In the Nation's Interest

Public Option? Why Not Something That Might Work?

The Sunday, October 18, 2009 New York Times long editorial in support of the public option in health care reform: first, displays a scary level of economic ignorance; second, validates a long and harmful tradition of budget smoke and mirrors; and third and worst of all, completely ignores a real alternative which has far and away the best chance of leading to a functioning health care reform, and which The Times seems almost deliberately to refuse even to mention.

We should say that we consider ourselves passionate centrists, served in senior positions in the White Houses of Democratic presidents, value the public sector a great deal, and have no connections with the insurance industry. We write because The Times has simply refused ever to look at the alternatives, and is simply wrong.

First, on the economic ignorance: The Times argues that a public plan would "only" attract members who bought their health insurance directly; that a public plan would be less expensive because it would not have to earn a profit and could "bargain" for lower prices, thus "helping" private plans; and should be allowed to pay Medicare reimbursement rates, thus also permitting lower health care reimbursement rates. The Times is correct about whom a public plan would cover, but The Times is a tad dishonest in that this would completely gut the one new idea in most of the current plans: the health insurance exchanges. A public option would start a vicious spiral driving possible clients away from private insurers, making a single-payer option inevitable. If that is where The Times wants to go, it ought to say so.

Beyond that point, The Times makes the fundamental economic mistake of confusing prices and costs. To start with, the state can always use its power to mandate lower prices, which is what The Times is calling for here. However, this does nothing about the actual cost of health care. When the soverign mandates lower prices, all that happens is that those unreimbursed costs get loaded on private sector plans which are then made non-competitive. We have a modest proposal The Times should love. Let's not go to all of the trouble to think about a rational health care plan; let's just wave a magic legislative wand and say the prices have to be lower, and doctors, hospital managers, nurses, orderlies, etc just go to prison if they charge more. The result would be exactly the same.

At the core of this long editorial is another completely confused economic argument: the public option as competition. Let's look at this. The public option has: a zero cost of capital (the House bill authorizes $2 billion as capital for a public option); the power to force suppliers to charge prices below their cost; and an implicit guarantee that it will never fail. This is all supposed to force private providers to compete honestly? A direct question: Why would any sane entrepreneur, or business leader, or shareholder, put up a dime of his or her own capital to "compete" against an alternative that has free capital and the power of the state to muscle doctor and hospital fees? This competition argument is the favorite sound bite of everyone who is for the public option. We bet it was polled. But it is completely specious.

Second, on the budget fraud, The Times in its strategy implicitly endorses the current Medicare "sustainable growth rate" budget scam. For years Congress has mandated and assumed major cuts in doctors' compensation, which is what The Times wants; but then every year, when the Congress realizes that cutting compensation like this is politically hard, it puts all the money back in. This is happening right now. But Congress has added a new twist: It is now proposing to pay $250 billion over the next 10 years to "fix" this problem, while blithely assuming that these costs aren't health care costs after all - by putting the money in a different bill, outside of health "reform." In effect, The Times is proposing that a central part of health care reform depend on the confusion of prices and costs, and the continuation of this fraudulent budget tactic. Like every fraud, it eventually will collapse of its own weight, when the "savings" do not materialize.

But third, hopefully, there is a better alternative: actually to make insurance markets work, with real regulation by public organizations that will understand health care in America. It is silly to assume implicitly - as The Times very much does - that today we have a true, functioning health care insurance market which can be used as evidence for anything. We have an employer-based system (which every major employer knows, but won't say publicly, cannot last) in which the health insurance choices for about 90% of all those who have health insurance are made by corporate human resource bureaucrats. Today's actual health insurance market is a small rump of this employer system, and because it is more of an afterthought than a market, it functions badly. Instead, perfectly reasonable people have proposed for 20 years that we build working health insurance exchanges; all of Congress and all federal employees choose their health insurance today through exchanges, and the level of satisfaction is very high. Why not try to build real working markets - that is, exchanges - for health insurance for everyone?

We are pessimists in all of this. The Congress will adopt the jumbled, mashed-together set of ideas all of the current bills represent; the result will create a death spiral toward a single-payer system, which we will start debating when the fiscal crunch - which this health "reform" will immeasurably worsen - really hits us.

While there is still time, The Times should devote a few paragraphs in its editorial to an alternative that might actually work.

Commentaries are the views of the authors and do not necessarily represent policies of the Committee for Economic Development