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The Public Option Can Only Fail

October 29, 2009

“The public option is needed to increase competition among insurance companies, rein in costs, and guarantee affordable coverage for all Americans.”

Such an outcome is fictional. The Public Option (PO) will be ineffective by itself. Competition among insurance companies is not the problem. Underlying issues will prevent the PO from having a positive impact.

The PO as proposed will be a non-profit insurance company supported only by premiums. The initial funding from the government is to be re-payed in ten years.

Providing affordable coverage for everyone, will require the very poorest paying less than cost. If the PO overcharges high income customers, to cover the poor, they will quickly turn to private insurance companies. The PO cannot guarantee affordable coverage to all Americans without compromising quality. Covering the poor requires charity, not another insurance company.

The PO will face the same obstacles as private insurance companies: adverse selection, fraud, employee management, attracting customers and suppliers and meeting costs.

The PO has the advantage of lower tax obligations, but its advantages end there. The PO has no more incentive or ability to cut costs than private firms. If the PO will solve all our problems, then the government should just admit that taxation is to blame for high health care prices and stop taxing insurance companies. Putting aside its tax advantage, the only way the PO can conceivably compete is by offering a different product. If the PO is exempt from providing mandated benefits, then it will be able to undercut insurance companies. The same outcome could be achieved by eliminating wasteful regulation.

Unlike most industries, insurance companies cannot compete across state lines. Each state has its own market that is insulated from the rest of the country. Many advocates of states’ rights hesitate to support a national insurance market. A national market is compatible with states’ rights. Regulation should be kept in the hands of the states, while consumers can buy insurance from any law-abiding company that meets their needs.

The outcome of the current market structure has been wasteful insurance companies reaping the benefits of state protectionism, wasteful state regulation that does not face the judgment of the market, or both. By allowing inter-state competition, the regulatory power be checked by the market. Responsible companies would be successful, and inefficient ones would die off. Inter-state competition will sort out what regulations consumers value and costs will be reduced without the PO.

The insurance market is not competitive, but the emphasis must be placed on regulatory competition. Ending isolationism is needed to increase competition among states, rein in costs and increase access to affordable coverage by Americans in all states. The Private Option offers no remedy that will solve the health care system’s maladies; simple market reforms offer far more promise at lower cost. The Public Option is not needed.

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