The Public Option

2/24/2013 05:15:00 PM
Yglesias has an interesting post on possible GOP compromises on Obamacare.
Now the GOP can't just turn around and get the deal they could have had four years ago. Four years ago these asks would be on the table in exchange for voting for the bill. Now that the bill has already become law, if Republicans want to accomplish some of these things they need to put concessions on the table. Raising the Medicare eligibility age in exchange for introducing a reasonably strong public option, for example, should have some appeal. And it's well-known that the Obama administration is eager to cut spending in various ways in exchange for higher taxes.
Now, I hadn't considered the possibility that the public option could still be on the table. Back in 2009, I was a strong supporter of the idea of having a government insurance arm compete directly with private insurance. I have since studied insurance markets, and am no longer sure I like the idea.

To be sure, Medicare is much, much cheaper than the average cost of private insurance. And it generally provides as good if not better coverage. A "public option" is basically just a change in the Medicare rules to allow people under 65 to choose to purchase Medicare insurance. So, in principle, a public option should make us all better off. 

But here's the problem: Medicare doesn't price discriminate, but private insurers do. Obamacare severely restricts the ability of private insurers to charge different prices to different people, but doesn't come any where near eliminating price discrimination. What that means is that private insurers won't actually compete with the public option--instead, they will offer high-deductible, low quality plans to healthy people, stealing them away from the public option. We would end up with segmentation of the market, with healthy people on crappy, cheap private plans and unhealthy people forced onto a public plan rendered high-cost due to its increasingly high-risk pool.

The high-risk pool that the public option is likely to attract means that it will be a perpetual public finance problem. At the very least, it will force the public insurers to hike premiums to much higher than private insurers, which Republicans will surely point to as a demonstration of the horrible inefficiency of government. The incentives will be to either make cuts to enforce cuts to public option or to subsidize it, neither of which are desirable outcomes. 

In conclusion, my point is this: Medicare-type programs don't work if we make them optional. The reason is adverse selection. As a result, I think that a better approach to the public option is to 
  1. lower the Medicare eligibility age
  2. help set up private non-profit insurers 
  3. set up online healthcare exchanges where individuals can shop for insurance and easily compare prices
  4. prohibit employers from directly contributing to insurance premiums (ensuring that insurers have to compete for customers on the individual market)
The first proposal is the only good way to expand government-provided health insurance. The only advantage the government has in providing insurance is that it can make it mandatory (thereby eliminating selection issues and bureaucratic/administrative burdens)--the government shouldn't try to offer insurance any other way. Proposals (2) and (3) are explicitly part of the ACA, though congress has recently defunded (2) in the fiscal cliff debates. Sigh. And according to Yglesias at least, the ACA is a stepping stone to the individual health plans envisioned by proposal (4).

And to preempt one criticism I expect to get--no, proposal (4) will not hurt you. Employers will simply pay employees the money they would otherwise spend on healthcare, and insurance companies will stop group-rating their plans, dramatically cutting the costs of individual health plans. So, your take-home pay goes up, the cost of individual health plans goes down, and you get affordable life-long health coverage that your employer(s) can't touch.