Revenge of the Public Option

By Robert VerBruggen

Monday, October 28, 2019

A lot of the Democratic presidential candidates are rushing as far to the left on health care as they can. But some in the “center lane” are advocating what they claim is a more moderate approach: finishing what President Obama started and creating a “public option,” meaning an insurance policy provided by the government that purportedly “competes” with private plans. Obama and some of his allies pushed hard to include this in the original Obamacare law, but they got only 58 of the 60 votes they needed in the Senate.

The next time they have a Senate majority, the Democrats will likely try to pass it through a process that requires just 51 votes. This is a lot less alienating to moderate Democrats than Medicare for All ever will be. So even if one of the lefty candidates becomes our next president and enjoys a sympathetic Congress, the public option might prove to be the most politically plausible big-ticket reform.

Let’s take a trip down memory lane and re-explain the problems with this approach. This is a special treat for me, since I first joined National Review in 2008 and spent a lot of time editing articles about Obamacare over the next few years, a period in which we ran plenty of pieces about the public option.

At first glance, the concept may seem harmless enough. Conservatives, after all, are always pointing out how inefficient the government is. One imagines that if a government-run insurer competed on equal terms with private businesses, it wouldn’t be able to keep up. Think the DMV, except facing private competition. But this ignores the economics of the health-care market and the might of the government within it.

More than a quarter of the country’s health-care spending is already covered by the federal government, largely through programs that directly insure patients. And since the government has such powerful control over what will be paid for millions of people’s health care, it can simply underpay providers on a take-it-or-leave-it basis. As the health-care expert Robert Laszewski recently noted, “Medicare pays close to half the price commercial insurers pay hospitals and pays about 20% less than commercial insurance pays doctors.” A study commissioned by the hospital lobby, for what it’s worth, estimates losses in the tens of billions of dollars each year from treating patients covered by Medicare and Medicaid.

This means that people on private insurance “cross-subsidize” people on government plans: To some (much-debated) degree, providers charge the former more so they can afford to take Medicare and Medicaid rates to treat the latter. Some doctors also limit the number of government-insured patients they’ll see.

That’s one of the biggest problems with giving Medicare to all: It drastically cuts payments by eliminating these cross-subsidies. It is, in effect, a huge bet that health-care providers will simply keep operating with tons less revenue. I am sympathetic to the idea that many hospitals charge high rates just because they have market power in their local areas and can get away with it, but that doesn’t mean all hospitals, especially the struggling rural ones, could weather rate cuts so severe.

And the same problem rears its head when you provide a public option “to all who want it.” The only way this product will be attractive to patients is if it forces providers to accept low rates to hold down premiums. That’s why public-option proposals typically require all providers who take Medicare to accept the public option too. (Back in 2009, various estimates held that public-option premiums would be 10 to 30 percent lower than private ones.) And if it goes that route, the public option hammers providers and does not compete with private plans on equal footing.

As Laszewski puts it: “How would you like to run a business and have the government show up with a competing product and use its unilateral power to pay the suppliers you both need half as much as you do?”

Another major problem with a public option is that, unlike a private insurer, it’s unlikely to go bankrupt and disappear if it loses money. As James C. Capretta has written, “there’s no particular reason why a publicly run product couldn’t experience ongoing losses, so long as the law provided for direct or indirect taxpayer subsidization. The Medicare program itself is funded heavily by taxpayer subsidies.”

On the other hand, if a public option really catches on — and the provider lobbies aren’t able to kill its growth — it leads to the single-payer system that moderates claim they don’t want. Not only does it normalize the idea of government health insurance for the masses, but as more people join the public option, providers have to charge the privately insured even higher rates, driving up their premiums and increasing their incentive to join the state-run plan.

This has been an open secret for years and played a role in the original debate over Obamacare. As Rich Lowry recounted in 2009: “A single-payer activist confronted liberal lion Barney Frank with a camera, demanding to know why he didn’t support single-payer. Frank shot back that he favors such a system, only he realizes Obamacare’s public option is the best way to get from here to there.” The same year, The American Prospect ran a piece explaining how the concept bridged what was politically feasible in Congress with the energy on the activist left, which “could live with the public option as a kind of stealth single-payer.”

In 2009 and 2010, there were enough truly moderate Democrats to keep the public option from becoming law. The next time Democrats take over, the dam might break, and then we’ll really be in for a ride.