Should Advocates of Single-Payer Health Insurance Oppose the Public Option?
	By NEIL H. BUCHANaN
	Thursday, July 30, 2009

As the August recess for Congress looms, much of the political debate in Washington revolves around the failure to pass a health care reform bill before Congress leaves town. The question is whether this failure spells the end of realistic hopes for any serious health care reform this year. If it does, the prevailing theory goes, then the Republicans will have dealt a serious, if not fatal, political blow to President Obama and his Democratic allies in Congress.

All of this tactical discussion, however, ignores the actual substance of the proposals before Congress. Republicans have apparently placed all of their bets on simply stopping any bill from becoming law (or at least on criticizing as "socialist" any plan that does pass), and Democrats often take a take-it-or-leave-it approach, arguing in essence that theirs is not a perfect plan, but it is better than nothing.

One essential part of the Democrats' proposals is the so-called "public option," which involves having the federal government create a health insurance company that would compete with private insurance companies. The idea is to allow those members of the public who would prefer not to work with a private insurer to opt out. Not coincidentally, this option would put pressure on private insurers to be well-behaved enough not to drive their potential customers into the public insurer's arms.

The politics of the public option are also fairly simple. The President and his backers ruled out single-payer health care (along the lines of the systems that have long been used, with notable success, by most of our major trading partners) at the beginning of the process, believing with some justification that proposing such a system could be politically disastrous. In turn, however, the public option has been offered in part as a way to pick up the support of those who wish that we could have a single-payer plan.

Perhaps, it is suggested, if the public option works well, then it will eventually drive out the private insurers who cannot compete. If that occurred, the public option could allow us to evolve into a single-payer plan, rather than forcing ourselves there through a political Big Bang that might well not succeed anyway. On the other hand, if the public option works poorly, then it will fade away, and we can all be happy to know that private insurers can actually provide superior service.

Analyses from political commentators, letters to the editor, and blogs have all accepted this basic calculus. Single-payer is for the very liberal; fully private health insurance is for the very conservative; and the public option is an attempt to co-opt realistic liberals and conservatives into a deal that both might reluctantly accept.

As the details of the Democrats' proposals are being hammered out, however, it is becoming possible that the "sensible center" that is supposedly captured by the public option actually might not be the next best choice. Even for those liberals who would support single-payer health care, it is possible that their second choice should not be private plans with a public option, but rather a version of the Democrats' proposals that would be stripped of the public aspect of such plans.

Before discussing this counter-intuitive possibility, however, it is important to lay out exactly what the Democrats are proposing, in order to more easily see how their plan is supposed to work, and thus identify what would remain if there were no public option.

The Status Quo Is Not Acceptable, But What Is The Alternative?

President Obama's skills as a communicator were once again on display last week during his press conference on health care. He did an excellent job of convincing people that the current system is broken, and that we cannot simply say "no" to any reform effort that comes from Congress.

Too many people are uninsured, more are losing their insurance every day, and still others live in constant fear of becoming uninsured. Even for those who are insured, the American health care system can be a nightmare. Co-pays and deductibles rise inexorably, and billing questions are lost in a maze of bureaucracy.

If, heaven forbid, a medical procedure is not coded correctly for insurance purposes (as happened to me a few years ago), it can take literally months (in my case, 18 months) to clean up the mess. Meanwhile, the delay is accompanied by long waits on customer service lines, letters to doctors and insurers, and the constant temptation, as more and more time is wasted by the patient, just to give up and pay even for unjustified costs.

We all know by now that this adds up to the most expensive health care system on earth, sucking up more than a sixth of the income produced by the U.S. economy each year, a proportion that is twice as high as in some other wealthy countries. Moreover, Americans do not seem to be getting much bang for the buck, as our health care outcomes on too many measures (infant mortality, for example) are much worse than in other countries.

So far, so good (or bad). With the case made that we cannot continue on our current path, too many of us still really do not know what the alternative is. We might be very certain that we are currently in a frying pan that is only getting hotter, but it would still be worse to jump into a fire. So, what do the Democrats propose?

Of course, at this stage of the legislative process, there are various versions of reform on offer from different groups of Democrats in the two houses of Congress. In a recent op-ed in The New York Times, however, Paul Krugman isolated the four key elements common to all of the plans: "regulation, mandates, subsidies and competition."

These basic elements are both straightforward and sensible. Private insurers would be prevented (by regulation) both from denying coverage for those with pre-existing conditions and from dropping clients once they become sick. In order to spread risks and costs as broadly as possible, the Democrats would then mandate that everyone buy health insurance. For those who cannot afford coverage and who do not receive insurance from an employer, the plan would pay subsidies to allow them to buy the required insurance.

The fourth element, competition, comes from the public option. Krugman says that the public option "would help hold down costs" and that all four of these pillars of reform are absolutely essential to the success of health care reform. While the first three -- regulation, mandates, and subsidies -- clearly do work together, it seems at least questionable, however, whether the public option is necessary or even useful.

The Revenge of Single-Payer: What Makes a Public Health Plan Less Expensive?

The belief that a public health insurance plan would be more efficient than private plans, thus holding down administrative costs, is based on two outstanding examples: Medicare, a single-payer option that covers all elderly Americans and that has very low administrative costs; and the single-payer systems in Canada and elsewhere, virtually all of which enjoy very low bureaucratic costs.

If public health insurance is cheaper to administer in those settings, the feeling seems to be that we can take advantage of those efficiencies to discipline private insurers by providing a public option. There are several reasons to be skeptical about this assumption, however.

One of the major costs of private health insurance plans comes from the completely rational desire on the part of any insurer to maximize revenues and minimize costs. This results in, among other problems, the denial of care to clients and potential clients, as described above. Private insurers spend surprisingly large amounts of money employing people whose job it is to figure out ways to refuse to pay for the care of sick people.

This problem, however, is already addressed by the regulations in the Democrats' plans. If those regulations are enforced, they will make it impossible for private insurers to reduce their costs by cherry-picking healthy clients and refusing to pay for those who become sick. The public option is not necessary to make this work.

Drs. Steffie Woolhandler and David Himmelstein, the founders of Physicians for a National Health Program, described in a recent article in The Progressive the other sources of the excessive bureaucracy and costs that are endemic to private health insurers. These include marketing costs (to encourage the customers of, say, Acme Health Insurance to switch to Ajax Health Care), billing and tracking expenses, as well as "fighting with providers over bills" and "lobbying politicians."

From the standpoint of the entire system, moreover, multiple insurers would still be employing duplicative staffs to handle all of these issues, creating coordination problems that would not exist in a single-payer system. Add in the costs from the standpoint of doctor's offices and patients, all of whom will still have to make choices among multiple providers and deal with any overlapping and inconsistent requirements, and we will still have a system that wastes enormous amounts of money -- even if the public option exists and is itself run efficiently.

One might add that the existence of a public option would encourage private insurers to test the limits of the regulations that Congress might impose, since the insurers would know that there is a public plan available to catch the unlucky people who are dropped from private plans on sketchy grounds (or worse). In contrast, the administrators of the public insurance plan would be less likely to push back than private insurers would be, especially since it would be a public relations nightmare for the public health insurance plan to be seen fighting against a private insurer over who can escape paying for a sick person's health care.

Congress also could well be less responsive to any such manipulation by private insurers if it knows that people are not actually losing health care, but are simply being shifted into the public plan. (While it would surely be good that people would be covered rather than lose insurance entirely, the question is whether we can cover people without creating an incentive to dump the most expensive cases into the public system.)

Private insurers, therefore, would find it advantageous to employ people whose job it would be test and expand the limits of the new regulations, further reducing any supposed efficiency advantage from having a public option. The Democrats' proposals could thus fail to provide the savings that we typically see in universal public health insurance plans, beyond any welcome changes that would flow from the Democrat's proposed regulatory rules for private insurers.

The Middle of the Road is Not a Safe Place to Be

Drs. Woolhandler and Himmelstein conclude from their description of the failings of the public/private system being proposed by the Democrats that we should adopt a single-payer plan. They would, therefore, go back to square one and try to force a vote on a much more fundamental reform of the American health care system.

If one accepts political reality, however, and believes that such a vote would only lead to defeat, then the question still remains: Is a partially public plan at least better than none at all -- even if one agrees that single-payer would ideally be the best plan?

In addition to the possibility that a public option would not encourage efficiencies among private insurers, we should also be seriously worried about the possibility that the public health insurance plan would become a poster child for the idea that government-run programs cannot do anything without wasting money. Any success on the part of private insurers in pushing the least attractive patients into the public system will raise the costs of the public plan, making that plan look "bloated and inefficient," as opportunistic politicians would surely be quick to label it.

The Democrats' plan could thus not only fail to rein in costs but could also discredit a universal, public health care plan in the event that the current reforms ultimately fall short. If a single-payer plan is not currently in the cards -- and it almost certainly is not -- then the question is whether to move to the middle of the road or to the other side. Although it is always tempting to default to the idea that compromise is better than capitulation, this might well be a case where half a loaf is worse than none at all.

So long as a fully private plan includes serious and well-enforced regulation, mandates, and subsidies, maybe the best that we can hope for under any plan that includes private insurers is -- surprisingly -- to omit the public option. After all, the goal is to give people affordable, reliable health insurance. And a public option might be neither a necessary nor a wise element in getting to that goal.

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.