Most people agree that our health care system needs an overhaul. The U.S. spends more than any other country on health care (while providing care that is no better than average). Health care costs are rising at rates that are unsustainable for the federal budget as well as for millions of household budgets.
Agreement exists about the need for many of the proposed cost cutting procedures, such as increasing efficiency in records processing, emphasizing preventative care, and the like. But the most crucial part of the debate surrounds the issue of whether to create a government-based health insurance alternative to private insurance.
The major concern with the public option is that the government will provide health insurance more efficiently than the private market, forcing insurance companies to go bankrupt and leave only government insurance. This is a curious argument to hear from conservatives, who have repeatedly harped on the wastefulness of government programs. Nonetheless, there is some cause for concern. Government programs such as Medicare and the Veterans Administration have administrative costs that are about 20 percent lower than private plans, primarily because they do not have to pay for advertising, CEO salaries and costs associated with risk-assessment (making decisions about denying or rescinding coverage).
Government-based insurance is also better equipped to control overall costs. When health care is sold in the private market, prices for those services and products are “inelastic” to demand. This means that consumers are forced to accept price increases rather than pursue alternatives to medical care. (I would rather pay higher insurance premiums than try homeopathy, thank you very much.) This market feature places upward pressure on prices, since private health care companies are bound by the constant need to increase profits. These same pressures do not apply for government-based health insurance, which is not profit driven. The government also has the potential to negotiate lower prices for health services and pharmaceuticals. This can effectively lower rates of growth in health care costs, as one can see when government programs that are allowed to negotiate (VA) are compared to programs that are not (Medicare Part D).
As we have seen in Massachusetts, mandating that everyone buy insurance through the private market alone would add to the profits of private insurance companies, but would not reduce health care costs. The recent health reform bill from the Senate Finance committee includes options for regional non-profit cooperatives (rather than a public option) to cover the uninsured. However, these are poor alternatives to government provided insurance. They are unlikely to reduce costs since they would have many of the same overhead costs of private companies while lacking the bargaining power of the government.
Despite the relative cost-cutting effectiveness of government insurance, the public option will not drive private insurance out of the market. Under current proposals, people would only be able to choose the public option if they buy their insurance privately or if they do not have insurance at all. The Government Accounting Office predicts that only a small proportion of the 60 percent of Americans that currently have health insurance through their employers will shift to the public plan. Moreover, private health insurance companies can adapt to additional competition by catering to specific risk pools and offering gap coverage. This is common in countries like France, which many assume have a fully “socialized” health care system. In the end, the public option is simply about paying for care (not providing care) and is not nearly as scary as it sounds; unless, of course, you are afraid of lower health care costs.
