Who is afraid of the Public Option?

It appears from a quick read of the health care reform debate that a lot of people are afraid of the “public option”. In fact it appears the two threads with health care reform that a majority agrees upon are: We need health care reform; we don’t need the “public option”.

So I want to explore the issue by first looking at is there an unmet need, then looking to see how the public option might fit the need and finally evaluating the impact on the competitors and market.

Definition
First let me define the “public option” I am using for this analysis. The “public option” is set of tax payer subsidized insurance plans available to all Americans. The tax payer subsidy is assumed to be means tested on a graduated scale. The insurance plans will not be allowed to turn away any Americans due to their health or financial condition.

Is there an unmet need?
At least 44 million are uninsured. A much larger number could be uninsured if they loose their job or get sick. They are uninsured for a number of reasons but the broad categories of causes are:

• Health insurance is unaffordable
• Health insurance is unavailable due to pre-existing conditions
• Health insurance is considered a discretionary spending and not a chosen priority
  

Could a “public option” meet the need?
An insurance company that must provide health insurance without regard for pre-existing conditions addresses the 2nd problem. A sliding scale tax subsidy in association with a tax deduction could address the affordability. New federal “must carry” regulation – mandating every one buy health insurance – could address the third problem.

So a “public option” could be part of the solution…

…so why the fear and opposition?
There are three primary categories of opposition to the “public option” and they need to be each evaluated carefully:

• It will cost a lot
• Government will screw it up
• It is not the proper role of government

It will cost a lot
This seems to me a perfectly sound argument. If this was cost free then it would most likely already been done. So the argument that needs to be bifurcated into two other arguments:

1. Is the underlying need worth investing in? Should we provide health insurance to all Americans?
2. Could the “public option” be cost effective?

I think the first point is a statement of values and the answer is likely to be different for each person. I believe access to good health care is critical to the pursuit of happiness clause in our constitution and should be viewed as fundamental as the equal opportunity clause.

As to whether the “public option” could be cost effective depends on how we design the system.

Government will screw it up
To some people this is almost a tautology. However we need to dig deeper into the various failure modes that can result in a “screw up” and see if any of them are so tied to the government sponsorship that they cannot be fixed by system design.

Screw up 1: Special interests will capture the system to extract enormous profits
Screw up 2: It will drive out innovation
Screw up 3: Customer service (patient care/insured services) will suffer

The only way I can think of to avoid capture by special interests is to increase the level of competition in the system so that there are a very large number of market participants with very clear regulatory boundaries and low barriers to entry.

In the current situation barriers to entry are very high resulting in health insurance oligopolies in many markets. It does not matter that some of the oligarchs are “not for profits” – they tend to raise prices, reduce innovation and lower levels of service.

Government programs can provide seed capital for innovation (remember the Internet). It again comes down how the system is designed. If the government involvement is oriented towards lowering barriers to entry, protecting consumers, increasing transparency and providing financial support to the people who need it then this could substantially increase the vigor and size of the health care market in the US.

Government incentives could drive a lot of needed innovation into lower cost and preventive therapies instead of the current incentives which are strongly biased toward very high cost/high intensity last ditch life saving interventions.

Customer service will suffer if the Government becomes a monopoly or oligopoly supplier. However if the Government acts an enabler, facilitator and financier (of last resort) for a vibrant health insurance market then we should see the opposite effect. Services for patients, families, providers and businesses should all improve as the various market participants compete for the new $$.

I don’t want to minimize the issue. Government can screw it up. Government has screwed it up in other areas. However history does not have to repeat itself. We can do better than our forefathers.

It is not the proper role of Government
This is again a value judgment. We have seen that market forces along with private charities are not able to step up and meet and clear and present need. It seems to me that this is precisely the role of government to act as a force multiplier to our best intents. To allow us to collectively solve a problem that we can’t solve individually, that is the proper purpose of a government by the people, for the people, of the people.

Impact on current market participants and the market
If the “public option” is defined as a combination of:

• Consumer protection laws – standardized base benefits, portable insurance, elimination of pre-existing condition requirements, elimination of maximums, increased price transparency
• Lower barriers to entry for new market entrants along with base regulation on financial solvency of the insurers
• Means tested sliding scale financial subsidy for health insurance buyers and tax policy support coupled with “must carry” laws.
  

Then:

• Consumers should benefit
• The health insurance market will grow as more consumers become available
• The health status of the US should improve as more people are covered and access appropriate levels of care
• Many current market participants (insurers, physicians, hospitals, etc.) will be able to increase their customer base.
• Some will loose as their oligopolies will be threatened and their competitive moats built using a tangle of regional regulations will be damaged.

However there are many other kinds of “public options” that don’t have these characteristics and could result in much different outcomes. So if you see a “public option” that is not like this perhaps you should be afraid.