were wasted just on unnecessary surgery. He argued that the efficiencies would be so large that government insurance program actually wouldn't cost any money. Yet, on Monday night, even the Democratically controlled Congressional Budget Office acknowledged that the cost of the health care proposals would cost at least $1.6 trillionover 10 years, and it warned that the total could go much higher depending upon what features were added to the program. Even at that cost the program would only cover one-third of the uninsured.

The government has consistently underestimated the costs of government health care programs in the past. The biggest problem with current CBO estimates is that they assume that only "15 million individuals" will give up private insurance to get what the government offers. Others have put the number at almost 120 million-- massively increasingly the cost of the program.

There is also the question of whether there will be any gainin physical healthfor those who are currently uninsured. Being uninsured is not the same thing as not getting health care. The uninsured received health care worth $116 billion in 2008. In addition, 2.3 percent of Americans are both uninsured and very dissatisfied with the quality of the health care that they receive.

Already the Congressional Budget Office is predicting a federal budget deficit of over $9.3 trillion. Just that new debt alone means an extra $103,000 for each of the 90 million tax filers who actually pay taxes. Depending on government to magically find ways to create efficiency will only ensure huge additional expenditures and debt. It can also jeopardize a health care system where 89 percent of Americans are happy with the health care that they receive.

John Lottis a senior research scientist at the University of Maryland and the author of Freedomnomics. John Lott's past pieces for can be found hereand here.