Child-only policies and a public option

In response to Aaron’s post on the withdrawal of child-only policies from the market, eRobin asked,

Wouldn’t a public option have put the insurance companies in more difficult position as far as this goes and had them taking whatever loss they would have incurred covering these kids in order to protect market share for when the public option does roll out?

This is precisely the insurance market analog to what Rex Santerre and I wrote about in our recent KHN column. Like public health facilities, a public insurance option can alter the competitive landscape, most directly in the dimension of access. By being available and attractive to populations that private entities may currently or one day wish to serve, public facilities and, perhaps, an insurance option, could play important competitive roles.

How much would private insurers change if there were a public option? I don’t know. But they would certainly take that option into consideration when planning their strategy and products.

Though a public option is likely to affect private firm behavior, it may not do so in ways we like. Private plans might make their policies less attractive to consumers of certain types, happily shedding them to a public option that serves as a high risk pool. And if people can always go to the public option, they’re likely to wait until they’re sick. Put another way, the existence of a public option itself does not solve the adverse selection problem. Only a mandate or policies that similarly compel people to buy insurance when healthy can do that.

Of course such risk-shedding behavior is possible in the absence of a public option (plans trying to dump bad risks on each other). But the existence of one might make that behavior less socially problematic since people would always have somewhere to go.

A public option is neither necessary nor sufficient for a well-functioning insurance market. It could help, but it may not. It could make things worse, but that’s not a certainty. It could make very little difference, and that’s probably the most likely outcome once you factor in all the political realities–the ways in which the public option we’d get would differ from that which one might envision. That’s especially true relative to the degree of attention the public option gets.

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