Out of Control Policy Blog

Public Option is an Economic Nightmare

In a town hall speech yesterday, the President made a pitch for his health care plan, arguing it makes economic sense. I am not a health care expert, but I do think about things in economic terms. The President may make an argument about universal health care as just. He may say it would benefit the medical community. He could argue that a public option would save lives. On those arguments and more I would direct you to my colleague Shikha Dalmia, and her recent column in Forbes.

But the President can not argue that ObamaCare would be an economic boon. From an economics perspective, and as someone who wants affordable health coverage, this is my thought process:

Why would I want my employer to pay for health care, if I can get it cheaper from the government? Why not just get it from the government and have my employer pay me what would have gone to Blue Cross?

The answer is that the public option will probably be lower quality than private insurance. Otherwise it would make more economic sense to go with the government option. At the President's town hall yesterday, a woman named Debby Smith broke down crying that she has kidney cancer and no way to treat it. If the public option could help anyone with this problem, everyone would flock to it. But that's not how the public option is being designed, it is only intended to cover a percentage of those currently uninsured. So, ostensibly, the $1.6 trillion public option draft legislation (according to the CBO) and mandate—not $1 trillion as the President originally laid out—will create a lower quality service for some of those that don't have coverage now. How does that help all the Debby Smiths?

Now, the only way a lower quality insurance program will work is to ration services. Which means not helping everyone. It also means long waits and picking and choosing who gets help. But at least some people would be helped, right? The question becomes, is spending $1.6 trillion worth it for getting a handful of American's health coverage? From an economics perspective, no. Even if the public option could help everyone under its plan, it wouldn't be a good use money because we have no way to pay for it and the nation is already trillions in debt. 

Now lets say that the ObamaCare public option is successful. Suppose Uncle Sam can keep costs down and provide for people (the goal). If it is working then I will want to be a part of it. And so will everyone else. That's the prudent financial decision. Suddenly the public option starts pulling people away from private companies. Those companies will need to charge more for their decreased number of clients.

Eventually, the private insurance companies will be charging very high premiums, putting a strain on businesses who are providing coverage, and the costs to individuals. In the mean time the public option will be over run, and be maxed beyond its capacity. Can we have a single payer system work in America? According to President Obama, no we can not. He said yesterday that the government is not capable of running all health care in this country, which is why his public option isn't trying to take people from the private system.

Ultimately, from an economic perspective, either the public option works and draws in a lots of people until it can't anymore, or it doesn't work and is an economic mess. Either way, it's not pretty.

Update: I originally misstated the CBO's scoring of universal health care spending. They said on June 16 that the universal health care draft bill being considered then would cost $1.6 trillion, but that did not include the cost of a public option. Which means the public option could increase the cost of the legislation if it is not completely paid for by premiums. Of course the final ObamaCare bill could be lower, but even if it is $500 billion, it doesn't change the broader financial status of the federal government—severely in debt.

Anthony Randazzo is Director of Economic Research

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Comments to "Public Option is an Economic Nightmare ":

KlayaD | July 3, 2009, 7:01am | #

"Why would I want my employer to pay for health care, if I can get it cheaper from the government?' This makes sense, indeed people want to seek for a cheaper health care. Personal finances was always been a sort of worry. We all need some help with financing, but often don't have a lump sum lying around in petty cash to pay off the really big things in life, which is where an installment loan comes in. You can also get a short term loan for sudden expenses with a payment plan, which is also an installment loan. To sum it up, appropriate sending is needed during hard times.

Edward Ruthazer | August 1, 2009, 8:23pm | #

I believe you are mistaken. You outline a damned if you do-damned if you don't scenario, but ignore the fact that if we do nothing the situation will remain untenable.

In fact, most of the free world has single-payer health care and it works just fine. So your nightmare scenario of everyone migrating to the public plan is in fact not a nightmare at all. Sure this is not ideal, but if the companies can't compete they shouldn't be in the business. Currently they succeed through a range of anti-capitalistic business practices including not permitting customers to comparison shop, retroactively dropping customers once they become too expensive, and colluding on prices (ever wonder what "contract price" means on your health-care statement -- it is the price the insurance company bullied the MD into accepting for care. This is like Walmart telling manufacturers to charge them a cheaper price than they charge the competition or else get removed from the Walmart shelves).

The answer is a national single payer plan for fundamental health care and a for-profit insurance company provided supplementary coverage that would allow for elite care and access to diagnostics beyond what is the basic medical necessity. For example if an X-ray will do, but you doctor recommends an MRI, the supplemental coverage would kick in the difference; Private vs. Semi-private rooms in hospitals; Coverage for non-vital services like ophthalmology or dental care, etc...

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