Want To Put A Stake In Obama’s Legacy? Try The Public Option

Forbes:

As we find ourselves crossing the event horizon of an adverse selection death spiral, the people who brought you the Affordable Care Act have resuscitated an idea to save the law. Paradoxically, they do so even as they continue to deny that there’s a serious problem with the law. It’s “the public option” — a federally controlled program that would sell policies on the health insurance exchanges established by the Affordable Care Act. President Obama has argued that it should be reconsidered. Hillary Clinton says she wants to make a public option possible. Yale Professor Jacob Hacker, who boasts of being the father of the public option, has written a new valiant defense of his idea. There appears to be this notion that, if only we had adopted it in the first place, as many had wanted, we might have prevented this calamity. And if we adopt it now, it can yet save President Obama’s legacy.

I don’t think so. The public option will put a stake into the President’s legacy domestic accomplishment. The ACA may persist in name for a while, but it will look even less than it does today like the program that the President and others touted so highly six years ago.

Just so we’re clear, at least the last time it was put forward, the public option — dubbed the “Community Health Insurance Option” — called for the federal government to create a program that would sell insurance on the Exchanges. Under section 1323 of the precursor to the ACA passed by the Senate , the federal government would assume the risk of the program rather than separate corporations.  Basically, the federal government would set rates either nationally or regionally, negotiate with providers, and “loan” start up money to the program, which was supposed to pay it back over no more than nine years. The federal government could contract out its administrative responsibilities in a given state or region to a non-profit entity.  The states could opt out of the plan.

The idea, ACA experts will note, is very similar to what morphed into the co-ops — you know, the ones who are now almost all either bankrupt or in financial distress.  The main difference is that instead of having decentralized non-profit co-ops bear financial risk cemented by loan documents, the federal government (a/k/a taxpayers) would be responsible for losses. (Look at § 1323 (e)(1)(C)). Default under the public option would be determined not by stony loan documents but by the political will to terminate a program that, doubtless, would be serving millions of people desperate for health insurance. (Look at § 1323(f)).

Two fates

The basic problem with the public option is that each of its two most likely fates are deeply problematic.

Fate 1: Underpricing, killing off the private market, inability to repay startup loans

The most likely possibility is that the public option will replicate the fate of the co-ops and feature inexperienced people succumbing to political pressure to sell discount insurance at too low a price. This will drive responsible insurers out of the market. If you think it’s bad that in 2017 there will be at most one private insurer in about 36% of the regions and no more than two insurers in about 55% of the regions,  just wait until a public insurer comes in. Even if the government plan is a reasonable one, there will likely end up being just one choice: the federally sculpted plan. And even if the public plan could only be sold in those areas that temporarily had no insurers, its entry will likely make sure that a monopoly situation — a government monopoly — is permanent.

This creation of a government monopoly is particularly probable if, as the Congressional Budget Office twice predicted (here and here), the public option disproportionately attracts high risk individuals. By basing its risk transfer formula on premiums rather than on costs, the present Risk Adjustment system in the ACA may force insurers foolish enough persisting in the Exchanges after the public option goes live to overcompensate the government plan.  Any private insurers remaining after the government enters will basically pay for the privilege of driving themselves out of business.

The public option program will likely prove unable to pay off its loans.  This is so because (1) program administrators will acquiesce to incredible political pressure to price below cost; (2) the exit of other private insurers will eliminate any possibility of risk adjustment payments subsidizing the program; and (3) the public program will be run only slightly better than some of the co-ops. The program will keep requiring, as the co-ops did before state regulators pulled the plug, ever more “loans.”  The public option will prove more difficult to kill, however, since its existence over a few years will have mothballed the private market and leave the nation with an institution that will have become, perhaps just like Obamacare itself, too big to fail. We will either live with something still called “The Affordable Care Act” but that will bear little resemblance to what was promised or the disjunction between promise and reality will renew yet more fervent calls for a true single payer system.

Fate 2: Nothing much different than the existing private plans

A second possibility, less likely in my view, is that the public option plan might be better managed. But this would mean doing little more than could already be done — probably better — by existing insurers already on the Exchanges. There’s a reason basically called “adverse selection” that is causing problems for insuers on the Exchange and the government won’t be immune from it when it sells policies. And we pretty much know that the public option plans won’t provide better benefits than those of private insurers.  The economic structure of ACA subsidies mean it’s going to have to sell mostly silver plans that leave the average consumer stuck with 30% of the bill.  And the version of the public option that squeaked through the Senate in 2009 provided, in order to keep costs in line, that it could provide only for “essential health benefits” and nothing more. That’s exactly the same thing private insurers have to provider. The public option may well provide choice that is only an echo.

And the fable

Read more