Choice and competition are the bedrocks of innovation and affordability in the market. If there are multiple companies competing for consumer money, the winner will be the one which either increases the value of their product or finds a way to lower its cost. In contrast, fewer choices and less competition give companies more leverage to set higher prices and relieve any pressure to add value.
Last Thursday, President Obama seemed to reaffirm these bedrocks in his speech on fixing the Affordable Care Act (ACA). Unfortunately, the public option he proposed to increase choice and competition — perhaps the most consequential of his three “tweaks” — would do the exact opposite.
The public option would basically be a rival insurance plan provided by the state to compete against other insurers. However, its introduction in the market would backfire. Insurance companies wouldn’t be able to compete with the public option and eventually get run out of business.
In order to understand how the public option would do this, it is important to realize that a similar version was already tried with the federally funded state co-ops. The co-ops were an utter failure. As of now, 17 of them have failed, costing taxpayers approximately $1.8 billion according to the House Energy & Commerce Committee. The remaining co-ops seem to be on the same path.
The reason for this, according to Forbes contributor Robert Book, is that the co-ops had to be “self-supporting.” A self-supporting model means “health care costs and administrative costs must be paid for out of premiums received.” In the end, they were unable to compete in the brutal healthcare landscape which has already broken the legs of long-standing insurance companies.
Here’s the catch: A public insurance option, unlike the co-ops, wouldn’t need to be self-supporting. Instead, the public option would rely on taxpayer funding. While a private insurance company must balance a budget to stay in business, the public option only needs to reach into the taxpayer’s pocket to mitigate losses.
Private insurers wouldn’t be able to compete with this type system. They would eventually be forced to exit the market, or basically stop providing insurance. Without other options, people would be forced into the public option. This lack of choice would be a simple step away from single-payer health care: the antithesis of competition and choice.
Of course, many see this as a noble goal. Popular culture often depicts single-payer healthcare as the sophisticated, European alternative to the free-market system which left 15 million uninsured prior to the ACA. While the faults of a single-payer system should be reserved for another post, it is important to recognize our heavily-regulated, third-party payer healthcare system prior to the ACA resembled nothing close to a free market.
Nonetheless, if President Obama truly believes in the economic principles of choice and competition, he should reconsider the public option.
At this point, it would be more prudent to systematically roll back the ACA. Republicans in the House should come up with incremental and responsible steps to do so and mitigate a shock to the market. On the other hand, a giant repeal-and-replace bill would become another breeding ground for all sorts of misguided and shortsighted regulations.
Choice and competition are easy to give lip service to. After all, they are the drivers of progress and innovation. Effective health policy must be centered on these principles, and adding a public option to the ACA would only create adverse effects.