Economics Arguments for a Public Option

This post has been cited in the 17 September 2009 edition of the Health Wonk Review, hosted by Healthcare Technology News.

Finally, a few more-than-incidental economists have said something sensible in defense of a public option in a remade health system. I’ve been looking for such arguments for some time. Last week, Alex Tabarrok made the reasonable (but by no means certain) assumption that health reform would strengthen the market power of health insurers. His premise is that individuals eventually will be required to purchase health insurance. He writes that major health reform proposals would

require insurance companies to take all customers …, offer guaranteed renewability…, impose no annual or lifetime caps, and offer coverage of preventative care with no-cost share, among other requirements…

In short, insurance reform will mean that everyone will be required to buy a product that will be tightly regulated and more homogeneous.  Both of these factors will increase the market power of insurance firms.  Since escape via non-purchase will no longer be a potential response to higher prices, mandatory purchase will reduce the elasticity of demand giving firms an incentive to increase prices.  Moreover, in oligopolistic markets, a more homogeneous product can increase the ability of firms to collude.

Tabarrok goes on to conclude that the foregoing predictions are justification for a public option.

Simon Johnson and James Kwak made a similar argument at the end of their Washington Post column Don’t Want a Public Plan? Well, What Do You Think of Medicare? but not before they correctly point out that the main features of a public option are precisely what we have now in traditional Medicare. If one is intellectually consistent, one cannot be simultaneously against a public option and in favor of traditional Medicare.

Johnson and Kwak don’t point out that Medicare includes private plans. Relative to traditional Medicare (the analog of the public option), those private plans are far less popular, attracting something like 20% of beneficiaries (and only that high due to overpayment to private plans, which is likely to be corrected soon). On the other hand, the Medicare market is not like the non-elderly market. Many retirees have employer supplements. While it is possible to draw lessons from Medicare that are relevant to health reform, one has to be careful to make apples-to-apples comparisons.

Nevertheless, good economics arguments for the public option have finally been made. Will they influence the debate? It may be too late.

Later: See also my post The Economic Necessity of a Public Option.

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