The Value of (Not Having) the Public Plan

This guest post was written by Arindrajit Dube, an economist at UC Berkeley Institute for Research on Labor and Employment who is joining the Department of Economics at the University of Massachusetts, Amherst. His work focuses on labor and health economics topics, as well as political economy.

Why have pivotal members of the Congress been reluctant to allow individuals the choice to buy into a public health insurance option? A political-economic reason is that the “bipartisan” group of six senators responds more to the interests of health insurance companies than public opinion, including the median voter. While this is hard to assess directly (although we do know they receive substantial campaign finance from insurance companies), we can however observe the effects of (a somewhat unanticipated) decision they made on those who stand to privately benefit from that decision.

Here is how the share prices of three major insurance companies (Cigna, United Healthcare Group, Aetna) responded on Tuesday, July 28 to the Monday night announcement that the group of six senators is going to eliminate the public option from their version of the health care reform legislation [graph produced using Yahoo Finance]. We have basically an 8-10 percent gain for these companies from the Senate announcement. And as the graph below shows, the S&P 500 index (yellow) was essentially flat. The market caps of these three companies together are around $53 billion, which suggests a $4-5 billion value from the announcement by the group of 6.


Since the change (due to the announcement) in the perceived probability of the public plan being instituted was less than 1 (i.e., it went from a middling number to a small number, as opposed to from a certain yes to a certain no), this is a lower bound estimate of the value to the insurers of protection from public sector competition – whatever the broader societal costs/benefits may be.

To get an estimate of the full value to insurance companies from killing the public option, we can use Intrade prediction markets to infer the unanticipated component of the Senate group of 6 announcement.


It appears that after the group of 6 announcement on July 28, the share price of the Intrade contract, “A federal government run health insurance plan to be approved before midnight ET 31 Dec 2009,” fell from around 45 to around 30, a roughly 15 point drop. This suggests the true value to these insurance companies of not having a public option may be around 6.7 (=1/.15) times the $4-5 billion change due to the announcement, or around $28-35 billion dollars.

One can also use the prediction market more systematically to see how changes in the perceived odds of enactment of a public plan correlate with stock price returns for these three companies. Regression analysis confirms the qualitative findings from the event study analysis above, though the dollar value from protection is found to be more in the range of $10 billion. Below, I use the full set of daily Intrade (prediction market) data, available from June 10 when the contract originated. I also use daily closing stock price data for these three companies to construct “abnormal returns” (i.e., Raw Return – “beta” x S&P500 Return, where the market “beta” is taken from the Google Finance website). I then plot the (market cap weighted) mean “abnormal returns” against changes in the price of the Intrade contract.


The correlation coefficient is -0.33, and the slope of the regression line is -0.21 (standard error of 0.11). This suggests that a 10 percentage point increase in the probability of the public plan passing is associated with a 2 percent drop in the price of in the stocks, and this is statistically significant at the 10 percent confidence level. If we are willing to extrapolate this, it would suggest an $11 billion (0.2 x $53 billion) gain for these companies from warding off a public option.

In summary, both the regression method as well as our event study method using the announcement by the group of 6 suggest large gains to insurance companies by avoiding competition with a public plan.

Originally published at The Baseline Scenario and reproduced here with the author’s permission.