Public Health Insurance, Opt-Out, and Trojan Horses

In all of the excitement about Harry Reid’s inclusion of an opt-out public option in the Senate version of the health care reform bill, one question has been somewhat submerged: “Opt out of WHAT exactly?”

What the public option actually would provide to states that DIDN’T opt out has been left pretty much to the imagination of each person. But the fact is that there are some concrete details to be worked out that will be very important in determining whether the public option actually helps much or not. First, what exactly are they proposing?

The core of the proposal is a not-for-profit plan run by a board chosen, one presumes, by the government in some form or other. It would negotiate reimbursement rates and coverage just as private plans do, but the main differences would be that:

- It would accept anyone who couldn’t get private insurance
- It would not make a profit, instead aiming to break even

Right there it would have a signficant advantage. It wouldn’t have to have a bureaucracy whose sole raison d’etre was to deny coverage to anyone who looked like they might get sick or who actually got sick. It also wouldn’t have to tack on a profit margin or huge salaries for a large bureaucracy, as private plans do. Nevertheless, it is unlikely that even these advantages could provide an immediate decrease in premiums for anyone, particularly if the public plans are state-based rather than federally based.

This last point is a key uncertainty. One of the main advantages of a national insurance plan is the fact that it would be large enough to both spread risk widely (and thereby reduce costs), and also that it would provide significant leverage to negotiate rates with providers, drug companies, etc. So here is something to watch. Will the “public option” really be 50 plans or will it be one national plan, either by design, or by strict federal regulation of what the public option plans can look like?

Also, can states form regional plans by joining each other? The bigger the population covered by each single plan the better.

Another consideration. Even if a public option didn’t provide an immediate cost decrease compared to private plans, it would from its very beginning be under enormous pressure not to raise rates quickly, and to do a good job of justifying any increases it did implement. You can be sure that watchdogs will be all over it to see that its rates are not ridiculously high, and that it doesn’t simply charge whatever the traffic will bear. That means that over time it will stay cheaper than private insurance, and that the growth rates of 8% a year we have seen in the private sector will no longer be possible since the premia for the public plan will almost inevitably grow far more slowly, if at all. (Note from John: My premia are going up almost 25% a year.)

And what of the rest of us who already have jobs and pay too much? The Senate and House bills being discussed limit the public option to individuals and small businesses – if you work for a large company that provides you insurance, you can’t choose the public option instead.

Here is a prediction: If we actually get a public option in place, and it is indeed cheaper than private alternatives because of its lack of a profit margin, and its ability to forgo the huge bureaucracy designed to deny coverage to sick people, you can bet the rent that our politicians will smell an easy vote-getting ploy: Open the plan to everyone who wants it! And why not? Larger numbers would make the public plan stronger, and happier voters would make the politicians more secure. Win win! All it takes is a few states to set the example, and soon everyone will start wondering why THEY don’t get the same good deal as the state next door.

We can even hope that eventually we will see a situation where basic medical needs for everyone are covered by the public plan, and those who want further and beyond coverage, or quicker coverage or fancier coverage, are free to go out and buy it.

But hasn’t that been tried somewhere before already? It has – in France – but just don’t ever call it “French.” I think calling it the “Freedom Public Option” would be a much catchier name.

Finally, let’s remember what happened to the original Trojan Horse. Once it got inside the gate it turned into a game changer. It still took the whole Greek army to win the battle, but it was much easier from inside the walls. And once you win, you get to set the rules.

In the end, perhaps that’s why the Republicans don’t like the public option. They know it will work.


I teach economics at Cornell University and specialize in macroeconomic policy both in the US and in developing countries. I often travel overseas to do research and consulting in other countries, most recently in Africa and Central Asia. I sometimes wonder how this ever happened, but I guess it is no real surprise after previous careers as a bond trader in the British government bond market, an economist at the World Bank, and a short order cook on the beach in Delaware. My personal obsessions are politics and sailboats so I alternate between being a complete news junkie and being completely unplugged from any media or communications whatever on sailboats wherever there is warm weather. Having grown up overseas in various countries in Latin America I always have a desire to be nearer to palm trees.

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