For the last year, the government health care idea known as “the public option” has been the focus of intense discussion and debate. There has been so much debate, in fact, that the future of the whole idea is far from certain. The public option has been inserted into legislation, taken out, put back in, cut again. Currently the public option is in, so let’s take a look at the idea and see how it works.

The simple summary of the public option is this: The government runs a health insurance company, and citizens can choose to use it or not. This idea sits in the middle of a spectrum of ideas. At one end of the spectrum is a world in which private insurance companies provide all health insurance in the United States. At the other end of the spectrum is a single payer system, where the government provides all health care coverage for everyone in America. The public option is more toward the former end than the latter. With the public option, there is simply one more company in the pool of companies providing health care coverage. That new company happens to be run by the government on behalf of its citizens.

It should be noted that most other developed nations have trended toward a single payer system. Single payer has the potential to dramatically lower health care costs for a nation. It also removes health care coverage from the backs of businesses, lowering the cost of doing business. In the United States there is concern that the single payer idea doesn’t have enough support to pass into law. It might also be economically disruptive in the short term, since it would fundamentally change an industry that makes up 18% of the American economy.

The approach behind the public option is not unusual. For example, the government-run post office competes with private companies like FedEx and UPS to provide letter and package delivery services. At last check, UPS and FedEx were doing fine and competing well against the government-run delivery system. In the same way, there are many public universities created by states and they live in harmony with private universities. This despite the fact that many public universities have significantly lower tuition costs because they receive state subsidies. These two examples demonstrate that public and private companies can coexist in a marketplace.

Why would the government want to set up a health insurance company? The idea is that a government-run system could provide service at a lower cost. This is important because health care costs are rising fast, and they could eventually cause serious problems for the economy. One prediction shows costs nearly doubling by 2040 and consuming 34% of the nation’s GDP. The public option would create competition that could, in theory, compel private insurance companies to lower prices and cover more people.

How might a government-run health insurance company lower costs? First it would eliminate the need to create profit and dividends for shareholders. Second it would be able to do away with multi-million dollar executive salaries. Third, it could probably lower other administrative costs. And it would, through its size, probably negotiate better rates on drugs and services.

Where would the money come from? The stated goal of the public option is to create a system which covers its own costs and is self-sustaining. People choosing the public option would pay premiums like they do to a private insurance company. People unable to afford insurance would receive subsidies from the government, which could be used for either public or private insurance.

Opposition to the public option idea comes on several fronts. Existing private insurance companies express concern that the public option will put them out of business. But as mentioned above, this seems unlikely. Pharmaceutical companies are concerned about the bargaining power of the public option. Some view the public option as a first step toward a single-payer system. It will be interesting to see if these opposing forces can eliminate the public option, or if it survives.

See also:
- the state of health care reform and how we got there
- Healthcare in the U.S. costs $7,290 per person. In Denmark it is $3,362 per person. 95% of Danes are satisfied with their health care – the highest in Europe
- Small businesses are seeing a big increase in insurance premiums, an average of 15%
- BCBS plea to customers on reform hits a nerve