Thinking Through the 'Public Option'

A mostly political weblog.
Aug. 19 2009 10:24 PM

Thinking Through the 'Public Option'

Getting to Know the Public Option As It Disappears: Steven Pearlstein argues that the "public option" isn't necessarily a good way to keep down health costs . He notes that, unlike Medicare, "public" insurers would have to bear the costs of collecting premiums, managing care and marketing. Administrative expenses would inevitably be significantly higher than Medicare's 2-3 percent.  Plus, the "public" plans wouldn't necessarily have much market leverage in areas where a single dominant hospital, for example, just has to be in your network.

But Pearlstein is assuming that the purpose of the "public option" is to control costs! What if, as Jacob Hacker and Rhul Rajkumar note , it is also designed to serve as a "crucial backup for those ill served by private plans"? Security, not cost. (Pearlstein asserts that a public option wouldn't be "the long-awaited safety net for the uninsured," but never backs it up with an explanation.)

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And why do I get the disquieting sense that if the Obama administration had needed a strong defense of the "public option," Pearlstein could have written it the other way?

P.S.: Hacker and Rajkumar produced a generous and highly useful set of answers to my questions about the "public option" that they've championed. My initial reactions:

1) H & R note that when it comes to "community rating"--requiring insurers to charge the same rate to sick and ill people--there will likely be a "cat and mouse game" as insurers try to avoid the rules. But when it comes to preventing private insurers from gaming the system by attracting only healthy patients (even if they charge everyone the same rate) H& R rely on the effectiveness of regulation. (I don't see how competition from "public" plans will help out regulators in the latter case . Will a public option discipline private insurers that engage in "cherrypicking"? The availability of a public option seems what is likely to allow private firms to get away with cherrypicking--the victims denied insurance can always get it from the public plan. That also seems likely to decrease the incentive for regulators to prosecute.)

2) Won't sick people flock to the secure public option? H &R say such "adverse selection" will be "modest,"--and that "extreme adverse selection that really jacks up the cost of the public plan" is "unlikely." But nobody knows, right? And H & R's fallback solution to this problem--"risk adjustment," requiring those who enroll healthy customers to pay money to those with less healthy customers--seems like a solution that proves too much, as lawyers likely say. If "risk adjustment" reallly works, won't it solve all problems of private insurer cherrypicking--indeed, virtually all the problems of health insurance? Yet obviously H & R think there will be continuing cherrypicking, if only on a "cat and mouse" level.

3) Why will the public plan "create a strong competitor that pushes plans to focus on controlling costs and improving value"? As Pearlstein notes, the public plan will have to do most of the things private plans now do--in fact, they will probably farm the administration out to private contractors. To the extent the public option cuts costs by aggressively managing care, doesn't that defeat the purpose of having it as a Medicare-like backup that doesn't aggressively manage care? Won't the public plan be more vulnerable than private plans to anti-managed-care lobbying by voters? So the pro-public argument on costs basically amounts to an antitrust argument: competition in some markets is weak, and this will add another competitor. .

4) The public option is a strange hybrid of Medicare and faux-competitor, apparently. It could emphasize security or cost-cutting depending on who is running it. It seems worth a shot. But I'd feel better about the whole private/public combo if some of my conservative friends would explain to me just what it is that private insurers do that makes them worth preserving. The central problem, sketched by David Cutler in his book Your Money or Your Life , is that the free market does not reward insurers who provide excellent care. The market punishes insurers who provide excellent care , because the people who will be most attracted by excellent care are sick people, the very people who will drive insurers into bankruptcy.  If private firms want to make a profit, at least in the indivudal market, the surest way to do it is to think up innovative ways to screw buyers--deny care to those likely to need it, write complicated clauses into policies that allow the insurer to weasel out of paying, etc.. Everyone agrees private insurers do these things. What do they do that's so great that makes up for it? [ Keep out unions?--ed Good point! But Medicare eliminates the private insurance middlemen and doesn't seem, yet, to have forced unionization upon hospitals, etc. Of course Dennis Rivera and the Democrats aren't done with their work yet.]

On H & R's final point, I'm still not convinced that if there is no public plan, and the health insurance market becomes a hell of "unraveling choices, runaway costs, and rampant health insecurity"  that there will be no political will to intervene later (because we've missed our "once in a generation chance"). Why isn't health care politics more like the environmental politics--you make some changes one year, and then if you win an election you make some more changes next year? (For a contrary argument, see my colleague Timothy Noah, who thinks the insurance lobby will be more powerful than ever after a reform mandating that everyone buy their product.)

P.P.S.: Reader D.C. submitted his own thorough set of answers to my public plan questions. Here is his explanation of why he thinks a public plan would attract enough healthy people to avoid a vicious circle in which it attracted the sickest people and had to raise premiums, further deterring the healthy:

[T]here are many ways for the public option to attract healthy workers, including:

-- peace of mind that you won't lose your job, your insurance, or your sanity when you get sick 
-- a much larger pool of doctors to choose from (you get to choose your doctor, as opposed to most HMO's) [ True?-MK ]
-- portability if you move to a different state
-- ease of customer service (yes, it's the government, but compare the status quo)
-- fewer shenanigans trying to deny coverage based on technicalities
-- better preventative coverage [ why?--MK ]
-- coordination with state and local health providers

Seems logical enough, though I can't vouch for D.C.'s credentials. Offering security might not unequivocally raise costs, because security attracts the healthy as well as the sick. Still, if that were the predominant effect, wouldn't private insurers be offering a lot more security than they do know?

At bottom, there clearly still seems to be an uneasy, ongoing tension between a public plan's cost-cutting purpose and it's security-for-those-who-get-sick purpose . Hard to see how it can do 100% of both at the same time. And I still don't think H & R know which of those two forces will win out.

Not that this is a fatal objection--one reason to try would be to find out. Unlike Pearlstein, I wouldn't be troubled if "security" won decisively at the expense of "cost-cutting." ...  8:42 P.M.

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Bob Wright on Colbert Report , discussing Evolution of God . "I don't believe in any of these three religions." Colbert (as Colbert) is not receptive. ... 10:35 P.M.

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Jeff Toobin, wrong again ? 11:03 P.M.

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Thinking Through The Pubic Option: John Edwards is "tired of all the lies" ! ... [ via Gawker ] 11:39 P.M. 

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