The Economic Necessity of a Public Option

The fundamental problem in health care in the U.S. is that we spend so much to get so little. The current health reform effort is unlikely to address this problem in the short term. But it will establish the institutional structure of health care financing within which it must one day be faced. At the moment it is not entirely clear what form this institutional structure will take. But any way you slice it, it is hard to see how to achieve cost, volume, and quality control without some form of public option.

At the moment, the market power of health care providers (e.g. hospitals) is largely being viewed as inviolable. In fact, and ironically, for reasons of payment reform described elsewhere on this blog providers may be encouraged toward greater integration and coordination. It is a reasonable expectation that provider market power will not diminish under health reform.

At the same time, there is a renewed interest among Democrats to repeal the existing exemption from federal antitrust law currently enjoyed by insurers under the 1945 McCarran-Ferguson Act. While the direct effects of repeal, if any, are uncertain (as discussed in today’s companion piece by Ian), this move strongly suggests an intent to break up large insurers and dilute insurance markets.

With insurers weakened, what would serve as a counter-weight to the power of provider groups that is expected to maintain or increase? Who or what would have the power to bargain on behalf of consumers? It would have to be an entity capable of negotiating (or dictating) low prices, reasonable volume, and high quality. An insurer without substantial market power cannot do it, but a public option could.

On the other hand, if we permit insurers to maintain sufficient market power to extract low prices from providers, what would compel them to pass the savings on to consumers? With little competition they wouldn’t have to. But a fallback version of the public option–one that entered if insurers didn’t offer affordable premiums–would serve as a stick.

Whatever market structure health reform encourages it had better be one that includes mechanisms for cost, volume, and quality control and, moreover, does so on behalf of consumers, not just to the benefit of insurers. At a high level, I don’t see how we get from here to there without at least the threat, if not the reality, of some form of public option. The only other approach I can fathom is to dilute the power of providers. But, for perhaps sound political reasons if not to facilitate payment reform, that does not seem to be in the works.

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