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How the public option works
November 2, 2009
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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
Comments
4 Responses to “How the public option works”
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I like your podcasts and have found many interesting posts here on your blog (just found out how prolifically you post today). You usually do a very good job of explaining really complicated things in a clear and concise way, but I do not believe this podcast/post is up to your usual standards:
* It is a matter of debate/controversy whether the “public option” is in the middle of the spectrum of health care perspectives (all private or all public). Many conservatives argue that the public option is a close precursor to 100% government managed/financed medical care. I think your characterization of it as being in the middle of the spectrum was overly simplified.
* While it is definitely true that a “single payer has the potential to dramatically lower health care costs for a nation,” you neglected to point out that this is most often done through explicit rationing of medical care by government officials. We ration health care in the US now, as must always be done for any finite resource subject to unlimited demand, but we do it through price. If the government restricts the availability of health care (fixing the prices it will pay for services is one way), it has to lead to shortages. That may be desirable for some, but it is poor form not to acknowledge it as a possible outcome. Not having the support to pass a law mandating a single payer system for medical care is the least of the things we should be concerned about.
* I do not believe that FedEx and UPS can compete with the USPS for letter delivery, unless you are counting overnight mail. It is my understanding that the USPS has a constitutional monopoly on letter delivery. You neglected to point out that the USPS is not subsidized by the government and has to charge rates that cover their costs. This is not always the case with government activities that compete with private sector companies. Medical care is subject to considerable government regulation and intervention that is not the case in package delivery so I think package delivery and university education may be overly simplistic comparisons.
* While it is true that those in favor of the public option argue that a government-run system could provide service at a lower cost, you would be hard pressed to find many examples of where a government organization is price competitive with private industry for producing the same thing. The “theory” that a public option would create competition to compel private insurance companies to lower prices and cover more people is speculative at best.
* I think it was an error to refer to simplistic arguments in favor of government-run enterprises like lower executive salaries, not having to make a profit, and having lower administrative costs. My reading has convinced me that most government organizations have much higher administrative costs than private businesses because they lack the discipline of competition to force them to critically examine every extra requirement they levy on themselves and others.
Your final paragraph summed up a few of the alternate views on this topic so that was a good thing. I just do not think your output on this post was up to your usually high standards of clear thinking.
My wife and I enjoyed reading your podcast that simplified the description of the public option. Last night’s vote in the Senate finally gives way to it’s debate to take place in the Senate in the coming days, (weeks, and months…).
As parents looking ahead to the future for our children having to deal with the rising health care costs in our country, we are in strong support of the public option.
However, we do question the subsidy portion:
“People unable to afford insurance would receive subsidies from the government, which could be used for either public or private insurance”
The U.S. Dept of Health & Human Services website states that “Medicaid” is health insurance that helps many people who can’t afford medical care pay for some or all of their medical bills.
Would people in this category be covered (instead) by Medicaid?
Will this subsidy in the public option for this category of people, in a sense, replace Medicaid?
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