Public Inroads for Private Sector

WASHINGTON —  To Daniel J. Mitchell, there is hardly an area of government that can’t be improved by competition from the private sector. Education? Let private and public schools compete for kids. Housing? Give poor people vouchers and let landlords compete for them. Social Security? Let workers decide which investment plan will produce the biggest nest egg.

Conservatives like Mitchell, an economist at the Heritage Foundation, a Washington think tank, say the rough-and-tumble of competition will create better services while trimming costs. Now, after pushing their case for decades, advocates of competition are moving forward with rare force into some of the most crucial areas of government.

On Monday, President Bush will sign a bill that, in addition to giving seniors a prescription drug benefit, will allow private health insurance companies to go toe-to-toe with Medicare to enroll seniors and the disabled.

In a likely advance for competition in education, Congress is close to approving the first federally funded school choice program, giving vouchers to 1,700 poor District of Columbia students to use toward tuition at private schools. And the Bush administration has persuaded lawmakers to leave intact new rules to help contractors compete for tens of thousands of jobs now held by federal workers. Final votes on the contracting rules and voucher program are likely this week in the House and next month in the Senate.

Many Democrats and unions have fought changes like these for years, calling them giveaways to business that would undermine government programs. That view carried little weight this year, with Congress and the White House in Republican hands. “We’ve been frustrated in some areas, but we’re also on the offensive,” Mitchell said. “The unions and the left -- they’re like the little Dutch boy trying to stick his finger in the dike, except there are now 10 holes springing in the dike.”

The battle over competition may sound arcane, but it will decide who can provide hundreds of billions of dollars’ worth of government services. It is also a deeply philosophical dispute over the nature of government: How much can the private sector do? Are some jobs -- such as running the nation’s air-traffic system, forecasting dangerous storms and providing health insurance to seniors -- inherently governmental?

“Wherever there is a private-market alternative, it ought to be providing the goods and services, rather than the government,” said Rep. Patrick J. Toomey (R-Pa.), who voted against the Medicare bill because he thought it did not create enough competition to hold the program’s expenses in check. “I don’t think there’s any question that competition tends to create quality products at lower cost. That’s why our economy flourishes.”

Critics say that free market ideals work for many areas of the economy, but not when it comes providing some of the most crucial government services.

Before Medicare, only half of America’s seniors had hospitalization insurance. “Even if you could afford it, no one would sell it to you, because 65-year-olds tend to get sick,” said Robert Kuttner, co-editor of the American Prospect, a liberal magazine. “It was something the market chose not to provide.”

And without free public schools, “half of the families in America could not afford to educate their kids. The result would be a terrible human cost and a loss to the productivity of society.”

In other words, he said, society sometimes wants a service to be available to everyone, while markets only want to serve profitable customers. And that should disqualify them from offering some government services, say Kuttner and others.

In competing with Medicare, insurance companies will find ways to select only healthy seniors, not the sickest, they say. Private schools will “cherry-pick” the most motivated students. The government will be left with the most expensive and difficult cases, and a more difficult time providing universal service. That is a key reason that Democrats say competition from private insurers could undermine Medicare.

Beyond Medicare, school vouchers and more liberal contracting rules for federal jobs, many conservatives want to add private competition to Social Security, a cause that Bush probably would take up in 2005 if he won reelection.

Even when the government invites private companies to compete with its own workers, businesses say they cannot succeed unless the government offers the proper work rules and payments. Those rules are often the subject of heated debate, as they were this fall as Congress considered competition in two areas of government: outsourcing and Medicare.

For years, the Defense Department has invited private firms to bid on work done by federal employees. Two years ago, the Bush administration said it would extend these job competitions to non-policymaking jobs across the government -- about one-quarter of the 1.6 million federal jobs in all.

The administration has also pushed for changes in how the competitions are conducted. Under traditional rules, federal workers are given time to offer their own proposals for working more efficiently, which might involve laying off workers or using new technology. The federal workers’ plans are then compared with bids from outside contractors, and one or the other is chosen.

In May, the White House barred federal workers in many cases from offering their own “most efficient” proposals, saying the process took too long. Unions and some lawmakers protested, but the White House apparently has persuaded Congress to keep the new rules mostly untouched, unions say.

“This administration has set the playing field so slanted toward the contractors that there really isn’t any competition. It’s a giveaway,” said John Gage, president of the American Federation of Government Employees.

The Medicare bill has also sparked a debate over the rules for competition -- as well as a fight over how to view the experience with Medicare health maintenance organizations so far.

Since 1985, a limited number of seniors have been able to join private insurance plans, subsidized by Medicare, that have sprung up in some areas of the country. By 1999, private plans were serving 6.2 million seniors, or 16% of all beneficiaries. Some plans won customers by offering better benefits than Medicare -- prescription drug coverage, for example.

Then companies began abandoning the market. Today, only 4.6 million people, less than 12%, are in Medicare HMOs.

Insurers say the reason for the drop is that the government has underpaid private plans. In Washington state for example, private plans get 94 cents for every dollar given to health-care providers in the traditional Medicare program, said Karen Ignagni, president of head of AAHP-HIAA, an insurance trade group.

But Kuttner and others said the experience showed that private plans overreached when they promised they could offer better benefits and still profit.

“Competition is not a perfect device,” said Paul Light of the Brookings Institution. “The market often fails. It failed for Medicare.”

Mitchell, the Heritage Foundation economist, is among those who say the Medicare bill should control costs by fostering even more competition. In a separate complaint, he faulted the Bush administration for failing to stop Congress from turning air passenger screeners into federal employees after Sept. 11 -- a rare case of private jobs becoming public jobs.

“When you have an idea that you really think will make the world better, and you see people throw up roadblocks, it’s very frustrating,” Mitchell said of competition. “Nonetheless, I’d rather be in my shoes than over at the unions, trying to oppose this tide of history.”