The Role for a Public Plan

This post originally appeared on The Finance Buff.

As I wrote previously, I’ve yet to find a compelling economic argument for a public plan option as part of a remade health system for the non-elderly. If there is an argument, it hinges on market failures, which no doubt exist in health care. Moreover, I see no other way to achieve universal coverage (if that is the goal) or to make coverage affordable to all (if that is a goal) without use of public resources. But I don’t see how any goal, short of single payer, leads necessarily to the required participation of a public plan. Economics may indicate that government participation is necessary, but I’ve yet to see how it unambiguously suggests the precise form that participation takes.

What I would find more plausible is an argument that calls for a public fallback option. That is, if the private market does not provide solutions to the problems we wish to solve in some market then a public plan that does so by government fiat would enter in that local market only. In principal the private market could be regulated in any number of ways and benchmarks for various goals could be set. If an insufficient number of plans participated in an area and/or goals were not met in some market, that would define market failure and justify a public plan in that particular market (not everywhere necessarily and possibly not anywhere if the private market proves to function well).

A public plan as fallback is not a new idea. I’ve seen it discussed elsewhere (here is one example). And, it is precisely what is provided in the legislation that authorized Medicare Part D (Medicare Modernization Act of 2003, MMA). If an insufficient number of private plans participate in a region under Part D, a government plan enters to fill the void.

So far, there has been ample private plan participation in Part D. The value the program provides to beneficiaries is substantial (source). There is genuine competition among plans. In many ways Part D is well designed, far better from an economics perspective than FFS Medicare (with government-set prices that contributed to a primary care doctor shortage) and Medicare Advantage (with administrative pricing that invites insurer rent seeking).

Part D is not perfect. I can think of a few things I’d change. For instance, I would remove the formulary inclusion requirements and would not allow plans to adjust formularies during the year (while most beneficiaries are locked into a plan), just to name two. But these are relatively minor tweaks to an otherwise successful program: one that does not currently include a public plan but provides that option if a true market failure arises.

A fallback public plan concept forces the debate to focus on what would justify government entry. That is, it calls to the surface a dialogue around what we mean by market failure. What are our goals for health reform? What regulations might make fulfilling those goals with maximum benefit to the taxpayers and populace most likely? While it is clear that the “first best”—unfettered private markets—is unpopular, it is not at all obvious to me that government provided insurance is second best. Government subsidization and regulation, with public insurance as a backup, would allow benefits of market competition (if any) to emerge with protection from market failure if they do not.

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