Why the public option isn't dispensable.

How to fix health policy.
Aug. 17 2009 7:07 PM

Why the Public Option Isn't Dispensable

Health reform may not work without it.

Click here for a guide to following the health care reform story online.

Kathleen Sebelius.
Health and Human Services Secretary Kathleen Sebelius

Speculation is rife that the White House will cut loose the "public option"—i.e., the creation of a government health-insurance program to compete against private insurers. The signals aren't new; I began worrying about this nearly six months ago. (See "Is Obama Soft on Health Insurance?") The political mainstream seems to be greeting the latest hints from Health and Human Services Secretary Kathleen Sebelius and others with its usual shrug that politics is the art of the possible; to make a deal, all sides may have to give something up. The trouble in this instance is that political pragmatism conflicts with programmatic pragmatism. Without a public option, there's a very real danger that health reform simply won't work. It might even make things worse.

If the public option gets dropped, the likely reason won't be a lack of commitment in the White House so much as a lack of votes in the Senate. A recent count from the liberal blogger Chris Bowers indicates 43 senators are prepared to vote in favor. That's seven votes shy of the necessary 50 (Vice President Joe Biden being the tiebreaker) if we assume health care reform passes as a "reconciliation" bill not subject to filibuster. If the reconciliation route is averted, it's 17 votes shy of a filibuster-proof majority. Nate Silver, the numbers-crunching blogger at FiveThirtyEight, knocks Bowers' public-option count down to 41, in part because it's doubtful that the gravely ill Sen. Edward Kennedy, D-Mass., will live past the Labor Day recess. On the other hand, Kennedy's death might stir some recalcitrant Democrats to honor his legacy by supporting the public option. (It's worth remembering that a Kennedy death, admittedly under more gruesome and tragic circumstances, helped create Medicare and Medicaid back in 1965.)

Why is the public option so vitally important to health reform?

At the broadest possible level, the public option is necessary simply because it's impossible to identify a successful health system anywhere in the world based on a for-profit insurance model. If profit-driven health insurance could be made to work, then surely somebody would have figured it out by now. Paul Krugman, in an Aug. 17 New York Times column, likens health reform to the reforms Switzerland instituted in 1994: "[E]veryone is required to buy insurance, insurers can't discriminate based on medical history or pre-existing conditions, and lower-income citizens get government help in paying for their policies." But there's a significant difference. In Switzerland, private insurers are required to provide basic health coverage on a nonprofit basis. Under Obamacare, private insurers will continue to seek profits, and it's quite possible that the new regulatory restraints imposed on them (take all comers, don't punish the sick with higher premiums, don't seek out fine-print reasons to cancel policies after policyholders get sick, etc.) will inspire them to find ever-more-ingenious ways to avoid payouts. President Obama often says that a public option will help keep the private insurers honest. What he doesn't say, but surely knows, is that private insurers' duties to their shareholders may be irreconcilable with their duties to their customers. Should that prove true, a public option would provide a necessary refuge.

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The president has been demonizing private health insurers lately, but the insurance industry has thus far done little publicly to oppose health reform, for two reasons. The first is that the public option, which insurers fear (perhaps with some justice) would drastically reduce their market shares, may never make it out of the Senate. The second is that the rest of health care reform will probably prove even more profitable to health insurers than the creation of Medicare was to physicians. Under health care reform's "individual mandate," every American will have to purchase health insurance or pay a substantial tax penalty (under the House bill, a 2.5 percent tax on modified adjusted gross income). Under its "employer mandate," all but the smallest businesses will have to offer employees health insurance or pay a substantial tax penalty (under the House bill, 8 percent of payroll). Pause for a moment to consider what these two requirements will mean for the health-insurance industry's bottom line. "The Health Insurers Have Already Won," Business Week proclaimed in an Aug. 6 cover story. Granted, the insurers will have to operate under some new restrictions, but these will probably be far less severe than advertised. According to Business Week, the health insurer United Health has already talked the Senate finance committee down from a 75 percent required average reimbursement level for medical bills to 65 percent.

If, as Business Week predicts, health reform will be a fantastic boon to private health insurers, then those increased profits will make health insurers even more powerful politically than they are today. That, in turn, will make it even harder to create a public option in the future.

How might health reform without a public option make things worse?

To answer this question, it's necessary to explain what health reformers mean when they recite that dreadful Beltway jargon "bending the cost curve." Sometimes they mean that health costs need to stop devouring an ever-expanding share of tax dollars and the economy. That's a very real but somewhat abstract and long-term concern. Sometimes, though, when health reformers discuss the need to check medical inflation, they refer to the more immediate reality that health insurance is rapidly becoming unaffordable to ordinary people. That problem will become significantly more urgent if health reform enacts, as it almost certainly will, an individual mandate. The government risks putting itself in the position of forcing people to buy something they can't afford.

To avert this possibility, health reformers would expand eligibility for Medicaid up to somewhere between 130 percent and 150 percent of the poverty line (currently about $22,000 for a family of four). They would also subsidize health-insurance premiums on a sliding scale for people with incomes up to 400 percent of the poverty line. No family receiving a subsidy would be required to pay more than 12.5 percent of its income on health insurance. (Click here for additional details.) Needless to say, this part of health reform will require exquisite fine-tuning to prevent the legislation from becoming more burden than benefit for the uninsured people it seeks to help. It is also the part least likely to attract significant attention from the press and the public at large, which means it's the part that congressional cost-cutters will be most tempted to chip away at as the bill moves toward final passage.

A public option wouldn't solve this dilemma immediately, especially in the drastically diminished form it has assumed in the bills thus far passed by four congressional committees. (According to one Congressional Budget Office estimate, only 2 million people would participate in the new government health-insurance program.) But at least it would establish a beachhead, making it possible for political pressure to prompt the government to expand eligibility and loosen up restrictions on negotiating price reductions with doctors, hospitals, and drug companies. You can also think of the public option as a pressure valve. Without it, the government's attempt to remake the health sector risks blowing itself to smithereens.

Timothy Noah is a former Slate staffer. His  book about income inequality is The Great Divergence.