Arnold Kling  

Questions about the Public Option

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Steven Landsburg is now blogging. One of his first posts is on health reform. Concerning the public option, he writes,


A more efficient bureaucracy? But if there were a way to save money by streamlining the bureacracy, why wouldn't all those greedy private insurers have adopted it already? Does anyone believe that the major insurance companies are too lackadaisical to make an easy extra buck?

Read the whole post. It has a lot of basic sense. However, I have highlighted a section that does not address the arguments of the proponents of a public option.

Paul Krugman and others will tell you that private-sector competition in health insurance is wasteful. Resources are spent on trying to select a pool of healthy customers. Since, in the aggregate, everyone must be included, those resources are a waste. A government health insurer will not be selective, and thus will not waste resources that way.

Just once, I would like to see someone making this argument collect data on how where insurance company overhead comes from. I suspect that very little of it comes from designing means for selecting customers in the individual market. Instead, I suspect that a lot of overhead is associated with designing and administering plans for employer-provided health insurance, where adverse selection is not an issue. In the individual market, a lot of the overhead relates to regulatory compliance, because health insurance is regulated differently in every state, and it is illegal to sell health insurance across state lines (except in the case of an employer-sponsored plan).

Which leads me to a question I have had all along about the public option. Will it have to comply with state regulations? If so, then it will be misleading to talk about the public option, because it is unlikely that the same plan will work in all fifty states. If not, then it is misleading to talk about the public option being on a level playing field with private health insurance.


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COMMENTS (11 to date)
Fenn writes:

is this the instance of infant torture from the book that Tyler mentioned on MR?

Dug Wonderboys, but the only thing from Chabon in the last 8 years I managed to finish was the Sherlock Holmes thing, and that was probably because it was short.

Do consider the possibility that his deliberations were theater--- that he had this essay in mind at the time, and that his final decision might have been influenced by what made for the best ending.

Marty writes:

REALLY good points.

Has anyone looked hard at the details of the "opt-out" provision(s)? Seems to me that at best all it does is put my fate in the hands of 12M other people (I live in Illinois) rather than 307M, but also what are the incentives on both the State and the people in it, for a State to opt either way? I hardly trust that this package would present a state with a truly neutral choice.

How does opting out affect a State's Medicaid?

Do residents of a State that opts out still pay toward national-program subsidies? If not, how is this reversed?

Just for starters...

Dan Weber writes:

Does anyone believe that the major insurance companies are too lackadaisical to make an easy extra buck?

I could easily imagine it. It's the way our aerospace industry worked for decades. Insurance companies that make "too much" profit face PR problems, but if they can drive up costs, they can also drive up profits. (John Edwards tried to stupidly encode this as law a while back by limiting profits by statute. Just one reason I'm glad his career is dead.)

And capturing more of the market with a more efficient system probably won't succeed. As you've said often, there is not much cost pressure on insurance companies because of the insulation. Most clients worry more "will I get everything I might possibly need" than "can I save 5% a month."

All in all I think the public option is like homeopathy: it won't be effective, but it won't be harmful, either (except that it distracts from real reforms -- people who don't want things to change should see this as a positive).

Crawdad writes:

Marty,

Roger Pilon and Michael Cannon posted two articles at Cato that might answers some of your questions.

http://www.cato-at-liberty.org/2009/10/27/opt-out-smoke-and-mirrors/

http://www.cato-at-liberty.org/2009/10/26/state-opt-out-proposal-a-ruse-within-a-ruse/

Joe Marier writes:

Hey, you just rephrased the Second Freeport Question!

MBP writes:

Krugman's argument and simialr arguments are devoid of any facts. Here are a few that may shed light on this issue.

1) Insurers can only select customers in the individual market. In the group/employer market they must take all comers within the group. The individual insurance market is about 26 million people. Less than 10% of the total population. To think that any significant part of insurers' overhead is spent sifting through a tiny piece of the market is simply not accurate.

2)Under Health care reform insurers have agreed to take all comers (guaranteed issue) at the same price (community rating) so the idea that they will spent lots of money trying to avoid certain individuals is moot. Even if insurers currently waste resources in this area that would stop after these rules are passed. ALL insurers would operate under these rules.

Under the current draft bills the public plan would operate under the same rules as other insurers - at least in terms of mandated benefits and state laws. Whether it would pay taxes, have access to gov't subsidized capital, be requires to run at break even, etc. is uncertain.

Larry writes:

The state regulation issue is the reason that there is no way for private insurers to compete with a national public option. PO gets scale economies and a drastically simpler regulatory environment. I have seen nothing that says there will actually be 1 per state, but that would neuter the issue.

@mbp - They can't select them per se, but they can design plans to attract more profitable customers and dissuade less profitable types. They'll still have knobs such as copays, covered conditions, drugs, and so on that they can tweak.

We don't know what the final bill will look like. Do you have a link to provisions about continuing state regulation? A better course would be to let consumers buy across state lines...

Arthur_500 writes:

Insurance company overhead comes in three basic form:
1. Selling and managing plans
2. Developing the statistics on which to create plans and the necessary financial foundation to support them
3. Investing in order to meet the needs of claimants
If we eliminate the risk factor, a basic premise in all the health insurance proposals currently being considered, we will not reduce the need to develop those statistics. In a competitive arena those statistics will remain the basis for determining how much low-risky people will get reamed in order to pay for the high-risk people. It will remain necessary to develop acturarial information to determine adequate reserves.
Does Paul Krugman really think the government option will simply write a blank check and have no accounting for reserves? If so, then why do we do we concern ourselves with acturarial data indicating that Medicare will be broke in seven years?
The one area where the government option plays out on paper is that it would not have to deal with State Regulatory agencies and it could attract a larger pool than the private market. So why aren't we reforming insurance rather than beating up on those greedy investors such as you and I who get rich on the 5% returns of Health Insurance Companies. I invite the Senators, Representatives and Mr. Krugman to come to my State and attempt to purchase Health Insurance with after-tax dollars.

jr writes:

Profit is not a dirty word.

Competition is not a dog fight.

It's the same old argument from prehistory to modern times to today. Just ignore all the major evidences.

Modern economics to Krugman is just a sugar coat on the same old argument.

Max writes:

"Paul Krugman and others will tell you that private-sector competition in health insurance is wasteful. Resources are spent on trying to select a pool of healthy customers. Since, in the aggregate, everyone must be included, those resources are a waste. A government health insurer will not be selective, and thus will not waste resources that way."

Yes, but by accepting any kind of person and not trying to balance the pool of insured, they will incure a higher debt at once than if they had spent the resources. An insurer wants a good amount of healthy people, that can cross-finance the pool of not so healthy people. This is not stupidity of the market, but a reasonable idea imo.

R. Richard Schweitzer writes:

For heavens sake, can it not be seen that the sturm & drang over "Public Option" or some kind of subsidized (tax-funded) mechanism to redistribute costs is nothing more than a political tactic to divert the focus needed on the rest of the legislative construct?

Stay focused on the main thrust and its effects.

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