Medicare and the Public Option

Simon and I have our latest weekly column up at the Washington Post. The topic is contradictions: opponents of the public option who bill themselves as defenders of Medicare, opponents of cost savings who support private health insurers, and so on. It’s also about a world without a public option:

Imagine health-care reform without a public option: Insurers have to charge the same price regardless of customers’ medical history; everyone has to buy insurance; and poor people get subsidies to help them afford it. From the insurers’ perspective, they get more than 40 million new customers, they subsidize the old and sick by overcharging the young and healthy (who have to overpay because of the mandate), and the government even pays people to buy their product. There are no new competitors (additional choices for customers), and there is no pressure to reduce costs. What could be better?

As we’ve said before, I think this is still far better than the current situation. Ezra Klein recently made the point much more forcefully. But still, reform without the public option could be a recipe for private insurers to charge whatever they feel like charging. Alex Tabarrok, not the first person you would expect to write a post called “In Defense of the Public Option,” writes:

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.

I believe that health insurance reform will increase the market power of insurance firms and drive up prices.  In this scenario, the public option at least has a raison d’etre, although whether it actually fulfills it’s purpose is an open question.


Originally published at The Baseline Scenario and reproduced here with the author’s permission.

6 Responses to "Medicare and the Public Option"

  1. Guest   August 26, 2009 at 5:57 am

    Your comments show a remarkable tolerance for sloppy economics and politics. Remember, Mr. Kwak, that Byzantium was a failure and imploded economically.If there are going to be government subsidies for health care, let them operate as true subsidies where the Government pays its share, not by fiat laws that force insurance companies to cover risks that they do not want and charge their other customers for the difference. There has already been too much of this fiat cost shifting in existing Medicare/ Medicaid programs.The present bills in Congress do not achieve their purported objectives. They fail in covering all of the uninsured, they fail on costs, they fail in reforming existing unsustainable Medicare/ Medicaid programs.Surely you can come up with a better intellectual product that the present Beltway rubbish!

  2. Guest   August 26, 2009 at 8:23 am

    The fact is approximately 200-500 billion of waste, fraud, and incompetency is already in the system. Why not start there and fix what is broken so we can expand the number of recipients of healthcare without increasing costs? If you want to make drastic changes to healthcare start with regulating the corrupt insurance companies and corrupt doctors bilking the system everyday. Why doesn’t the government talk about that? They have already been bought and paid for. WAKE UP AMERICA!!! The 911 emergency response system has become a cab to the hospital for a toothache or earache for many people. Billions of dollars are being wasted to drive people to the hospital for non-emergency treatment. Do we really want to put trillions more into this black hole? You got to be kidding me. The healthy already subsidize the unhealthy in every company healthcare system. Should we pay even more to subsidize more irresponsible people? Obesity related health treatments already are approaching 400 billion. Should we subsidize poor decisions too? Where does it end? Let McDonalds, Burger King, and Wendy’s pay for the related health costs of obesity. Let PM and Altria pay the related costs for cancer. Americans should not be forced to pay for others bad decisions. The country can not afford it!!

    • Guest   August 26, 2009 at 12:37 pm

      Recently I lost 60 pounds and eating at fast food places like Wendy’s were part of the diet. I think they get to much blame!

    • Guest   August 27, 2009 at 5:50 am

      I agree with you. Why do not more people have common sense. I have given up on Beltway politicians and their bubble world years ago!

  3. Guest   August 26, 2009 at 12:35 pm

    Insurance companies are regulated – I do not believe they are the main drivers of cost. We all have home owners insurance, car insurance and those industries have not seen the price increases that medical has seen. Currently the government spends almost 50 cents on every health care dollar spent. COuld they be the problem for the high cost?

    • Guest   August 27, 2009 at 1:37 pm

      Yes they are regulated but due to the fact that the insurance industry has bought every politician with the millions they spend on lobbyists the regulations have no effect. (remember Aig is an insurance company and they needed 150+ billion from us the American smucks that keep voting in these crooked politicians) Doctors no exactly how to work the system to get every dollar they can out of the insurance companies and in return the insurance companies raise rates on Americans. Frivilous x-rays and redundant tests that docotrs know will be covered by insurance are one reason why costs are out of control. These activities need to be regulated and stopped.