In my occasional series on health care, I have argued that most of the arguments for a "public option" in the provision of health care either don't withstand scrutiny or are based on questionable assumptions. What doesn't withstand scrutiny is the claim that a public option is needed to "introduce" competition or to keep private insurers "honest" (i.e., an argument that competition among private insurers somehow can't do what competition does in the provision of every other good and service we buy), the assertion that insurer companies (through things like policy rescission) somehow have an ability to avoid their contractual obligations that no other provider of goods and services does, the notion that "profit" is rent and of no value and that administrative costs are irrational and gratuitous expenses that accomplish nothing, and the belief that the state would not ration care. The questionable assumptions are that it is possible for a centralized determination of what is and is not good practice and that such determinations are "better" when made by politicians as opposed to business people.
But, we are told, even if all of this is true, a public option will only be one choice among many. No need to fear it because we can simply ignore it.
That strikes me as unlikely. For it to even have a chance to be true, the public option would have to bear the following characteristics.
It must charge participants the cost of their insurance. You can't simply fund a public option by imposing a tax on employers who don't provide private coverage. If the current proposal for an 8% tax is less than what it costs employers to insure their employees, they will drop coverage. Unless someone other than the taxpayer bears the cost of that, there will be little incentive to do otherwise. Employers don't drop coverage now because it will harm them in the labor market. Unless employees forced into the public option bear the burden of the hidden subsidy (i.e, the government charges you $4000 and undertakes the $10000 obligation that such coverage really costs), the private market will be decimated. Even if the public option turns out to provide inferior service, there will few or no competing private options left.
The public option cannot be allowed to lose money. If its costs exceed its revenues for - or in - any given year, it could not be permitted to ask Congress for money. It would have to go into the private market and borrow money. Indeed, as the President himself has acknowledged, it ought to be required to borrow its startup costs at competitive rates.
The public option cannot be backed by the credit of the federal government. Any law establishing a public option would have to expressly state that under no circumstances will the federal government guarantee the obligations of the public option. If that doesn't happen, we will wind up with something like Fannie or Freddie. It will be able to undercut the private market by borrowing at a preferred rate not based on its own financial capability but by the expectation that the government will bail it out. This type of arrangement, as we have come to see, has moral hazard written all over it. In fact, the mere possibility may be reason enough to oppose a public option since Congress could always "take back" its promise not to back up the public option's obligations. Remember there was no commitment to back up Fannie and Freddie, but everyone assumed it would happen. (And they were right.)
The public option cannot be too big to fail. A corollary of the foregoing is that it must be made clear that the public option will be permitted to fail. In other words, the law cannot create a "right" to enroll in the public option that it is independent of its ability to survive as a going concern, i.e., the law can create a public option; it can't create an individual right that it continue to be available.
Subsidies cannot be gamed in favor of the public option. Any system of reform - heck, my system of reform - would provide subsidies to purchase insurance. They cannot be weighted or designed in a way that makes them more valuable for use in purchasing insurance that approximates the public option.
Regulations cannot make private insurance impossible. A prime example would be guaranteed issue at community rates. If that is not combined with a mandate or an extremely strong incentives to insure, it basically destroys the concept of health insurance. That will run private insurers out of business and, although the public option will also bleed money, it will survive as the only game in town.
If a public option does not have all - and, I suspect, other - features, we don't have a truly competitive system. Off hand, I can't think of any public provision of goods and services in competition with private providers that have been structured i this way, so I am skeptical that ObamaCare will be.
But even if it is, there is a further danger with a public option. Supporters of things like public options and single payer systems like to talk about Medicare. Medicare is a prime example of a monopsonistic player throwing its weight around. It pays whatever it wants whenever it wants and gets away with it because it has a lot of insureds. As a result, it worries little about what it's paying for. Good for Medicare but not as bad for our health care system as it might otherwise be because not everyone is eligible for Medicare and costs can be shifted to other patients. Thus, you subsidize Medicare through your taxes and your insurance premiums and what you pay for health care.
But everyone will be eligible for a public option and it will have more bodies than Medicare. When it throws its weight around, there will be less opportunity for cost shifting but what cost shifting does occur will increase the costs of private plans while lowering the costs of the public option, thus driving patients into the public option. As private plans lose patients to the monopsonistic purchaser, their costs are further increased. This is classic monopolization of a market.
Here's the twist. While the public option operates as a monopsonistic buyer, it will also - as it is successful - operate as a monopolistic provider of insurance. The resulting equilibrium will be a noncompetitive - or much less competitive - one. It will probably mean - as it does in single payer and public dominated plans abroad - less care more evenly distributed. The new equilibrium might be more "fair" but far less effective for those who are sick. This is why I would rather facilitate competitive markets with subsidies for those who can't afford to participate.
Of course, there are other possible scenarios. Opponents of strict enforcement of antitrust laws to avoid the creation of monopolies and oligopolies generally argue that, if the noncompetitive equilibrium is less than optimal, new entrants will come in as long as there are not insurmountable barriers to entry. Thus, even if the public option pushes out private providers, they can come back should the public option not meet the needs of the market. That could be the case here and the pushback against the Canadian system might be seen as an example of that.
The problem is that the high degree of regulation and extensive mandates that seem to be contemplated in ObamaCare are barriers to entry.
The other possibility is that the public option is almost immediately seen as inferior. That's the irony of President Obama's reference to the Post Office. FedEx and UPS survive because the Post Office is so bad that it can survive only with massive federal subsidies. (In fairness, there is probably a certain amount of subsidy to rural areas in play here.) Is Obama suggesting that the public option will that be bad? Not intentionally.
That people are concerned about the possibility of a public option destroying the private sector is, of course, borne out by the statements of candidate Obama and so many others that a public option is how "we get to" single payer. It is difficult to see how what Obama and Tammy Baldwin offered as an argument for this plan are "phony" and "dishonest" "distortions" when noted by its opponents.
I guess someone has "gotten wee-wee'ed up."