Recently I attented the Tenth Annual Innovation 2009 Conference in California. One of the issues garnering a lot of attention was the notion that the Obama healthcare reform plan could ultimately wind up creating a government-run insurer.

One of the speakers, former Congresswoman Nancy Johnson, indicated a strong belief that a public health plan of this nature would essentially doom innovation in many areas of healthcare. There was a lot of agreement on this from most of the attendees. The prevailing feeling was that the respective track records of Medicare and Medicaid aren’t very encouraging when it comes to driving new ideas and advancing healthcare.

This immediately reminded me of a recent New York Times editorial that supported the development of a new public health plan that would be modeled on Medicare and compete with private insurers. As I experienced at the Innovation Conference, the topic is already stirring debate. I suspect it will be a source of even more vociferous discussion in political circles in the coming months. Unfortunately, either intentionally or out of ignorance, those favoring a government-run plan are missing a key point.

A government-based health insurer modeled after Medicare would possess Medicare’s distinct advantage over private insurance companies – the ability to use the power of the law to set rates of reimbursement to doctors, hospitals and other care providers. Private plans, in contrast, are forced to negotiate these rates. The significance of this disparity was captured in a study by Milliman, Inc., and last December. The study revealed that private plans shouldered a $90 billion annual cost-shift from Medicare and Medicaid. A public plan’s ability to use the legal authority of the federal government to set whatever rates it chooses, as Medicare does, would effectively eliminate any chance private plans have to be competitive. Contrary to what the Times’ editorial states, this would indeed serve as a death knell for private insurers as we know them.

It is important to bear in mind that insurers are required to create and maintain financial surpluses in order to exist. Like banks, they must dedicate these surpluses to reserves for covering major losses. This reserve money is largely dependent upon revenue, which is directly impacted by reimbursement rates. A government-run plan wouldn’t have to maintain a reserve since it could simply tap into tax dollars when the need arises. Removing reserves from the equation in this way could easily result in the healthcare equivalent of the current financial crisis caused by undercapitalized banks, wherein private plans would be forced to match the non-negotiable reimbursement rates of an undercapitalized public entity. This too could ultimately render private plans extinct.

Our healthcare system – and our economy – simply cannot withstand the elimination of private insurance companies. Aside from adding literally millions of people to the ranks of the unemployed, it would remove the very competition that creating a public insurer is intended to generate in the first place. Such competition is a key component of the Obama reform plan.

Additionally, government programs such as Medicare and Medicaid have nowhere near private insurers’ history of innovation in healthcare management and delivery. At best, Medicare and Medicaid wait for good ideas to arise from the private sector and then attempt to implement something similar. We therefore need private plans to pioneer new solutions in order to ensure a robust and prosperous system overall.

As the president’s plan suggests, competition is a great thing – and something most private insurers would welcome. However, the playing field must be level. No entity should have an unfair advantage over the others. Therefore we simply must ensure that any plan will negotiate reimbursement rates with care providers the same way today’s private plans do, and that all plans maintain appropriate reserves. It is crucial that pundits understand this – and all of the other peripheral facts – when debating the highly volatile healthcare issue in public forums.