Neil H. Buchanan

Can the Public Option in Health Care Reform Be Saved? Should It Be?

By NEIL H. BUCHANAN


Thursday, August 13, 2009

This is Part One in a two-part series of columns on health care reform and the public option. Part Two will appear tomorrow, Friday, August 14. – Ed.

The debate over health care reform in the United States has taken some unexpected turns in the last few weeks. President Obama and other Democrats are not only finding themselves on the defensive, but also facing objections to possible changes in the law that no one in the Administration or Congress has actually proposed.

Loud public denunciations of state-mandated euthanasia, the public financing of abortions, and other ideas that equally form no part of current health care reform proposals have at least temporarily consumed the public discourse. As a result, little room has been left for thoughtful consideration of the issues that are actually in play as Congress considers what to include in its final legislation.

This is unfortunate, because there are very serious questions about how to rein in at least the worst abuses of the current system. And these questions must be addressed if we are to have any hope of solving the manifest problems in our health care system.

Among the most important of these problems are the system's costs, which currently consume almost one-fifth of the U.S. economy and continue to rise at a seemingly ever-accelerating rate; its poor health outcomes, including higher death rates for many diseases here than in other wealthy countries; the plight of workers who feel locked into their jobs because they fear changing health insurers; widespread insecurity over whether those who have health insurance will be able to keep it (and whether it will actually cover a person who becomes ill); and, of course, the grave situation of the one citizen out of every six who lacks health insurance entirely.

In the belief that substance must ultimately have its time in the sun, it seems worthwhile to return to perhaps the central issue in the legislative debate: whether to create a "public option," that is, a non-profit insurance plan run by the government that would offer health insurance coverage as one among several plans from which citizens could choose when purchasing health insurance.

As proposed in various pending pieces of legislation, this "option" is just that: an option, and not a requirement. If a person wants to be insured through Aetna or Blue Cross/Blue Shield (and if those plans are offered to her through her employer or in some other way), she can do so. If she would rather be insured by the government's plan, she will also be able to make that choice.

In a recent column here on FindLaw, I offered the counterintuitive argument that those of us whose first choice would be to have the U.S. adopt a single-payer plan – a form of health coverage that would make private insurance unnecessary and obsolete – should not consider the public option to be the next-best choice. Although I discussed several inter-related issues, the central worry expressed in that column was that the public health insurer would too easily become a dumping ground for difficult and expensive patients, notwithstanding legislative efforts to police such manipulation of the system by private insurers.

In this column and in a companion column to be published this Friday, August 14, I will explore whether there is a way to design a public option such that its most promising feature – being a non-profit competitor that could discipline the excesses of for-profit health insurers – could overcome the strong forces that would otherwise tend to undermine the public option.

I conclude, unfortunately, that the degraded state of public debate about government budgets in this country will ultimately doom any efforts to use a public option in a way that could improve the health care system. Instead, I conclude that politicians' (perhaps deliberate) misunderstanding of the mechanics of public finance will cause them to deride the public option, and thus undermine public support for it.

Would a Non-Profit Competitor Discipline For-Profit Insurers?

Advocates of the public option typically invoke two arguments in favor of the idea that the creation of a public insurer will improve matters for patients and taxpayers alike. First, they point out correctly that existing public insurers – especially Medicare and the Veterans Administration – have much lower administrative costs and much better outcomes than private insurers. Second, they point out that an insurer that does not need to pay dividends to shareholders or high salaries to executives must surely be able to put downward pressure on the costs of health care in this country.

With regard to the first point, that Medicare and the VA are efficient and effective, the problem is that the efficiencies that we see in those systems arise directly from the fact that Medicare and the VA are not in competition with private insurers. Medicare need not spend money to market itself to people, because everyone who is eligible for Medicare simply signs up for coverage. The system, furthermore, has no need to employ bureaucrats to fight with other insurers over who should pay for coverage, since there are no other insurers onto which Medicare could dump its most expensive patients.

The error in this argument, therefore, is not factual. It is true that public health care systems in the U.S. and elsewhere have shown themselves to be extremely good at delivering what this country needs. The error is in thinking that simply having a public insurer will deliver those positive outcomes, even when the basic structure of the health insurance system has not otherwise been changed. Medicare itself is not inherently inexpensive because it is public; it is inherently inexpensive because, in essence, it focuses on providing care, rather than fighting with competitors.

The second argument in favor of the public option – the argument that a non-profit alternative will force prices down even from for-profit corporate insurers -- is potentially more persuasive. This argument, after all, does not rest on an assumption that there would be no other insurers. Instead, the very basis of the argument is that if we must have private insurers, then we can at least use the public option to keep their pursuit of profits from bankrupting the health care system (and ultimately, the nation itself).

Consider, however, the basic assumption that underlies this conclusion. A public insurer would have costs and revenues, just as private insurers have costs and revenues. The public insurer would be willing to collect less money in revenues than private insurers would otherwise try to collect, because the public insurer would only be trying to cover its costs and need not worry about shareholders who expect to receive dividends every quarter. The public insurer, therefore, would offer attractive rates to potential customers, and private insurers would be forced to match those rates or suffer the consequences.

This sounds very good. Market discipline might lead to low costs, with the public insurer (perhaps paradoxically, depending on one's degree of cynicism about the government) providing the impetus to reduce costs that is currently missing from the system. Indeed, it is even possible to imagine that, unless private insurers can find a way to lower their other costs below those of the public insurance company, the public option could evolve into a single-payer plan as private insurers opted to leave an increasingly unprofitable market. This could happen, moreover, without any politician ever having to vote for a "government takeover" of the health care system. The market would simply have spoken.

This appealing picture, however, almost certainly will not become reality under a public option. In part, the problem is that a public insurer would have to play by different rules. In addition, however, the way politicians talk about public expenditures is so misleading that it will cause people to think that even an efficient system is a disaster.

In the second part of this column, I will describe the political realities that will force the public insurer to take on higher costs than its private competitors, and I will then describe why a non-profit public entity will be portrayed as a "failure" even if it is in fact highly efficient. Finally, I will describe why creating a public insurer as an entity that is formally separate from the rest of the government will not create the political cover necessary to make the public option succeed. Given those conclusions, the best choice will be to support a fully private system of health insurance but to enact a new system of rigorously enforced rules to protect patients and their doctors.


Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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