Neil H. Buchanan

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

By NEIL H. BUCHANAN


Friday, August 14, 2009

This is Part Two in a two-part series of columns on health care reform and the public option. Part One appeared yesterday, Thursday, August 13. In addition, Professor Buchanan wrote an earlier column discussing the public option on July 30 of this year. – Ed.

In Part One of this series, I discussed the need for reform of the health care system in the United States, a need that nearly everyone recognizes due to the pathologies of our system: high costs, tragic outcomes, and the insecurity that people rightly feel about their medical and financial health. I then summarized the two arguments that are typically offered by advocates of the "public option," which is a nonprofit insurance plan that would compete with private insurers.

The first argument is that other publicly run health care systems, most prominently Medicare in this country, are both efficient and effective while covering nearly everyone in the relevant population of patients. I pointed out that this argument is misplaced, because it is not the nonprofit nature of Medicare alone that makes it work so well. It is the very fact that Medicare has no competition that allows it to focus entirely on providing coverage for medical care rather than engaging in expensive marketing campaigns and immoral patient-shedding strategies.

The second argument in favor of a public option is my initial focus in today's column: whether a public insurer's freedom from having to earn profits and pay dividends would allow it to compete effectively against private insurers and force its competitors to reduce costs and improve care.

As promising as this argument is, it is unfortunately likely that a public insurer would not be able to keep its own costs down. Even if it did, moreover, the political culture in this country would mischaracterize even a successful public program as a costly failure. Furthermore, designing the public insurer to seem less like a "government program" would ultimately not defeat the voices that would try to convince the public that their money is being wasted.

Because of these unfortunate realities, I conclude that the best choice for current reform is to make a concerted effort to design and enforce better rules that would change the behavior of private health insurers.

Reality Strikes Back: Public Scrutiny of Public Expenditures

As I argued in an earlier FindLaw column on healthcare reform, one of the realities facing the public option is that it will not be able to fight back when private insurers try to push expensive, extremely ill patients into publicly-funded care.

Even if Congress adopts strict rules attempting to limit such manipulation, nearly every member of Congress would surely denounce those who are in charge of the public insurance company if the press were to report that the public insurer had tried to refuse treatment to a sympathetic patient. This would be true even if the public insurer were absolutely correct in arguing that a private insurer was wrongly denying care to the patient, and that the remedy should be to make the private insurer do its duty, not for the burden to shift to the public insurer.

The assumption that the costs faced by the public insurer would be equal to those of its private competitors is almost surely, therefore, wishful thinking. More fundamentally, however, even if the public insurer were able to keep its costs on a par with everyone else's costs, the way the finances of public entities are reported and discussed differs crucially from the way private entities report their finances.

Put simply, since public insurers do not seek or report "profits," they tend to be assessed on the basis of their costs alone. Since there is no natural point at which we can say that the public insurer's costs are "low enough," however, there will always be room for opportunistic politicians to complain that the public option is too expensive.

The public insurer, in other words, cannot simply say that it has set its rates at the lowest possible level to cover its costs, because the entire debate will be about whether it should have tried just a little bit harder to get rid of all of that "waste, fraud, and abuse" that we are convinced must be hiding in the costs of every public bureaucracy.

This problem will, moreover, be compounded by the subsidies that people will receive to be able to buy health insurance coverage. These subsidies are an essential part of all of the current reform proposals, because far too many people lack the resources to buy insurance on their own. The presence of these subsidies will mean that it will be possible at all times to point to the public insurer and say that it is not really covering its costs, because some of its revenues are actually merely government funds moved from one pocket to another.

The public insurer will thus be characterized as a drain on the public purse, and therefore as yet further proof that government fails. Calls to cut costs – or to abandon the public option entirely -- will surely follow.

Is There a Way Out? Isolating the Public Insurer's Finances

There might, however, be a way to prevent the political debate from becoming preoccupied with the costs of keeping the public insurance company afloat. One approach would be to create the public insurer not as simply another entry on the general federal budget, but instead as a separate entity, with its own balance sheet and financial rules. This could in theory shield the public insurer from being beaten down at every turn by its failure to meet unachievable cost-savings targets.

Unfortunate, separating the costs and the revenues of the public insurer from the rest of the government would be a matter of form and not substance. Consider, for example, public discussion of the Social Security program. While President Roosevelt carefully set up Social Security so that it would appear to be a separate system, we have seen all too clearly in recent years that politicians quickly point to the "reality" that Social Security is not truly separate from the government. And in fact, it is not.

The argument becomes seemingly impossible to win for the defenders of Social Security. With Social Security having been running huge surpluses for years, we hear that the government is squandering those surpluses by spending them on non-Social Security programs, meaning that we should respect the separateness of the system. With Social Security predicted to begin running annual deficits in about a decade, however, the argument becomes instead that the money that the program has been building up in trust funds is not "real" because those are merely promises on pieces of paper that must be honored by committing tax revenues to finance some Social Security benefits -- an argument that treats the system as just another part of the government. (The point that investments in the stock market are also merely promises on pieces of paper is somehow lost in the shuffle.)

A public insurance company would similarly be held to inconsistent standards, with its finances being treated as separate from the rest of the government's finances when convenient, and as merely part of the budget otherwise. Defenders of the system, like the defenders of Social Security, will not be able to deny that there is an element of truth to those arguments, because the public insurer really will be a part of the government but also will have its own set of books.

For a more direct analogy, consider Medicare itself. For all of its efficiency and effectiveness, it is common political wisdom that the system is going "bankrupt" because the Medicare trust fund (which is neither more nor less real than any trust fund, public or private) is soon to be depleted. When workers' contributions to Medicare were building up the trust fund, of course, this was not taken as evidence that the system was efficient, since it was possible then for critics simply to focus on the system's costs and to ignore the revenues.

Let Private Insurers Be Private – and Make Sure They Obey the Law

The unfortunate reality, therefore, is that a public insurance option would not be safe from political grandstanding even if efforts were made to treat it as a separate entity. Lacking the decades of public support that Social Security and Medicare have built up, it is exceedingly difficult to imagine that the public insurer would be able to overcome political skepticism and enjoy the public's trust.

It thus seems likely that the public insurer would come to be treated more like Medicaid than like Medicare – becoming a neglected, reviled, and under-funded part of the system that might be allowed to survive, but would never provide the robust competition that its supporters imagine it might.

Because of these unpleasant realities, the better option for lawmakers is to craft legislation that would improve the laws and regulations that private health insurers must follow. In addition, it is essential to ensure that those legal requirements will be vigorously enforced. Congress must forbid the denial of coverage for those with pre-existing conditions, prevent insurers from drowning clients (and doctors) in a sea of red tape, and make sure that doctors and hospitals are correctly and adequately reimbursed for keeping their patients healthy.

Making all of that happen is complicated and messy work. Any resulting legislation will necessarily be imperfect. Even so, focusing Congress's attention on these achievable goals is surely better than trying to create a public insurer that will not be able to compete on a level playing field and that will, not coincidentally, become the target of public ridicule for failing to achieve the impossible.


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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