Saturday, July 11, 2009

The truth about the controversy surrounding public option for health care reform

The public option has created a ton of controversy and risks becoming the hotbutton that makes the whole health care reform movement fall apart. And yet, the arguments don't meet the facts. So I will attempt to clear up the misinformation and confusion.

What is the public option?

Many health reform proposals create a health market/exchange where people could be grouped into large balanced risk pools via either state or federal groupings (I prefer federal see previous blog, #1 for details) and have numerous health insurance companies to choose from.

The problem with this model, especially with the state market/exchange solution, is that there has been such consolidation in the health insurance market, that 94% of metropolitan markets in the U.S. have only one choice. If it were on a state by state basis, that might improve to a few choices - unless there is some agreement by insurers to maintain state monopolies to reduce competition. If it were on a federal basis, like the federal insurance plan that congress uses [not saying we should duplicate this, but there are many aspects of FEHBP that are worth emulating], there would be a large number of choices (100s).

Adding a public option to the list of choices has been suggested by many.

1) Public Option will likely cost less due to lower administrative costs. (Probably true, though less so with the state exchange model, moreso with a federal model.)
2) Public Option will be able to have protections for patients e.g. pre-existing conditions, preventative care etc...
3) Public Option will increase competition and force the private insurers to become more efficient and have added value benefits that a public option doesn't have. (Maybe yes, maybe no. See my explanation below.)

1) Public Option will steal patients away from the private insurance market. (To some degree yes. See below for further explanation.)
2) Public Option will cause insurers to make less money. (Probably so. Though they will have access to a larger market with all those newly insured patients and might be able to make up for it on volume - e.g. the Walmart model.)
3) Public Option will cause bureaucrats to be in charge of healthcare ("get between you and your doctor"). (Possibly. Some models suggest an independent federal reserve type system to oversee the public option to prevent this. But right now most people have no insurance w/ER, or underinsurance with corporation "getting between you and your doctor.")
4) Public Option will pay doctors and hospitals just as poorly as Medicare and Medicaid. (Possibly. Medicare and Medicaid pay less than cost for many doctors for many conditions [and yet perversely overpay for certain procedures] and while insurers aren't exactly generous, doctors and hospitals do better with private insurers overall.)

So do we need a public option?

  • The biggest fear amongst individuals against the public plan is that it will steal patients from private insurers and cause them to go out of business, and thereby creating a single payer model that is increasingly showing itself to be insufficient in the many countries that have one. However, I asked a number of my well-insured friends if they would choose to keep their insurer versus going to a public plan and all said they would shy away from using a public plan. Not scientific I know, but it backs up a PNHP study from FEHBP experience: that more people choose a higher out-of-pocket plan if it gives them more choice. In other words, people won't necessarily choose the cheapest one. It is possible that the public plan might even have trouble finding people to choose it in the beginning, until it proves itself to be at least equal in quality to a private insurance plan.
  • If we don't have a public option that causes insurance companies to change their practices by competition, the alternative is not having one, but increasing regulations of the insurance companies who participate in the market/exchange. I'm not a fan of increased regulations due to the law of unintended consequences. But expect this if the public plan option is not enacted.
  • The public option will allow for competition in markets where there is a monopoly. True, in our current state, but with a well-functioning market/exchange system there should be plenty of competition already, making that a less viable reason for enacting one.
  • Insurance companies will have trouble with growth and maintaining value for their shareholders. Initially, there will be plenty of growth with the many new people entering the healthcare insurance market. However, it may be that health insurance companies will have to move into a high dividend model for shareholder value, rather than a growth model. Personally, I think this is the only ethical way to run health care businesses. Insurance companies do provide a valuable service in the creation of risk pooling and redistribution of funds to allow for people to be covered for illness, and therefore do have a right to get a margin of profit on that. However, growth of profits at the expense of health care is abhorrent (as the only way to grow profits is by decreasing what you pay to providers/hospitals, decreasing coverage/denying care for patients, increasing rates, and consolidating with other companies to create monopolies).
  • The public option will force insurance companies to be more efficient/competitive and create added value. Maybe. The insurance companies might provide more services to attract new customers. Unfortunately, it is not in their best interest to do so, in that the more services you offer, you then select for people who need more services, and thus you get a sicker group of people as clients and less profits. More than likely, they won't offer more services, they'll try to compete on price and simply make less money and/or cut reimbursement rates to providers/hospitals to compensate.
The answer is No. We don't NEED a public option. We can accomplish the same goals through regulation. However the public option provides a method of getting the desired changes we need through competition, not regulation, in a more efficient manner. So while we don't need a public option, I think it is the best way to get what we want, and I don't think it will lead to a single payer system. That is, unless the public option is so superior that private insurers fail to compete on any level. Which I find highly unlikely. UPS and FedEx have found ways to compete with the USPS. Private corporations can compete successfully with government programs allowing both to healthily coexist. Thus the public option can be beneficial without being disruptive.


  1. Quick question: it seems like the argument against a public option is not internally consistent, do you agree? One the one hand, the argument is that "government run health care is inferior to our current private model." On the other hand, there is the argument that "a public option will steal customers from insurance companies." How can these both be true? Thoughts?

    Thank you, this is helpful in identifying the issues.

  2. fnazeeri thank you for noticing! That is exactly the question. The argument against makes no sense. Gov health care is inferior but will steal pts from insurance companies. They can't both be true at the exact same time. The argument is not consistent, as you pointed out. Both can be possible. Government run health care could turn out to be inferior. It could also turn out to be better and more efficient than private insurance. That is why having a public plan could be a very good thing. It will survive or fail on its own merits.

  3. Nice post. Many of us who are wary of the public option would be less hostile if the plan were permitted to 'survive or fail on its own merits'. This will not be a Darwinian experiment, however. The government will be extending preferential treatment to its beloved option, which will not be the fair marketplace competition they promised. The government will fund the program, make the rules and enforce them. The public option is likely to emerge as the only option. Then the whole country will be under a Medicare-type program which is burying the budget and dmoralizing the medical community. I invite you and your readers to visit my blog at

  4. I was a big supporter of the public option and was sad to see its recent demise.