Three heads are better than one.

Photographer: Jill Toyoshiba/kansas city star/tns/getty images

Don't Be Scared of a Health-Insurance Public Option

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
Read More.
a | A

One of the big debates in health care right now is whether to create a public option for health insurance. Most observers of Obamacare agree that the big problem is private insurers pulling out of health-care exchanges. That leaves smaller states with only one or two insurers participating, which kills competition in insurance markets and raises costs. Although there are many intermediate fixes available, some are suggesting bringing back an idea that didn’t make it into Obamacare -- a public option, with government selling insurance to anyone who wants to buy it. Yale political scientist Jacob Hacker writes:

Obamacare could use improvements — and right now, the most critical of them is to add a “public option,” available in all parts of the country, that would allow Americans buying coverage through the Obamacare "exchanges" to enroll in a public insurance plan modeled after Medicare. A public option would increase coverage and create greater insurance competition.

Presidential candidate Hillary Clinton and President Barack Obama have both come out in favor of a public option, though as long as Republicans control Congress the odds of its adoption are remote. But regardless of its odds of adoption, what would the economics of it be?

QuickTake Obamacare, Assessed

Like many others on both the left and right, I see the public option as a back-door route to full nationalization of most of the U.S. health-care system. The reason is that Medicare is capable of providing the same quality of care to most customers at a lower price than any private insurer.

Part of this is because the government can just subsidize Medicare if it wants -- no private company can compete on price with a government service that doesn't need to make a profit. But even without any subsidies, Medicare can probably undercut private services through a variety of natural advantages. It can use its leverage as a very big purchaser to negotiate lower prices with providers. It has also lower administrative costs and doesn’t have to spend money on marketing.

You can easily see this in the data. Here, via the Kaiser Family Foundation and the Wall Street Journal, is a graph of health-cost growth and growth projections for government and private insurance:

That stands in stark contrast to other industries -- for example, parcel delivery, where the U.S. Postal Service has struggled to compete with private rivals like UPS and FedEx. The economics of health care simply seems to be very different from other markets.

With this kind of cost advantage, a public option will probably push all private insurers off of the Obamacare exchanges. Of course, it could choose not to do so, and set its price equal to whatever the private companies charge -- but that would negate the point of the public option in the first place. So if government-provided health care goes on the exchanges and stays there, it’s likely that it will eventually be the only option. After that, it would be only a matter of time until the public option displaced most private health care in the country, except for premium services offering high-end or specialized care that the government would find too expensive to cover.

Will that be good or bad? The discussion of whether nationalized or private health care is better is long, complex and fraught. But if a national health service could provide equivalent-quality care at a lower price -- as Medicare already seems to do, and as many other countries’ national health services also seem to do -- then that’s a plus.

Another potential plus would be to encourage people to work more. Currently, many companies buy health insurance for their workers, which acts like a fixed cost per worker. Changing that to an hourly wage would give people an incentive to work more hours, raising their total income.

A downside of government health care would be higher taxes. Currently, small business can claim a tax credit for giving their employees health insurance; if government took over, the effective tax rate on these businesses would rise.

The biggest downside, though, is the possibility that with private insurers eliminated from the market by Medicare-for-all, government costs might creep up faster than they have in recent years. Part of the reason for Medicare’s cost advantage might have come from political pressure to keep prices substantially lower than the private sector. With the private sector reduced to a high-end add-on market, that pressure might go away, and administrative bloat or unresponsiveness to changing technology might send government health costs soaring.

However, that doesn’t appear to have been the case with other developed countries. And it’s important to remember that nationalization of basic insurance is different from full nationalization of the health-care industry -- wealthy customers would still be able to purchase insurance for the things government won’t cover, or pay out of pocket for faster or higher-quality service. So maybe a public option, leading to Medicare-for-all, isn’t such a huge or scary step after all.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net